##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended May 2, 2009
 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. 333-148108
 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 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer x
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o x




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##### 



CLAIRES STORES, INC. AND SUBSIDIARIES
INDEX
 PAGE NO.PART I.
    
    FINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets as of May 2, 2009 and January 31, 2009
    
    
    3Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended May 2, 2009 and May 3, 2008
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended May 2, 2009 and May 3, 2008
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    26PART II.
    
    OTHER INFORMATION
    
    
    27Item 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    27Item 6. Exhibits
    
    
    27SIGNATURE PAGE
    
    
    28EX-31.1EX-31.2EX-32.1EX-32.2
  2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 May 2, 2009
    
    
    January 31, 2009(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    206,703
    
    
    $
    204,574Inventories
    
    
    100,993
    
    
    
    103,691Prepaid expenses
    
    
    44,396
    
    
    
    31,837Other current assets
    
    
    26,225
    
    
    
    27,079Total current assets
    
    
    378,317
    
    
    
    367,181Property and equipment:Land and building
    
    
    22,288
    
    
    
    22,288Furniture, fixtures and equipment
    
    
    147,876
    
    
    
    143,702Leasehold improvements
    
    
    218,786
    
    
    
    214,007388,950
    
    
    
    379,997Less accumulated depreciation and amortization
    
    
    (132,094
    )
    
    
    (113,926
    )256,856
    
    
    
    266,071Intangible assets, net of accumulated amortization of $23,677 and
$19,371, respectively
    
    
    585,930
    
    
    
    587,125Deferred financing costs, net of accumulated amortization of $20,278
and $17,646, respectively
    
    
    57,312
    
    
    
    59,944Other assets
    
    
    54,503
    
    
    
    56,428Goodwill
    
    
    1,544,346
    
    
    
    1,544,3462,242,091
    
    
    
    2,247,843Total assets
    
    $
    2,877,264
    
    
    $
    2,881,095LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Trade accounts payable
    
    $
    59,595
    
    
    $
    53,237Current portion of long-term debt
    
    
    14,500
    
    
    
    14,500Income taxes payable
    
    
    5,695
    
    
    
    6,477Accrued interest payable
    
    
    28,086
    
    
    
    13,316Accrued expenses and other current liabilities
    
    
    105,008
    
    
    
    107,974Total current liabilities
    
    
    212,884
    
    
    
    195,504Long-term debt
    
    
    2,379,196
    
    
    
    2,373,272Revolving credit facility
    
    
    194,000
    
    
    
    194,000Deferred tax liability
    
    
    112,335
    
    
    
    112,829Deferred rent expense
    
    
    17,544
    
    
    
    18,462Unfavorable lease obligations and other long-term liabilities
    
    
    40,465
    
    
    
    42,8712,743,540
    
    
    
    2,741,434Commitments and contingencies
    
    
    
    
    
    
    Stockholders deficit:Common stock par value $0.001 per share; authorized 1,000
shares;
issued and outstanding 100 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    609,948
    
    
    
    609,427Accumulated other comprehensive loss, net of tax
    
    
    (17,134
    )
    
    
    (22,319
    )Retained deficit
    
    
    (671,974
    )
    
    
    (642,951
    )(79,160
    )
    
    
    (55,843
    )Total liabilities and stockholders deficit
    
    $
    2,877,264
    
    
    $
    2,881,095
  3




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CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMay 2, 2009
    
    
    May 3, 2008Net sales
    
    $
    293,098
    
    
    $
    327,003Cost of sales, occupancy and buying expenses
    
    
    151,179
    
    
    
    171,982Gross profit
    
    
    141,919
    
    
    
    155,021Other expenses (income):Selling, general and administrative
    
    
    108,469
    
    
    
    131,335Depreciation and amortization
    
    
    18,155
    
    
    
    22,101Severance and transaction-related costs
    
    
    349
    
    
    
    5,968Other (income) expense
    
    
    414
    
    
    
    (560
    )127,387
    
    
    
    158,844Operating income (loss)
    
    
    14,532
    
    
    
    (3,823
    )Interest expense (income), net
    
    
    45,234
    
    
    
    48,657Loss before income taxes
    
    
    (30,702
    )
    
    
    (52,480
    )Income tax benefit
    
    
    (1,679
    )
    
    
    (16,910
    )Net loss
    
    $
    (29,023
    )
    
    $
    (35,570
    )Net loss
    
    $
    (29,023
    )
    
    $
    (35,570
    )Foreign currency translation and interest rate
swap adjustments, net of tax
    
    
    5,185
    
    
    
    9,314Comprehensive loss
    
    $
    (23,838
    )
    
    $
    (26,256
    )
  4




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CLAIRES STORES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMay 2, 2009
    
    
    May 3, 2008Cash flows from operating activities:Net loss
    
    $
    (29,023
    )
    
    $
    (35,570
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    18,155
    
    
    
    22,101Amortization of lease rights and other assets
    
    
    494
    
    
    
    528Amortization of debt issuance costs
    
    
    2,632
    
    
    
    2,647Payment in kind interest expense
    
    
    9,549
    
    
    
