##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended January 28, 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 No. 1-8899
 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
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, $0.05 par value
    
    New York Stock ExchangeRights to Purchase Series A Junior
    
    New York Stock ExchangeParticipating Preferred Stock
  Title of each class
 
  x  ̈
  ̈ x
 x  ̈
  ̈
  x  ̈  ̈
  ̈ x
   DOCUMENTS INCORPORATED BY REFERENCE




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##### Table of Contents



TABLE OF CONTENTS
 Item
    
    
    
    Page No.PART I.
    
    
    
    
    3Item 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    8Item 1B.
    
    Unresolved Staff Comments
    
    
    14Item 2.
    
    Properties
    
    
    14Item 3.
    
    Legal Proceedings
    
    
    15Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    15PART II.
    
    
    
    
    15Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    15Item 6.
    
    Selected Financial Data
    
    
    17Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 8.
    
    Financial Statements and Supplementary Data
    
    
    30Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    56Item 9A.
    
    Controls and Procedures
    
    
    56Item 9B.
    
    Other Information
    
    
    56PART III.
    
    
    
    
    57Item 10.
    
    Directors and Executive Officers of the Registrant
    
    
    57Item 11.
    
    Executive Compensation
    
    
    57Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    57Item 13.
    
    Certain Relationships and Related Transactions
    
    
    57Item 14.
    
    Principal Accountant Fees and Services
    
    
    57PART IV.
    
    
    
    
    57Item 15.
    
    Exhibits, Financial Statement Schedules
    
    
    57Signatures
    
    
    
    
    60Subsidiaries of the CompanyConsent of KPMG LLPSection 302 Co-CEO CertificationSection 302 Co-CEO CertificationSection 302 CFO CertificationSection 906 Co-CEO CertificationSection 906 Co-CEO CertificationSection 906 CFO Certification
 2




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##### Table of Contents



PART I.
 Statement Regarding Forward-Looking Disclosures
  
 Item 1. Business
 General
   th 3
    Table of Contents     Business Description
   
    
    Jewelry  Costume jewelry, earrings and ear piercing services; and
    
    Accessories  Other fashion accessories, hair ornaments, handbags and novelty items.
  Fiscal Year EndedJan. 28, 2006
    
    
    Jan. 29, 2005
    
    
    Jan. 31, 2004Jewelry
    
    $
    795,377
    
    
    
    58.0
    %
    
    $
    717,406
    
    
    
    56.0
    %
    
    $
    603,564
    
    
    
    53.0
    %Accessories
    
    
    574,375
    
    
    
    42.0
    %
    
    
    562,001
    
    
    
    44.0
    %
    
    
    529,270
    
    
    
    47.0
    %$
    1,369,752
    
    
    
    100.0
    %
    
    $
    1,279,407
    
    
    
    100.0
    %
    
    $
    1,132,834
    
    
    
    100.0
    %
  4    Table of Contents  Fiscal Year EndedJan. 28,
    
    
    Jan. 29,
    
    
    Jan. 31,2006
    
    
    2005
    
    
    2004NET SALESNorth America
    
    $
    964,008
    
    
    $
    906,071
    
    
    $
    820,332International
    
    
    405,744
    
    
    
    373,336
    
    
    
    312,502Total revenues
    
    $
    1,369,752
    
    
    $
    1,279,407
    
    
    $
    1,132,834INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXESNorth America
    
    $
    204,554
    
    
    $
    170,323
    
    
    $
    138,387International
    
    
    55,117
    
    
    
    51,313
    
    
    
    36,035Total income from continuing
operations before income taxes
    
    $
    259,671
    
    
    $
    221,636
    
    
    $
    174,422LONG-LIVED ASSETSNorth America
    
    $
    159,361
    
    
    $
    145,418
    
    
    $
    128,585International
    
    
    63,358
    
    
    
    59,108
    
    
    
    57,266Total long-lived assets
    
    $
    222,719
    
    
    $
    204,526
    
    
    $
    185,851
  Strategy
  Actively Manage Merchandise Trends and Display of Merchandise
 Provide Attentive Customer Service
 Store Growth Strategy
 Licensing Arrangements.
 5
    Table of Contents  Maintain Strong Supplier Relationships
 Capitalize on Our Brand Name.
 Stores
    Purchasing and Distribution
    6
    Table of Contents  Store Management
  Store Openings, Closings and Future Growth
     Brand Building
 7
    Table of Contents    Trademarks and Service Marks
  Competition
  Seasonality
  Employees
  