    Net accretion of favorable (unfavorable) lease obligations
    
    
    (615
    )
    
    
    Loss on sale/retirement of property and equipment, net
    
    
    4
    
    
    
    27Stock compensation expense
    
    
    521
    
    
    
    2,767(Increase) decrease in:Inventories
    
    
    3,642
    
    
    
    269Prepaid expenses
    
    
    (11,874
    )
    
    
    (14,845
    )Other assets
    
    
    2,046
    
    
    
    (1,637
    )Increase (decrease) in:Trade accounts payable
    
    
    6,139
    
    
    
    16,855Income taxes payable
    
    
    (1,551
    )
    
    
    (14,164
    )Accrued expenses and other liabilities
    
    
    (3,349
    )
    
    
    9,218Accrued interest payable
    
    
    14,771
    
    
    
    22,621Deferred income taxes
    
    
    (108
    )
    
    
    (14,329
    )Deferred rent expense
    
    
    (784
    )
    
    
    2,153Net cash provided by (used in) operating activities
    
    
    10,649
    
    
    
    (1,359
    )Cash flows from investing activities:Acquisition of property and equipment, net
    
    
    (5,185
    )
    
    
    (15,598
    )Acquisition of intangible assets/lease rights
    
    
    (340
    )
    
    
    (427
    )Net cash used in investing activities
    
    
    (5,525
    )
    
    
    (16,025
    )Cash flows from financing activities:Credit facility payment
    
    
    (3,625
    )
    
    
    (3,625
    )Net cash used in financing activities
    
    
    (3,625
    )
    
    
    (3,625
    )Effect of foreign currency exchange rate changes on cash and
cash equivalents
    
    
    630
    
    
    
    3,049Net increase (decrease) in cash and cash equivalents
    
    
    2,129
    
    
    
    (17,960
    )Cash and cash equivalents at beginning of period
    
    
    204,574
    
    
    
    85,974Cash and cash equivalents at end of period
    
    $
    206,703
    
    
    $
    68,014Supplemental disclosure of cash flow information:Income taxes paid
    
    $
    423
    
    
    $
    11,973Interest paid
    
    
    18,356
    
    
    
    24,022
  5




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CLAIRES STORES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
 10-Q
   2. Significant Accounting Policies
 Recent Accounting Pronouncements
   6




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Disclosures about Derivative Instruments and Hedging
Activities  an Amendment of FASB Statement No. 133
 Business Combinations Noncontrolling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51
 Interim Disclosures about Fair Value of Financial Instruments Disclosures about Fair Values of
Financial Instruments , Interim Financial Reporting,
 Recognition and Presentation of
Other-Than-Temporary Impairments
 Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly
 7




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3. Segment Information
   Three Months
    
    
    Three MonthsEnded
    
    
    EndedMay 2, 2009
    
    
    May 3, 2008Net sales:North America
    
    $
    196,444
    
    
    $
    209,344Europe
    
    
    96,654
    
    
    
    117,659Total net sales
    
    
    293,098
    
    
    
    327,003Depreciation and amortization:North America
    
    
    12,567
    
    
    
    14,626Europe
    
    
    5,588
    
    
    
    7,475Total depreciation and amortization
    
    
    18,155
    
    
    
    22,101Operating income (loss) for reportable segments:North America
    
    
    16,129
    
    
    
    3,697Europe
    
    
    (1,248
    )
    
    
    (1,552
    )Total operating income for reportable segments
    
    
    14,881
    
    
    
    2,145Severance and transaction-related costs
    
    
    349
    
    
    
    5,968Total consolidated operating income (loss)
    
    
    14,532
    
    
    
    (3,823
    )Interest expense (income), net
    
    
    45,234
    
    
    
    48,657Total consolidated loss before income taxes
    
    $
    (30,702
    )
    
    $
    (52,480
    )
   8




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4. Stock Options and Stock-Based Compensation
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Life (Years)
    
    
    ValueOutstanding at January 31, 2009
    
    
    6,807,556
    
    
    $
    10.00
    
    
    
    5.1
    
    
    
    Options granted
    
    
    254,850
    
    
    $
    10.00
    
    
    
    6.9
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    (584,308
    )
    
    $
    10.00
    
    
    
    
    
    
    
    Options expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at May 2, 2009
    
    
    6,478,098
    
    
    $
    10.00
    
    
    
    5.1
    
    
    
    Exercisable at May 2, 2009
    
    
    1,387,502
    
    
    $
    10.00
    
    
    
    5.1
    
    
    
    
   5. Income Taxes
   9




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6. Fair Value of Financial Instruments
     Fair Value Measurements at May 2, 2009 UsingQuoted Prices inActive Markets for
    
    
    Significant
    
    
    SignificantIdentical Assets
    
    
    Other Observable
    
    
    Unobservable(Liabilities)
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Debt and Credit Facility
    
    $
    (1,228,000
    )
    
    $
    
    
    
    $
    Interest rate swaps
    
    $
    
    
    
    $
    (19,048
    )
    
    $
    
 Fair Value Measurements at January 31, 2009 UsingQuoted Prices inActive Markets for
    
    
    Significant
    
    
    SignificantIdentical Assets
    
    
    Other Observable
    
    
    Unobservable(Liabilities)
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Debt and Credit Facility
    
    $
    (734,000
    )
    
    $
    
    
    
    $
    Interest rate swaps
    
    $
    
    
    
    $
    (19,734
    )
    
    $
    
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMay 2, 2009
    
    
    May 3, 2008Unrealized gain from changes in fair value
of interest rate swap agreements, net of tax
    
    $
    433
    
    
    $
    3,109
 10




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7. Commitments and Contingencies
  8. Supplemental Financial Information
  11




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Condensed Consolidating Balance SheetMay 2, 2009(in thousands)Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    129,166
    
    
    $
    15,640
    
    
    $
    61,897
    
    
    $
    
    
    
    $
    206,703Inventories
    
    
    
    
    
    
    70,269
    
    
    
    30,724
    
    
    
    
    
    
    
    100,993Prepaid expenses
    
    
    518
    
    
    
    14,900
    
    
    
    28,978
    
    
    
    
    
    
    
    44,396Other current assets
    
    
    59
    
    
    
    18,196
    
    
    
    7,970
    
    
    
    
    
    
    
    26,225Total current assets
    
    
    129,743
    
    
    
    119,005
    
    
    
    129,569
    
    
    
    
    
    
    
    378,317Property and equipment:Land and building
    
    
    
    
    
    
    22,288
    
    
    
    
    
    
    
    
    
    
    
    22,288Furniture, fixtures and equipment
    
    
    2,162
    
    
    
    105,311
    
    
    
    40,403
    
    
    
    
    
    
    
    147,876Leasehold improvements
    
    
    1,703
    
    
    
    137,156
    
    
    
    79,927
    
    
    
    
    
    
    
    218,7863,865
    
    
    
    264,755
    
    
    
    120,330
    
    
    
    
    
    
    
    388,950Less accumulated depreciation and amortization
    
    
    (1,432
    )
    
    
    (87,833
    )
    
    
    (42,829
    )
    
    
    
    
    
    
    (132,094
    )2,433
    
    
    
    176,922
    
    
    
    77,501
    
    
    
    
    
    
    
    256,856Intercompany receivables
    
    
    
    
    
    
    34,131
    
    
    
    58,631
    
    
    
    (92,762
    )
    
    
    Investment in subsidiaries
    
    
    2,168,336
    
    
    
    (1,702
    )
    
    
    
    
    
    
    (2,166,634
    )
    
    
    Intangible assets, net
    
    
    286,201
    
    
    
    16,436
    
    
    
    283,293
    
    
    
    
    
    
    
    585,930Deferred financing costs, net
    
    
    57,312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,312Other assets
    
    
    16,536
    
    
    
    2,785
    
    
    
    35,182
    
    
    
    
    
    
    
    54,503Goodwill
    
    
    
    
    
    
    1,229,940
    
    
    
    314,406
    
    
    
    
    
    
    
    1,544,3462,528,385
    
    
    
    1,281,590
    
    
    
    691,512
    
    
    
    (2,259,396
    )
    
    
    2,242,091Total assets
    
    $
    2,660,561
    
    
    $
    1,577,517
    
    
    $
    898,582
    
    
    $
    (2,259,396
    )
    
    $
    2,877,264LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Trade accounts payable
    
    $
    611
    
    
    $
    17,066
    
    
    $
    41,918
    
    
    $
    
    
    
    $
    59,595Current portion of long-term debt
    
    
    14,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,500Income taxes payable
    
    
    
    
    
    
    1,459
    
    
    
    4,236
    
    
    
    
    
    
    
    5,695Accrued interest payable
    
    
    28,086
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,086Accrued expenses and other current liabilities
    
    
    30,008
    
    
    
    34,608
    
    
    
    40,392
    
    
    
    
    
    
    
    105,008Total current liabilities
    
    
    73,205
    
    
    
    53,133
    
    
    
    86,546
    
    
    
    
    
    
    
    212,884Intercompany payables
    
    
    92,762
    
    
    
    
    
    
    
    
    
    
    
    (92,762
    )
    
    
    Long-term debt
    
    
    2,379,196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,379,196Revolving credit facility
    
    
    194,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194,000Deferred tax liability
    
    
    
    
    
    
    99,001
    
    
    
    13,334
    
    
    
    
    
    
    
    112,335Deferred rent expense
    
    
    558
    
    
    
    13,012
    
    
    
    3,974
    
    
    
    
    
    
    
    17,544Unfavorable lease obligations and other long-term
liabilities
    
    
    
    
    
    
    37,185
    
    
    
    3,280
    
    
    
    
    
    
    
    40,4652,666,516
    
    
    
    149,198
    
    
    
    20,588
    
    
    
    (92,762
    )
    
    
    2,743,540Stockholders equity (deficit):Common stock
    
    
    
    
    
    
    367
    
    
    
    2
    
    
    
    (369
    )
    
    
    Additional paid in capital
    
    
    609,948
    
    
    