 Item 1A. Risk Factors
 Certain Risk Factors Relating to our Business.
  Fluctuations in consumer preference may adversely affect the demand of our products and result
in a decline in our sales.
  Our business is affected by consumer spending patterns
  8
    Table of Contents  Advance purchases of our merchandise make us vulnerable to changes in consumer preferences and
pricing shifts and may negatively affect our results of operations.
  A disruption of imports from our foreign suppliers or significant fluctuation in the value of
the U.S. Dollar or foreign exchange rates may increase our costs and reduce our supply of
merchandise.
   Interruptions in distribution of our merchandise from our distribution facilities may
negatively affect our profitability.
  9
    Table of Contents  Store operations and expansion may affect our ability to increase net sales and operate
profitably.
  The failure to execute our international expansion or successfully integrate our international
operations may impede our strategy of increasing net sales and adversely affect our operating
results.
   Natural disasters or unusually adverse weather conditions or potential emergence of disease or
pandemic could adversely affect our net sales or supply of inventory.
  Information technology systems changes may disrupt our supply of merchandise
 10
    Table of Contents    We are implementing certain other changes to our information technology systems that may
disrupt operations
  Fluctuations in same-store net sales may affect the price of our stock.
  Changes in the anticipated seasonal business pattern could adversely affect our sales and
profits and our quarterly results may fluctuate due to a variety of factors.
  11
    Table of Contents  Our growth is dependent on successful execution of our business strategy.
  Our industry is highly competitive.
  A decline in number of people who go to malls could reduce the number of our customers and
reduce our net sales.
  The possibility of war and acts of terrorism could disrupt the Companys information or
distribution systems and increase our costs of doing business.
  We depend on our key personnel.
  12
    Table of Contents  Litigation matters incidental to our business could be adversely determined against us.
  We make estimates for our tax liabilities based on tax positions that could be challenged in
the future.
  The Companys cost of doing business could increase as a result of changes in federal, state or
local regulations.
  If our independent manufacturers or licensees or joint venture partner do not use ethical
business practices or comply with applicable laws and regulations, our brand name could be harmed
due to negative publicity and our results of operations could be adversely affected.
  We rely on third parties to distribute our merchandise and if these third parties do not
adequately perform this function, our business would be disrupted.
  We may be unable to protect our trademarks and other intellectual property rights.
 13
    Table of Contents    The Company may be unable to rely on liability indemnities given by foreign vendors which could
adversely affect its financial statements as a whole.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
      14
    Table of Contents  Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  Closing Price of Common StockHigh
    
    
    LowYear Ended January 28, 2006First Quarter
    
    $
    23.79
    
    
    $
    20.01Second Quarter
    
    
    25.75
    
    
    
    21.32Third Quarter
    
    
    26.55
    
    
    
    22.89Fourth Quarter
    
    
    31.29
    
    
    
    24.53Year Ended January 29, 2005First Quarter
    
    $
    21.91
    
    
    $
    18.61Second Quarter
    
    
    23.52
    
    
    
    18.75Third Quarter
    
    
    26.25
    
    
    
    21.87Fourth Quarter
    
    
    27.05
    
    
    
    19.78
 15
    Table of Contents  16
    Table of Contents  Item 6. Selected Financial Data
  As of or for the Fiscal Year EndedJan. 28,
    
    
    Jan. 29,
    
    
    Jan. 31,
    
    
    Feb. 1,
    
    
    Feb. 2,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(1)(In thousands except per share amounts)Statement of Operations Data:Net sales
    
    $
    1,369,752
    
    
    $
    1,279,407
    
    
    $
    1,132,834
    
    
    $
    1,001,537
    
    
    $
    918,737Income from continuing operations
    
    
    172,343
    
    
    
    146,259
    
    
    
    115,038
    
    
    
    77,979
    
    
    
    41,126Net income
    
    
    172,343
    
    
    
    143,124
    
    
    
    115,038
    
    
    
    77,744
    
    
    
    19,583Income Per Share:Basic:From continuing operations
    
    $
    1.74
    
    
    $
    1.48
    
    
    $
    1.17
    
    
    $
    0.80
    
    
    $
    0.42Net income
    
    
    1.74
    
    
    
    1.45
    
    
    
    1.17
    
    
    
    0.80
    
    
    
    0.20Diluted:From continuing operations
    
    $
    1.73
    
    
    $
    1.47
    
    
    $
    1.17
    
    
    $
    0.80
    
    
    $
    0.42Net income
    
    
    1.73
    
    
    
    1.44
    
    
    
    1.17
    
    
    
    0.80
    
    
    
    0.20Cash Dividends Per Share:Common stock
    
    $
    0.65
    
    
    $
    0.30
    
    
    $
    0.14
    
    
    $
    0.08
    
    
    $
    0.08Class A common stock
    
    
    0.325
    
    
    
    0.15
    
    
    
    0.07
    
    
    
    0.04
    
    
    
    0.04Balance Sheet Data:Current assets
    
    $
    598,007
    
    
    $
    493,326
    
    
    $
    360,023
    
    
    $
    321,608
    
    
    $
    214,424Current liabilities
    
    
    179,445
    
    
    
    166,938
    
    
    
    143,326
    
    
    
    141,010
    
    
    
    82,536Working capital
    
    
    418,562
    
    
    
    326,388
    
    
    
    216,697
    
    
    
    180,598
    
    
    
    131,888Total assets
    
    
    1,090,701
    
    
    
    966,129
    
    
    
    805,924
    
    
    
    738,129
    
    
    
    611,575Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,000
    
    
    
    110,104Stockholders equity
    
    
    868,318
    
    
    
    755,687
    
    
    
    632,450
    
    
    
    501,254
    
    
    
    404,188
 
 (1)
    
    Restated to reflect the plan to discontinue the operations of Mr. Rags (Lux Corp.) in January
2002. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    17
    Table of Contents  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
 18
    Table of Contents  Critical Accounting Policies and Estimates
    Inventory Valuation
  Valuation of Long-Lived Assets
   Goodwill Impairment
 19
    Table of Contents    Intangible Asset Impairment
  Income Taxes
     20
    Table of Contents  Stock-Based Compensation
     Results of Consolidated Operations
  Fiscal Year2006
    