    1,445,795
    
    
    
    876,798
    
    
    
    (2,322,593
    )
    
    
    609,948Accumulated other comprehensive loss, net of tax
    
    
    (17,134
    )
    
    
    (591
    )
    
    
    (13,110
    )
    
    
    13,701
    
    
    
    (17,134
    )Retained deficit
    
    
    (671,974
    )
    
    
    (70,385
    )
    
    
    (72,242
    )
    
    
    142,627
    
    
    
    (671,974
    )(79,160
    )
    
    
    1,375,186
    
    
    
    791,448
    
    
    
    (2,166,634
    )
    
    
    (79,160
    )Total liabilities and stockholders equity (deficit)
    
    $
    2,660,561
    
    
    $
    1,577,517
    
    
    $
    898,582
    
    
    $
    (2,259,396
    )
    
    $
    2,877,264
 12




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Condensed Consolidating Balance SheetJanuary 31, 2009(in thousands)Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    154,414
    
    
    $
    211
    
    
    $
    49,949
    
    
    $
    
    
    
    $
    204,574Inventories
    
    
    
    
    
    
    73,445
    
    
    
    30,246
    
    
    
    
    
    
    
    103,691Prepaid expenses
    
    
    434
    
    
    
    14,641
    
    
    
    16,762
    
    
    
    
    
    
    
    31,837Other current assets
    
    
    6
    
    
    
    16,104
    
    
    
    10,969
    
    
    
    
    
    
    
    27,079Total current assets
    
    
    154,854
    
    
    
    104,401
    
    
    
    107,926
    
    
    
    
    
    
    
    367,181Property and equipment:Land and building
    
    
    
    
    
    
    22,288
    
    
    
    
    
    
    
    
    
    
    
    22,288Furniture, fixtures and equipment
    
    
    2,025
    
    
    
    103,571
    
    
    
    38,106
    
    
    
    
    
    
    
    143,702Leasehold improvements
    
    
    1,704
    
    
    
    136,554
    
    
    
    75,749
    
    
    
    
    
    
    
    214,0073,729
    
    
    
    262,413
    
    
    
    113,855
    
    
    
    
    
    
    
    379,997Less accumulated depreciation and amortization
    
    
    (1,250
    )
    
    
    (77,042
    )
    
    
    (35,634
    )
    
    
    
    
    
    
    (113,926
    )2,479
    
    
    
    185,371
    
    
    
    78,221
    
    
    
    
    
    
    
    266,071Intercompany receivables
    
    
    
    
    
    
    26,876
    
    
    
    58,416
    
    
    
    (85,292
    )
    
    
    Investment in subsidiaries
    
    
    2,139,955
    
    
    
    (4,061
    )
    
    
    
    
    
    
    (2,135,894
    )
    
    
    Intangible assets, net
    
    
    286,750
    
    
    
    17,960
    
    
    
    282,415
    
    
    
    
    
    
    
    587,125Deferred financing costs, net
    
    
    59,944
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,944Other assets
    
    
    19,392
    
    
    
    2,602
    
    
    
    34,434
    
    
    
    
    
    
    
    56,428Goodwill
    
    
    
    
    
    
    1,229,940
    
    
    
    314,406
    
    
    
    
    
    
    
    1,544,3462,506,041
    
    
    
    1,273,317
    
    
    
    689,671
    
    
    
    (2,221,186
    )
    
    
    2,247,843Total assets
    
    $
    2,663,374
    
    
    $
    1,563,089
    
    
    $
    875,818
    
    
    $
    (2,221,186
    )
    
    $
    2,881,095LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Trade accounts payable
    
    $
    2,347
    
    
    $
    21,112
    
    
    $
    29,778
    
    
    $
    
    
    
    $
    53,237Current portion of long-term debt
    
    
    14,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,500Income taxes payable
    
    
    
    
    
    
    
    
    
    
    6,477
    
    
    
    
    
    
    
    6,477Accrued interest payable
    
    
    13,313
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    13,316Accrued expenses and other current liabilities
    
    
    35,795
    
    
    
    35,782
    
    
    
    36,397
    
    
    
    
    
    
    
    107,974Total current liabilities
    
    
    65,955
    
    
    
    56,894
    
    
    
    72,655
    
    
    
    
    
    
    
    195,504Intercompany payables
    
    
    85,292
    
    
    
    
    
    
    
    
    
    
    
    (85,292
    )
    
    
    Long-term debt
    
    
    2,373,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,373,272Revolving credit facility
    
    
    194,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194,000Deferred tax liability
    
    
    
    
    
    
    99,122
    
    
    
    13,707
    
    
    
    
    
    
    
    112,829Deferred rent expense
    
    
    698
    
    
    
    12,532
    
    
    
    5,232
    
    
    
    
    
    
    
    18,462Unfavorable lease obligations and other long-term
liabilities
    
    
    
    
    
    
    39,074
    
    
    
    3,797
    
    
    
    
    
    
    
    42,8712,653,262
    
    
    
    150,728
    
    
    
    22,736
    
    
    
    (85,292
    )
    
    
    2,741,434Stockholders equity (deficit):Common stock
    
    
    
    
    
    
    367
    
    
    
    2
    
    
    
    (369
    )
    
    
    Additional paid in capital
    
    
    609,427
    
    
    
    1,445,795
    
    
    
    876,798
    
    
    
    (2,322,593
    )
    
    
    609,427Accumulated other comprehensive loss, net of tax
    
    
    (22,319
    )
    
    
    (2,326
    )
    
    
    (20,597
    )
    
    
    22,923
    
    
    
    (22,319
    )Retained deficit
    
    
    (642,951
    )
    
    
    (88,369
    )
    
    
    (75,776
    )
    
    
    164,145
    
    
    
    (642,951
    )(55,843
    )
    
    
    1,355,467
    
    
    
    780,427
    
    
    
    (2,135,894
    )
    
    
    (55,843
    )Total liabilities and stockholders equity (deficit)
    
    $
    2,663,374
    
    
    $
    1,563,089
    
    
    $
    875,818
    
    
    $
    (2,221,186
    )
    
    $
    2,881,095
 13




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##### Table of Contents



Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)For The Three Months Ended May 2, 2009(in thousands)Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    325,983
    
    
    $
    107,467
    
    
    $
    (140,352
    )
    
    $
    293,098Cost of sales, occupancy and buying expenses
    
    
    
    
    
    
    234,040
    
    
    
    57,491
    
    
    
    (140,352
    )
    
    
    151,179Gross profit
    
    
    
    
    
    
    91,943
    
    
    
    49,976
    
    
    
    
    
    
    
    141,919Other expenses (income):Selling, general and administrative
    
    
    6,270
    
    
    
    58,472
    
    
    
    43,727
    
    
    
    
    
    
    
    108,469Depreciation and amortization
    
    
    744
    
    
    
    11,073
    
    
    
    6,338
    
    
    
    
    
    
    
    18,155Severance and transaction-related costs
    
    
    349
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    349Other (income) expense
    
    
    (2,667
    )
    
    
    4,602
    
    
    
    (1,521
    )
    
    
    
    
    
    
    4144,696
    
    
    
    74,147
    
    
    
    48,544
    
    
    
    
    
    
    
    127,387Operating income (loss)
    
    
    (4,696
    )
    
    
    17,796
    
    
    
    1,432
    
    
    
    
    
    
    
    14,532Interest expense (income), net
    
    
    45,280
    
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    45,234Income (loss) before income taxes
    
    
    (49,976
    )
    
    
    17,796
    
    
    
    1,478
    
    
    
    
    
    
    
    (30,702
    )Income tax expense (benefit)
    
    
    
    
    
    
    378
    
    
    
    (2,057
    )
    
    
    
    
    
    
    (1,679
    )Income (loss) from continuing operations
    
    
    (49,976
    )
    
    
    17,418
    
    
    
    3,535
    
    
    
    
    
    
    
    (29,023
    )Equity in earnings of subsidiaries
    
    
    20,953
    
    
    
    566
    
    
    
    
    
    
    
    (21,519
    )
    
    
    Net income (loss)
    
    
    (29,023
    )
    
    
    17,984
    
    
    
    3,535
    
    
    
    (21,519
    )
    
    
    (29,023
    )Foreign currency translation and interest
rate swap adjustments, net of tax
    
    
    5,185
    
    
    
    1,734
    
    
    
    7,510
    
    
    
    (9,244
    )
    
    
    5,185Comprehensive income (loss)
    
    $
    (23,838
    )
    
    $
    19,718
    
    
    $
    11,045
    
    
    $
    (30,763
    )
    
    $
    (23,838
    )
 Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)For The Three Months Ended May 3, 2008(in thousands)Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    367,918
    
    
    $
    131,478
    
    
    $
    (172,393
    )
    
    $
    327,003Cost of sales, occupancy and buying expenses
    
    
    
    
    
    
    275,566
    
    
    
    68,809
    
    
    
    (172,393
    )
    
    
    171,982Gross profit
    
    
    
    
    
    
    92,352
    
    
    
    62,669
    
    
    
    
    
    
    
    155,021Other expenses (income):Selling, general and administrative
    
    
    10,205
    
    
    
    66,653
    
    
    
    54,477
    
    
    
    
    
    
    
    131,335Depreciation and amortization
    
    
    760
    
    
    
    12,921
    
    
    
    8,420
    
    
    
    
    
    
    
    22,101Severance and transaction-related costs
    
    
    4,300
    
    
    
    
    
    
    
    1,668
    
    
    
    
    
    
    
    5,968Other (income) expense
    
    
    (5,301
    )
    
    
    4,628
    
    
    
    113
    
    
    
    
    
    
    
    (560
    )9,964
    
    
    
    84,202
    
    
    
    64,678
    
    
    
    
    
    
    
    158,844Operating income (loss)
    
    
    (9,964
    )
    
    
    8,150
    
    
    
    (2,009
    )
    
    
    
    
    
    
    (3,823
    )Interest expense (income), net
    
    
    49,167
    
    
    
    (185
    )
    