    
    2005
    
    
    2004Net sales
    
    $
    1,369,752
    
    
    $
    1,279,407
    
    
    $
    1,132,834Increase in comparable store sales
    
    
    6.0
    %
    
    
    8.0
    %
    
    
    7.0
    %Gross profit percentage
    
    
    54.3
    %
    
    
    54.1
    %
    
    
    53.7
    %Selling, general and administrative expenses
as a percentage of Net sales
    
    
    32.8
    %
    
    
    33.7
    %
    
    
    34.8
    %Income from continuing operations
    
    $
    172,343
    
    
    $
    146,259
    
    
    $
    115,038Net income
    
    $
    172,343
    
    
    $
    143,124
    
    
    $
    115,038Income from continuing operations per diluted share
    
    $
    1.73
    
    
    $
    1.47
    
    
    $
    1.17Number of stores at the end of the period(1)
    
    
    2,878
    
    
    
    2,836
    
    
    
    2,812
 
 (1)Number of stores excludes Claires Nippon and stores operated under license agreements outside of
North America  21
    Table of Contents       Fiscal Year EndedJan. 28, 2006
    
    
    Jan. 29, 2005
    
    
    Jan. 31, 2004Jewelry
    
    
    58.0
    %
    
    
    56.0
    %
    
    
    53.0
    %Accessories
    
    
    42.0
    %
    
    
    44.0
    %
    
    
    47.0
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   22
    Table of Contents       Seasonality and Quarterly Results
  Impact of Inflation
  23




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##### Table of Contents



Segment Operations
  North America
  Fiscal Year2006
    
    
    2005
    
    
    2004Net sales
    
    $
    964,008
    
    
    $
    906,071
    
    
    $
    820,332Increase in comparable store sales
    
    
    6.0
    %
    
    
    10.0
    %
    
    
    10.0
    %Gross profit percentage
    
    
    54.5
    %
    
    
    53.9
    %
    
    
    54.5
    %Number of stores at the end of the period(1)
    
    
    2,106
    
    
    
    2,119
    
    
    
    2,112
 
 (1)Number of stores excludes Claires Nippon and stores operated under license agreements outside of North
America      Fiscal Year EndedJan. 28, 2006
    
    
    Jan. 29, 2005
    
    
    Jan. 31, 2004Jewelry
    
    
    64.0
    %
    
    
    63.0
    %
    
    
    60.0
    %Accessories
    
    
    36.0
    %
    
    
    37.0
    %
    
    
    40.0
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 24




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##### Table of Contents



International
  Fiscal Year2006
    
    
    2005
    
    
    2004Net sales
    
    $
    405,744
    
    
    $
    373,336
    
    
    $
    312,502Increase (decrease) in comparable store sales
    
    
    6.0
    %
    
    
    4.0
    %
    
    
    (2.0
    )%Gross profit percentage
    
    
    53.8
    %
    
    
    54.4
    %
    
    
    51.7
    %Number of stores at the end of the period(1)
    
    
    772
    
    
    
    717
    
    
    
    700
 
 (1)Number of stores excludes Claires Nippon stores and stores operated under license agreements     Fiscal Year EndedJan. 28, 2006
    
    
    Jan. 29, 2005
    
    
    Jan. 31, 2004Jewelry
    
    
    45.0
    %
    
    
    40.0
    %
    
    
    37.0
    %Accessories
    
    
    55.0
    %
    
    
    60.0
    %
    
    
    63.0
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 25




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##### Table of Contents



Analysis of Consolidated Financial Condition
  Fiscal Year EndedJan. 28, 2006
    
    
    Jan. 29, 2005
    
    
    Jan. 31, 2004Operating activities
    
    $
    242,859
    
    
    $
    199,290
    
    
    $
    204,407Investing activities
    
    
    52,113
    
    
    
    (205,635
    )
    
    
    (58,709
    )Financing activities
    
    
    (58,000
    )
    
    
    (28,141
    )
    
    
    (113,980
    )
      26




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##### Table of Contents



.
 Liquidity and Capital Resources
    Contractual Obligations and Off Balance Sheet Arrangements
  27




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##### Table of Contents



Payments Due by PeriodContractual Obligations
    
    
    
    
    
    Less than 1
    
    
    
    
    
    
    
    
    
    
    More than(in millions)
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating leases
for real estate
    
    $
    901.1
    
    
    $
    158.8
    
    
    $
    284.7
    
    
    $
    227.9
    
    
    $
    229.7Operating leases
for equipment and
leasehold
improvements
    
    
    7.7
    
    
    
    3.6
    
    
    
    3.5
    
    
    
    0.6
    
    
    
    Letters of credit
    
    
    3.4
    
    
    
    3.4
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    912.2
    
    
    $
    165.8
    
    
    $
    288.2
    
    
    $
    228.5
    
    
    $
    229.7
   Recent Accounting Pronouncements
    28




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency
   29
    Table of Contents    Interest Rates
  
 Item 8. Financial Statements and Supplementary Data
 Page No.Reports of Independent Registered Public Accounting Firm
    
    
    31Consolidated Balance Sheets as of January 28, 2006 and January 29, 2005
    
    
    33Consolidated Statements of Operations and Comprehensive Income for the
fiscal years ended January 28, 2006, January 29, 2005 and January 31, 2004
    