    
    (325
    )
    
    
    
    
    
    
    48,657Income (loss) before income taxes
    
    
    (59,131
    )
    
    
    8,335
    
    
    
    (1,684
    )
    
    
    
    
    
    
    (52,480
    )Income tax expense (benefit)
    
    
    (22,043
    )
    
    
    8,856
    
    
    
    (3,723
    )
    
    
    
    
    
    
    (16,910
    )Income (loss) from continuing operations
    
    
    (37,088
    )
    
    
    (521
    )
    
    
    2,039
    
    
    
    
    
    
    
    (35,570
    )Equity in earnings of subsidiaries
    
    
    1,518
    
    
    
    505
    
    
    
    
    
    
    
    (2,023
    )
    
    
    Net income (loss)
    
    
    (35,570
    )
    
    
    (16
    )
    
    
    2,039
    
    
    
    (2,023
    )
    
    
    (35,570
    )Foreign currency translation and interest
rate swap adjustments, net of tax
    
    
    9,314
    
    
    
    56
    
    
    
    5,672
    
    
    
    (5,728
    )
    
    
    9,314Comprehensive income (loss)
    
    $
    (26,256
    )
    
    $
    40
    
    
    $
    7,711
    
    
    $
    (7,751
    )
    
    $
    (26,256
    )
 14




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##### Table of Contents



Condensed Consolidating Statement of Cash FlowsThree Months Ended May 2, 2009(in thousands)Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (29,023
    )
    
    $
    17,984
    
    
    $
    3,535
    
    
    $
    (21,519
    )
    
    $
    (29,023
    )Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:Equity in earnings of subsidiaries
    
    
    (20,953
    )
    
    
    (566
    )
    
    
    
    
    
    
    21,519
    
    
    
    Depreciation and amortization
    
    
    744
    
    
    
    11,073
    
    
    
    6,338
    
    
    
    
    
    
    
    18,155Amortization of lease rights and other assets
    
    
    
    
    
    
    12
    
    
    
    482
    
    
    
    
    
    
    
    494Amortization of debt issuance costs
    
    
    2,632
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,632Payment in kind interest expense
    
    
    9,549
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,549Net accretion of favorable (unfavorable) lease obligations
    
    
    
    
    
    
    (760
    )
    
    
    145
    
    
    
    
    
    
    
    (615
    )(Gain) loss on sale/retirement of property and equipment
and other assets, net
    
    
    
    
    
    
    7
    
    
    
    (3
    )
    
    
    
    
    
    
    4Stock compensation expense
    
    
    (22
    )
    
    
    
    
    
    
    543
    
    
    
    
    
    
    
    521(Increase) decrease in:Inventories
    
    
    
    
    
    
    3,177
    
    
    
    465
    
    
    
    
    
    
    
    3,642Prepaid expenses
    
    
    (84
    )
    
    
    (259
    )
    
    
    (11,531
    )
    
    
    
    
    
    
    (11,874
    )Other assets
    
    
    812
    
    
    
    (1,202
    )
    
    
    2,436
    
    
    
    
    
    
    
    2,046Increase (decrease) in:Trade accounts payable
    
    
    (1,732
    )
    
    
    (3,615
    )
    
    
    11,486
    
    
    
    
    
    
    
    6,139Income taxes payable
    
    
    
    
    
    
    10
    
    
    
    (1,561
    )
    
    
    
    
    
    
    (1,551
    )Accrued expenses and other liabilities
    
    
    (5,101
    )
    
    
    (1,175
    )
    
    
    2,927
    
    
    
    
    
    
    
    (3,349
    )Accrued interest payable
    
    
    14,774
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    14,771Deferred income taxes
    
    
    
    
    
    
    386
    
    
    
    (494
    )
    
    
    
    
    
    
    (108
    )Deferred rent expense
    
    
    (140
    )
    
    
    765
    
    
    
    (1,409
    )
    
    
    
    
    
    
    (784
    )Net cash provided by (used in) operating activities
    
    
    (28,544
    )
    
    
    25,837
    
    
    
    13,356
    
    
    
    
    
    
    
    10,649Cash flows from investing activities:Acquisition of property and equipment, net
    
    
    (141
    )
    
    
    (3,046
    )
    
    
    (1,998
    )
    
    
    
    
    
    
    (5,185
    )Acquisition of intangible assets/lease rights
    
    
    (13
    )
    
    
    (17
    )
    
    
    (310
    )
    
    
    
    
    
    
    (340
    )Net cash used in investing activities
    
    
    (154
    )
    
    
    (3,063
    )
    
    
    (2,308
    )
    
    
    
    
    
    
    (5,525
    )Cash flows from financing activities:Credit Facility payments
    
    
    (3,625
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,625
    )Intercompany activity, net
    
    
    7,075
    
    
    
    (7,090
    )
    
    
    15
    
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    3,450
    
    
    
    (7,090
    )
    
    
    15
    
    
    
    
    
    
    
    (3,625
    )Effect of foreign currency exchange rate changes on cash and
cash equivalents
    
    
    
    
    
    
    (255
    )
    
    
    885
    
    
    
    
    
    
    
    630Net increase (decrease) in cash and cash equivalents
    
    
    (25,248
    )
    
    
    15,429
    
    
    
    11,948
    
    
    
    
    
    
    
    2,129Cash and cash equivalents at beginning of period
    
    
    154,414
    
    
    
    211
    
    
    
    49,949
    
    
    
    
    
    
    
    204,574Cash and cash equivalents at end of period
    
    $
    129,166
    
    
    $
    15,640
    
    
    $
    61,897
    
    
    $
    
    
    
    $
    206,703
 15




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##### Table of Contents



Condensed Consolidating Statement of Cash FlowsFor The Three Months Ended May 3, 2008(in thousands)Non-Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (35,570
    )
    
    $
    (16
    )
    
    $
    2,039
    
    
    $
    (2,023
    )
    
    $
    (35,570
    )Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:Equity in earnings of subsidiaries
    
    
    (1,518
    )
    
    
    (505
    )
    
    
    
    
    
    
    2,023
    
    
    
    Depreciation and amortization
    
    
    760
    
    
    
    12,921
    
    
    
    8,420
    
    
    
    
    
    
    
    22,101Amortization of lease rights and other assets
    
    
    
    
    
    
    14
    
    
    
    514
    
    
    
    
    
    
    
    528Amortization of debt issuance costs
    
    
    2,647
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,647Loss on sale / retirement of property and equipment, net
    
    
    
    
    
    
    11
    
    
    
    16
    
    
    
    
    
    
    
    27Stock compensation expense
    
    
    2,767
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,767(Increase) decrease in:Inventories
    
    
    
    
    
    
    2,455
    
    
    
    (2,186
    )
    
    
    
    
    
    
    269Prepaid expenses
    
    
    (505
    )
    
    
    190
    
    
    
    (14,530
    )
    
    
    
    
    
    
    (14,845
    )Other assets
    
    
    495
    
    
    
    515
    
    
    
    (2,647
    )
    
    
    
    
    
    
    (1,637
    )Increase (decrease) in:Trade accounts payable
    
    
    (442
    )
    
    
    (1,828
    )
    
    
    19,125
    
    
    
    
    
    
    
    16,855Income taxes payable
    
    
    (683
    )
    
    
    (8,040
    )
    
    
    (5,441
    )
    
    
    
    
    
    
    (14,164
    )Accrued expenses and other liabilities
    
    
    3,808
    
    
    
    2,096
    
    
    
    3,314
    
    
    
    
    
    
    
    9,218Accrued interest payable
    
    
    22,616
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    22,621Deferred income taxes
    
    
    
    
    
    
    (13,575
    )
    
    
    (754
    )
    
    
    
    
    
    
    (14,329
    )Deferred rent expense
    
    
    (135
    )
    
    
    1,859
    
    
    
    429
    
    
    
    
    
    
    
    2,153Net cash provided by (used in) operating activities
    
    
    (5,760
    )
    
    
    (3,903
    )
    
    
    8,304
    
    
    
    
    
    
    
    (1,359
    )Cash flows from investing activities:Acquisition of property and equipment, net
    
    
    (20
    )
    
    
    (11,575
    )
    
    
    (4,003
    )
    
    
    
    
    
    
    (15,598
    )Acquisition of intangible assets
    
    
    
    
    
    
    (35
    )
    
    
    (392
    )
    
    
    
    
    
    
    (427
    )Net cash used in investing activities
    
    
    (20
    )
    
    
    (11,610
    )
    
    
    (4,395
    )
    
    
    
    
    
    
    (16,025
    )Cash flows from financing activities:Credit facility payment
    
    
    (3,625
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,625
    )Intercompany financing
    
    
    (13,849
    )
    
    
    15,419
    
    
    
    (1,570
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (17,474
    )
    
    
    15,419
    
    
    
    (1,570
    )
    
    
    
    
    
    
    (3,625
    )Effect of foreign currency exchange rate changes on cash and
cash equivalents
    
    
    (2,361
    )
    
    
    1,587
    
    
    
    3,823
    
    
    
    
    
    
    
    3,049Net increase (decrease) in cash and cash equivalents
    
    
    (25,615
    )
    
    
    1,493
    
    
    
    6,162
    
    
    
    
    
    
    
    (17,960
    )Cash and cash equivalents at beginning of period
    
    
    25,835
    
    
    
    1,892
    
    
    
    58,247
    
    
    
    
    
    
    
    85,974Cash and cash equivalents at end of period
    
    $
    220
    
    
    $
    3,385
    
    
    $
    64,409
    
    
    $
    
    
    
    $
    68,014
 16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Business Overview
     
  
    
    Accessories  includes hair goods, handbags, small leather goods, and other fashion
classifications, such as scarves, headwear, attitude glasses, leg wear and seasonal
accessories,
such as sunglasses, sandals, slippers and cold weather merchandise including hats, gloves,
scarves and boots, as well as cosmetics
 