    
    34Consolidated Statements of Changes in Stockholders Equity for the fiscal
years ended January 28, 2006, January 29, 2005 and January 31, 2004
    
    
    35Consolidated Statements of Cash Flows for the fiscal years ended
January 28, 2006, January 29, 2005 and January 31, 2004
    
    
    36Notes to Consolidated Financial Statements
    
    
    37
 30    Table of Contents  Report of Independent Registered Public Accounting Firm
 
    Internal Control  Integrated
Framework
  
 31
    Table of Contents  Report of Independent Registered Public Accounting Firm
 
 Internal
Control  Integrated Framework
    Internal Control  Integrated Framework Internal Control 
Integrated Framework
   
 32
    Table of Contents  CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 Jan. 28,
    
    
    Jan. 29,2006
    
    
    2005(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    431,122
    
    
    $
    191,006Short-term investments
    
    
    
    
    
    
    134,613Inventories
    
    
    113,405
    
    
    
    110,072Prepaid expenses and other current assets
    
    
    53,480
    
    
    
    57,635Total current assets
    
    
    598,007
    
    
    
    493,326Property and equipment:Land and building
    
    
    18,151
    
    
    
    18,151Furniture, fixtures and equipment
    
    
    252,346
    
    
    
    238,022Leasehold improvements
    
    
    238,817
    
    
    
    211,721509,314
    
    
    
    467,894Less accumulated depreciation and amortization
    
    
    (286,595
    )
    
    
    (263,368
    )222,719
    
    
    
    204,526Intangible assets, net
    
    
    56,175
    
    
    
    52,474Other assets
    
    
    15,162
    
    
    
    14,736Goodwill
    
    
    198,638
    
    
    
    201,067269,975
    
    
    
    268,277Total assets
    
    $
    1,090,701
    
    
    $
    966,129LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    50,242
    
    
    $
    42,325Income taxes payable
    
    
    36,708
    
    
    
    30,600Accrued expenses and other liabilities
    
    
    92,495
    
    
    
    94,013Total current liabilities
    
    
    179,445
    
    
    
    166,938Deferred tax liability
    
    
    20,979
    
    
    
    24,293Deferred rent expense
    
    
    21,959
    
    
    
    19,21142,938
    
    
    
    43,504Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Preferred stock par value $1.00 per share;
authorized 1,000,000 shares,issued and
outstanding 0 shares
    
    
    
    
    
    
    Class A common stock par value $0.05 per share;
authorized 40,000,000 shares,issued and
outstanding 4,895,746 shares and 5,125,432
shares, respectively
    
    
    245
    
    
    
    256Common stock par value $0.05 per share;
authorized 300,000,000 shares, issued and
outstanding 94,580,977 shares and 93,858,213
shares, respectively
    
    
    4,729
    
    
    
    4,693Additional paid-in capital
    
    
    63,321
    
    
    
    50,477Unearned compensation
    
    
    (2,690
    )
    
    
    Accumulated other comprehensive income, net of tax
    
    
    21,036
    
    
    
    28,041Retained earnings
    
    
    781,677
    
    
    
    672,220868,318
    
    
    
    755,687Total liabilities and stockholders equity
    
    $
    1,090,701
    
    
    $
    966,129
  33
    Table of Contents  CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 Fiscal Year EndedJan. 28, 2006
    
    
    Jan. 29, 2005
    
    
    Jan. 31, 2004(In thousands, except per share amounts)Net sales
    
    $
    1,369,752
    
    
    $
    1,279,407
    
    
    $
    1,132,834Cost of sales, occupancy and buying expenses
    
    
    625,866
    
    
    
    587,687
    
    
    
    524,455Gross profit
    
    
    743,886
    
    
    
    691,720
    
    
    
    608,379Other expenses (income):Selling, general and administrative
    
    
    449,555
    
    
    
    431,060
    
    
    
    394,152Depreciation and amortization
    
    
    48,900
    
    
    
    44,882
    
    
    
    41,451Interest expense
    
    
    
    
    
    
    
    
    
    
    2,561Interest and other income
    
    
    (14,240
    )
    
    
    (5,858
    )
    
    
    (4,207
    )484,215
    
    
    
    470,084
    
    
    
    433,957Income from continuing operations before income taxes
    
    
    259,671
    
    
    
    221,636
    
    
    
    174,422Income taxes
    
    
    87,328
    
    
    
    75,377
    
    
    
    59,384Income from continuing operations
    
    
    172,343
    
    
    
    146,259
    
    
    
    115,038Discontinued operation (Note 4):Loss on disposal of Lux Corp., net of income taxes
of $0, $1,865 and $0, respectively
    
    
    
    
    
    
    (3,135
    )
    
    
    Net loss from discontinued operations
    
    
    
    
    
    
    (3,135
    )
    
    
    Net income
    
    
    172,343
    
    
    
    143,124
    
    
    
    115,038Foreign currency translation adjustments
    
    
    (7,005
    )
    
    
    7,932
    
    
    
    12,890Comprehensive income
    
    $
    165,338
    
    
    $
    151,056
    
    
    $
    127,928Net income per share:Basic:Income from continuing operations
    
    $
    1.74
    
    
    $
    1.48
    
    
    $
    1.17Loss from discontinued operations
    
    
    
    
    
    
    (0.03
    )
    
    
    Net income per share
    
    $
    1.74
    
    
    $
    1.45
    
    
    $
    1.17Diluted:Income from continuing operations
    
    $
    1.73
    
    
    $
    1.47
    
    
    $
    1.17Loss from discontinued operations
    
    
    
    
    
    
    (0.03
    )
    
    
    Net income per share
    
    $
    1.73
    
    
    $
    1.44
    
    
    $
    1.17Basic weighted average number of common shares
outstanding
    
    
    99,106
    
    
    
    98,937
    
    
    
    97,955Diluted weighted average number of common and common
equivalent shares outstanding
    
    
    99,522
    
    
    
    99,310
    
    
    
    98,440Dividends declared per share:Common stock
    
    $
    0.65
    
    
    $
    0.30
    
    
    $
    0.14Class A common stock
    
    $
    0.325
    
    
    $
    0.15
    
    
    $
    0.07
  34
    Table of Contents  CLAIRES STORES, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
  Number of
    
    
    
    
    
    
    Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulatedshares of Class
    
    
    Class A
    
    
    shares of
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    otherA common
    
    
    common
    
    
    common
    
    
    Common
    
    
    paid-in
    
    
    Unearned
    
    
    comprehensive
    
    
    Retainedstock
    
    
    stock
    
    
    stock
    
    
    stock
    
    
    capital
    
    
    compensation
    
    
    income
    
    
    earnings
    
    
    TotalBalance: February 1, 2003
    
    
    2,693
    
    
    $
    135
    
    
    
    46,147
    
    
    $
    2,307
    
    
    $
    32,834
    
    
    $
    
    
    
    $
    7,219
    
    
    $
    458,759
    
    
    $
    501,254Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,038
    
    
    
    115,038Class A common stock converted to Common stock
    
    
    (83
    )
    
    
    (5
    )
    
    
    83
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect of 2 for 1 stock split
    
    
    2,612
    
    
    
    131
    
    
    
    46,471
    
    
    
    2,323
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,454
    )
    
    
    Stock options exercised, including tax benefit
    
    
    
    
    
    
    
    
    
    
    992
    
    
    
    50
    
    
    
    16,558
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,608Cash dividends ($0.14 per Common share and
$0.07 per Class A common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,340
    )
    
    
    (13,340
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,890
    
    
    
    
    
    
    
    12,890Balance: January 31, 2004
    
    
    5,222
    
    
    
    261
    
    
    
    93,693
    
    
    
    4,685
    
    
    
    49,392
    
    
    
    
    
    
    
    20,109
    
    
    
    558,003
    
    
    
    632,450Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143,124
    
    
    
    143,124Class A common stock converted to Common stock
    
    
    (97
    )
    
    
    (5
    )
    
    
    97
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised, including tax benefit
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    3
    
    
    
    1,085
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,088Cash dividends ($0.30 per Common share and
$0.15 per Class A common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,907
    )
    
    
    (28,907
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,932
    
    
    
    
    
    
    
    7,932Balance: January 29, 2005
    
    
    5,125
    
    
    
    256
    
    
    
    93,858
    
    
    
    4,693
    
    
    
    50,477
    
    
    
    
    
    
    
    28,041
    
    
    
    672,220
    
    
    
    755,687Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172,343
    
    
    
    172,343Class A common stock converted to common stock
    
    
    (229
    )
    
    
    (11
    )
    
    
    229
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends ($0.65 per common share and
$0.325 per Class A common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,886
    )
    
    
    (62,886
    )Stock options exercised, including tax benefit
    
    
    
    
    
    
    
    
    
    
    323
    
    
    
    17
    
    
    
    5,727
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,744Acceleration of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314Restricted stock issued
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    8
    
    
    
    3,812
    
    
    
    (2,690
    )
    
    
    
    
    
    
    
    
    
    
    1,130Long-term incentive plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,991
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,991Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,005
    )
    
    
    
    
    
    
    (7,005
    )Balance: January 28, 2006
    
    
    4,896
    
    
    $
    245
    
    
    
    94,581
    
    
    $
    4,729
    
    
    $
    63,321
    
    
    $
    (2,690
    )
    
    $
    21,036
    
    
    $
    781,677
    
    
    $
    868,318
  35
    Table of Contents  CLAIRES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Year EndedJan. 28, 2006
    
    
    Jan. 29, 2005
    
    
    Jan. 31, 2004(In thousands)Cash flows from operating activities:Net income
    
    $
    172,343
    
    
    $
    143,124
    
    
    $
    115,038Adjustments to reconcile net income to net cash
provided by operating activities:Loss on disposal of discontinued operations, net of tax benefit
    
    
    
    
    
    
    3,135
    
    
    
    Depreciation and amortization
    
    
    48,900
    
    
    
    44,882
    
    
    
    41,451Amortization of intangible assets
    
    
    1,232
    
    
    
    1,129
    
    
    
    1,211Loss on retirement of property and equipment
    
    
    3,460
    
    
    
    3,253
    
    
    
    2,923(Gain) loss on sale of intangible assets
    
    
    
    
    
    
    (170
    )
    
    
    (409
    )Tax benefit of stock options
    
    
    857
    
    
    
    323
    
    
    
    3,900Stock compensation expense
    
    
    4,121
    
    
    
    
    
    
    
    Acceleration of stock options
    
    
    314
    
    
    