    
    Jewelry  includes earrings, ear piercing, necklaces, bracelets and rings
 17




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##### Table of Contents



Current Market Conditions
  Consolidated Results of Operations
  Three Months
    
    Three MonthsEnded
    
    EndedMay 2, 2009
    
    May 3, 2008Net sales
    
    $
    293,098
    
    
    $
    327,003Increase (decrease) in same store sales
    
    
    (2.3
    )%
    
    
    (8.4
    )%Gross profit percentage
    
    
    48.4
    %
    
    
    47.4
    %Selling, general and administrative expenses as a percentage of
net sales
    
    
    37.0
    %
    
    
    40.2
    %Depreciation and amortization as a percentage of net sales
    
    
    6.2
    %
    
    
    6.8
    %Severance and transaction-related costs as percentage of net sales
    
    
    0.1
    %
    
    
    1.8
    %Operating income (loss)
    
    $
    14,532
    
    
    $
    (3,823
    )Net loss
    
    $
    (29,023
    )
    
    $
    (35,570
    )Number of stores at the end of the period (1)
    
    
    2,970
    
    
    
    3,053
 
 (1)
    
    Number of stores excludes stores operated under franchise agreements and joint venture stores. Net sales
   18




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##### Table of Contents



Three Months
    
    
    Three MonthsEnded
    
    
    Ended% of Total
    
    May 2, 2009
    
    
    May 3, 2008Accessories
    
    
    49.1
    
    
    
    45.2Jewelry
    
    
    50.9
    
    
    
    54.8100.0
    
    
    
    100.0
 Gross profit
   Selling, general and administrative expenses
  Depreciation and amortization expense
  Severance and transaction-related costs
  Other (income) expense
  Interest expense (income), net
  19




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##### Table of Contents



Income tax benefit
  Segment Operations
  North America
  Three Months
    
    Three MonthsEnded
    
    EndedMay 2, 2009
    
    May 3, 2008Net sales
    
    $
    196,444
    
    
    $
    209,344Increase (decrease) in same store sales
    
    
    (2.9
    )%
    
    
    (12.3
    )%Gross profit percentage
    
    
    50.0
    %
    
    
    47.6
    %Number of stores at the end of the period (1)
    
    
    2,024
    
    
    
    2,142
 
 (1)
    
    Number of stores excludes stores operated under franchise agreements and joint venture stores.   20




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##### Table of Contents



Three Months
    
    
    Three MonthsEnded
    
    
    Ended% of Total
    
    May 2, 2009
    
    
    May 3, 2008Accessories
    
    
    43.9
    
    
    
    39.7Jewelry
    
    
    56.1
    
    
    
    60.3100.0
    
    
    
    100.0
 Europe
  Three Months
    
    Three MonthsEnded
    
    EndedMay 2, 2009
    
    May 3, 2008Net sales
    
    $
    96,654
    
    
    $
    117,659Increase (decrease) in same store sales
    
    
    (0.9
    )%
    
    
    (0.2
    )%Gross profit percentage
    
    
    45.2
    %
    
    
    47.1
    %Number of stores at the end of the period (1)
    
    
    946
    
    
    
    911
 
 (1)
    
    Number of stores excludes stores operated under franchise agreements and joint venture stores.    Three Months
    
    
    Three MonthsEnded
    
    
    Ended% of Total
    
    May 2, 2009
    
    
    May 3, 2008Accessories
    
    
    59.7
    
    
    
    55.0Jewelry
    
    
    40.3
    
    
    
    45.0100.0
    
    
    
    100.0
 21




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##### Table of Contents



Analysis of Consolidated Financial Condition
  Three Months
    
    Three MonthsEnded
    
    EndedMay 2, 2009
    
    May 3, 2008Operating activities
    
    $
    10,649
    
    
    $
    (1,359
    )Investing activities
    
    
    (5,525
    )
    
    
    (16,025
    )Financing activities
    
    
    (3,625
    )
    
    
    (3,625
    )
 Cash flows from operating activities
  Cash flows from investing activities
  Cash flows from financing activities
    Cash position
    22




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##### Table of Contents



Critical Accounting Policies and Estimates
  Recent Accounting Pronouncements
    Disclosures about Derivative Instruments and Hedging
Activities  an Amendment of FASB Statement No. 133
 23




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##### Table of Contents



Interim Disclosures about Fair Value of Financial Instruments Disclosures about Fair Values of
Financial Instruments , Interim Financial Reporting,
 Recognition and Presentation of
Other-Than-Temporary Impairments
 Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly
 24




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##### Table of Contents



Cautionary Note Regarding Forward-Looking Statements and Risk Factors
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Cash and cash equivalents
  Foreign Currency
  25




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##### Table of Contents



Interest Rates
   General Market Risk
 
 Item 4. Controls and Procedures
   26




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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.
 27




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##### Table of Contents



SIGNATURES
  CLAIRES STORES, INC.June 12, 2009
    By:
    /s/ Eugene S. KahnEugene S. Kahn, Chief Executive Officer(principal executive officer)June 12, 2009
    By:
    /s/ J. Per BrodinJ. Per Brodin, Senior Vice President and ChiefFinancial Officer (principal financial and
accounting officer) 28




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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.
 29