    
    
    
    
    2,416(Increase) decrease in -Inventories
    
    
    (4,995
    )
    
    
    (15,959
    )
    
    
    (1,192
    )Prepaid expenses and other current assets
    
    
    2,995
    
    
    
    (4,830
    )
    
    
    (1,330
    )Increase (decrease) in -Trade accounts payable
    
    
    9,747
    
    
    
    3,585
    
    
    
    120Income taxes payable
    
    
    5,776
    
    
    
    3,657
    
    
    
    15,638Accrued expenses and other liabilities
    
    
    (309
    )
    
    
    11,629
    
    
    
    22,473Deferred income taxes
    
    
    (4,458
    )
    
    
    4,502
    
    
    
    797Deferred rent expense
    
    
    2,876
    
    
    
    1,030
    
    
    
    1,371Net cash provided by operating activities
    
    
    242,859
    
    
    
    199,290
    
    
    
    204,407Cash flows from investing activities:Acquisition of property and equipment
    
    
    (73,444
    )
    
    
    (63,567
    )
    
    
    (48,838
    )Acquisition of intangible assets
    
    
    (9,056
    )
    
    
    (7,455
    )
    
    
    (9,871
    )Purchase of short-term investments
    
    
    (82,334
    )
    
    
    (246,234
    )
    
    
    Sale of short-term investments
    
    
    216,947
    
    
    
    111,621
    
    
    
    Net cash provided by (used in) investing activities
    
    
    52,113
    
    
    
    (205,635
    )
    
    
    (58,709
    )Cash flows from financing activities:Principal payments on term loan
    
    
    
    
    
    
    
    
    
    
    (85,932
    )Principal payments on lines of credit
    
    
    
    
    
    
    
    
    
    
    (25,000
    )Proceeds from stock options exercised
    
    
    4,886
    
    
    
    766
    
    
    
    10,292Dividends paid
    
    
    (62,886
    )
    
    
    (28,907
    )
    
    
    (13,340
    )Net cash used in financing activities
    
    
    (58,000
    )
    
    
    (28,141
    )
    
    
    (113,980
    )Effect of foreign currency exchange rate changes on cash
and cash equivalents
    
    
    3,144
    
    
    
    862
    
    
    
    (2,570
    )Net increase (decrease) in cash and cash equivalents
    
    
    240,116
    
    
    
    (33,624
    )
    
    
    29,148Cash and cash equivalents at beginning of period
    
    
    191,006
    
    
    
    224,630
    
    
    
    195,482Cash and cash equivalents at end of period
    
    $
    431,122
    
    
    $
    191,006
    
    
    $
    224,630
  36
    Table of Contents  CLAIRES STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Operations
 Principles of Consolidation
 Reclassifications
 Use of Estimates
 Fiscal Year
 Cash and Cash Equivalents
 Short-term Investments
  Inventories
 37
    Table of Contents  Prepaid Expenses and Other Current Assets
 Jan. 28,
    
    
    Jan. 29,2006
    
    
    2005Prepaid rent and occupancy
    
    $
    16,017
    
    
    $
    26,696Deferred tax asset
    
    
    13,071
    
    
    
    12,246Credit card and other receivables
    
    
    10,325
    
    
    
    7,280Trust assets
    
    
    7,066
    
    
    
    4,560Store supplies
    
    
    5,110
    
    
    
    5,120Other
    
    
    1,891
    
    
    
    1,733$
    53,480
    
    
    $
    57,635
 Property and Equipment
  Goodwill
  Other Assets
  38
    Table of Contents  Intangible Assets
 Jan. 28, 2006
    
    
    Jan. 29, 2005Gross
    
    
    Accumulated
    
    
    Gross
    
    
    AccumulatedCarrying Amount
    
    
    Amortization
    
    
    Carrying Amount
    
    
    AmortizationAmortizable lease rights
    
    $
    22,198
    
    
    $
    10,550
    
    
    $
    19,275
    
    
    $
    10,218Non-amortizable lease
rights
    
    
    44,527
    
    
    
    
    
    
    
    43,417
    
    
    
    $
    66,725
    
    
    $
    10,550
    
    
    $
    62,692
    
    
    $
    10,218
 Weighted AverageAmortizationPeriod for AmortizableLease Right Acquisitions
    
    Non-Amortizable
    
    Amortizable
    
    Lease Rights Acquisitions(in years)Fiscal Year EndedJanuary 28, 2006
    
    $
    4,427
    
    
    $
    4,629
    
    
    
    7.8January 29, 2005
    
    $
    7,310
    
    
    $
    913
    
    
    
    10.3January 31, 2004
    
    $
    9,348
    
    
    $
    1,045
    
    
    
    9.0
  Accrued Expenses and Other Liabilities
 Jan. 28,
    
    
    Jan. 29,2006
    
    
    2005Compensation and benefits
    
    $
    37,547
    
    
    $
    39,133Sales and local taxes
    
    
    13,445
    
    
    
    9,529Gift cards and certificates
    
    
    12,645
    
    
    
    12,009Store rent
    
    
    5,410
    
    
    
    5,189Accrued expenses and other
    
    
    23,448
    
    
    
    28,153$
    92,495
    
    
    $
    94,013
 Revenue Recognition
 Cost of Sales 39
    Table of Contents    Gift Cards and Gift Certificates
 Leasing
 Basic and Diluted Shares
  Fiscal Year EndedJan. 28,
    
    
    Jan. 29,
    
    
    Jan. 31,2006
    
    
    2005
    
    
    2004Numerator:Income from continuing operations
    
    $
    172,343
    
    
    $
    146,259
    
    
    $
    115,038Denominator:Weighted average number of shares outstandingBasic
    
    
    99,106
    
    
    
    98,937
    
    
    
    97,955Effect of dilutive stock options
    
    
    370
    
    
    
    373
    
    
    
    485Effect of dilutive time-vested and long-term incentive stock awards
    
    
    46
    
    
    
    
    
    
    
    Diluted
    
    
    99,522
    
    
    
    99,310
    
    
    
    98,440Income from continuing operations per share:Basic
    
    $
    1.74
    
    
    $
    1.48
    
    
    $
    1.17Diluted
    
    $
    1.73
    
    
    $
    1.47
    
    
    $
    1.17
  40    Table of Contents  Income Taxes
 Foreign Currency Translation
 Fair Value of Financial Instruments
 Derivative Instruments and Hedging Activities
   Stock-Based Compensation 41
    Table of Contents    Fiscal Year EndedJan. 28,
    
    
    Jan. 29,
    
    
    Jan. 31,2006
    
    
    2005
    
    
    2004Net income  as reported
    
    $
    172,343
    
    
    $
    143,124
    
    
    $
    115,038Stock-based employee compensation
expense determined under the fair
value based methods, net of income
tax
    
    
    (6,734
    )
    
    
    (1,944
    )
    
    
    (1,649
    )Stock-based employee compensation
expense included in reported
net income, net of income tax
    
    
    2,945
    
    
    
    
    
    
    
    Net income  pro forma
    
    $
    168,554
    
    
    $
    141,180
    
    
    $
    113,389Basic net income per share  as reported
    
    $
    1.74
    
    
    $
    1.45
    
    
    $
    1.17Basic net income per share  pro forma
    
    $
    1.70
    
    
    $
    1.43
    
    
    $
    1.16Diluted net income per share  as reported
    
    $
    1.73
    
    
    $
    1.44
    
    
    $
    1.17Diluted net income per share  pro forma
    
    $
    1.69
    
    
    $
    1.42
    
    
    $
    1.15
  Recent Accounting Pronouncements
  42    Table of Contents  2. STATEMENTS OF CASH FLOWS
   3. CREDIT FACILITIES
  43
    Table of Contents  4. COMMITMENTS AND CONTINGENCIES
 Leasing
 Fiscal 2006
    
    
    Fiscal 2005
    
    
    Fiscal 2004Minimum store rentals
    
    $
    162,066
    
    
    $
    154,994
    
    
    $
    143,067Store rentals based on net sales
    
    
    4,734
    
    
    
    4,700
    
    
    
    3,767Other rental expense
    
    
    14,141
    
    
    
    17,796
    
    
    
    22,605Total rental expense from
continuing operations
    
    $
    180,941
    
    
    $
    177,490
    
    
    $
    169,439
   2007
    
    $
    162,3532008
    
    
    152,1642009
    
    
    136,0692010
    
    
    121,2922011
    
    
    107,202Thereafter
    
    
    229,671$
    908,751
   44
    Table of Contents     Foreign Currency Options
  Legal
  Other
  5. STOCKHOLDERS EQUITY
 Stock Split
 45
    Table of Contents   Preferred Stock
 Class A Common Stock
 Rights to Purchase Series A Junior Participating Preferred Stock
 Stock
Repurchase Program
 Time-Vested
Stock Awards
 Long-Term
Incentive Stock Plan 46
    Table of Contents    6. STOCK OPTIONS
     47
    Table of Contents  Fiscal 2006
    
    
    Fiscal 2005
    
    
    Fiscal 2004Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of period
    
    
    1,511,813
    
    
    $
    15.39
    
    
    
    1,266,868
    
    
    $
    14.23
    
    
    
    1,669,096
    
    
    $
    8.52Options granted
    
    
    
    
    
    
    
    
    
    
    350,000
    
    
    $
    19.01
    
    
    
    900,000
    
    
    $
    16.77Options exercised
    
    
    (323,127
    )
    
    $
    15.09
    
    
    
    (68,555
    )
    
    $
    11.16
    
    
    
    (1,235,728
    )
    
    $
    8.30Options canceled
    
    
    (75,250
    )
    
    $
    17.30
    
    
    
    (36,500
    )
    
    $
    15.96
    
    
    
    (66,500
    )
    
    $
    15.34Outstanding at end of period
    
    
    1,113,436
    
    
    $
    15.33
    
    
    
    1,511,813
    
    
    $
    15.40
    
    
    
    1,266,868
    
    
    $
    14.23Exercisable at end of period
    
    
    1,108,436
    
    
    $
    15.32
    
    
    
    428,842
    
    
    $
    12.39
    
    
    
    189,534
    
    
    $
    8.73Weighted average fair value
of options granted during
the period(see below)
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    $
    10.19
    
    
    
    
    
    
    $
    8.98
  Fiscal
    
    
    Fiscal
    
    
    Fiscal2006
    
    
    2005
    
    
    2004Expected dividend yield
    
    
    N/A
    
    
    
    1.30
    %
    
    
    1.40
    %Expected stock price volatility
    
    
    N/A
    
    
    
    50.00
    %
    
    
    50.00
    %Risk-Free interest rate
    
    
    N/A
    
    
    
    4.60
    %
    
    
    4.70
    %Expected life of options
    
    
    N/A
    
    
    7 years
    
    7 years
  Options Outstanding
    
    Options ExercisableWeightedAverageRemaining
    
    Weighted
    
    
    
    
    
    WeightedNumber of
    
    Contractual
    
    Average
    
    
    
    
    
    AverageShares
    
    Life
    
    Exercise
    
    Number of
    
    ExerciseExercise Prices
    
    Outstanding
    
    (Years)
    
    Price
    
    Shares
    
    Price$8.96
    
    
    100,000
    
    
    
    0.48
    
    
    $
    8.96
    
    
    
    100,000
    
    
    $
    8.96$10.19
    
    
    226,936
    
    
    
    3.87
    
    
    $
    10.19
    
    
    
    226,936
    
    
    $
    10.19$13.40
    
    
    35,000
    
    
    
    7.41
    
    
    $
    13.40
    
    
    
    35,000
    
    
    $
    13.40$16.93
    
    
    436,500
    
    
    
    7.63
    
    
    $
    16.93
    
    
    
    431,500
    
    
    $
    16.93$18.61 to $22.04
    
    
    315,000
    
    
    
    8.06
    
    
    $
    19.05
    
    
    
    315,000
    
    
    $
    19.051,113,436
    
    
    
    6.34
    
    
    $
    15.33
    
    
    
    1,108,436
    
    
    $
    15.32
  48
    Table of Contents  7. EMPLOYEE BENEFIT PLANS
 Profit
Sharing Plan
 Deferred
Compensation Plans
 8. INCOME TAXES
  Fiscal
    
    
    Fiscal
    
    
    Fiscal2006
    
    
    2005
    
    
    2004Domestic
    
    $
    186,904
    
    
    $
    155,497
    
    
    $
    125,567Foreign
    
    
    72,767
    
    
    
    66,139
    
    
    
    48,855$
    259,671
    
    
    $
    221,636
    
    
    $
    174,422
 49
    Table of Contents  Fiscal Year EndedJan. 28,
    
    
    Jan. 29,
    
    
    Jan. 31,2006
    
    
    2005
    
    
    2004Federal:Current
    
    $
    71,693
    
    
    $
    55,299
    
    
    $
    38,307Deferred
    
    
    (3,315
    )
    
    
    3,557
    
    
    
    5,66468,378
    
    
    
    58,856
    
    
    
    43,971State:Current
    
    
    6,028
    
    
    
    4,679
    
    
    
    3,970Deferred
    
    
    (343
    )
    
    
    369
    
    
    
    5875,685
    
    
    
    5,048
    
    
    
    4,557Foreign:Current
    
    
    14,247
    
    
    
    10,836
    
    
    
    9,373Deferred
    
    
    (982
    )
    
    
    637
    
    
    
    1,48313,265
    
    
    
    11,473
    
    
    
    10,856Total income tax expense from
continuing operations
    
    
    87,328
    
    
    
    75,377
    
    
    
    59,384Tax benefit of discontinued operations
    
    
    
    
    
    
    (1,865
    )
    
    
    Total income tax expense
    
    $
    87,328
    
    
    $
    73,512
    
    
    $
    59,384
 50
    Table of Contents  Jan. 28,
    
    
    Jan. 29,2006
    
    
    2005Deferred tax assets:Accrued expenses
    
    $
    5,050
    
    
    $
    4,193Deferred rent
    
    
    4,408
    
    
    
    3,555Discontinued operations
    
    
    224
    
    
    
    3,023Compensation & benefits
    
    
    5,575
    
    
    
    3,921Inventory
    
    
    1,714
    
    
    
    621Gift cards
    
    
    1,089
    
    
    
    Net operating loss carry forwards
    
    
    8,418
    
    
    
    6,388Other
    
    
    840
    
    
    
    760Total gross deferred tax assets
    
    
    27,318
    
    
    
    22,461Valuation allowance
    
    
    (8,305
    )
    
    
    (5,884
    )Total deferred tax assets, net
    
    
    19,013
    
    
    
    16,577Deferred tax liabilities:Depreciation
    
    
    3,230
    
    
    
    9,139Operating leases
    
    
    230
    
    
    
    1,034Intangible asset amortization
    
    
    22,151
    
    
    
    17,607Other
    
    
    809
    
    
    
    844Total deferred tax liabilities
    
    
    26,420
    
    
    
    28,624Net deferred tax liability
    
    $
    (7,407
    )
    
    $
    (12,047
    )
  Fiscal Year EndedJan. 28,
    
    
    Jan. 29,
    
    
    Jan. 31,2006
    
    
    2005
    
    
    2004U.S. income taxes at statutory federal rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Foreign income tax benefit at less than U.S. rate
    
    
    (6.4
    )
    
    
    (6.0
    )
    
    
    (5.3
    )State and local income taxes, net of federal tax benefit
    
    
    1.4
    
    
    
    1.7
    
    
    
    1.7American Jobs Creation Act repatriation
    
    
    2.2
    
    
    
    
    
    
    
    Change in accrual for estimated tax contingencies
    
    
    2.3
    
    
    
    1.9
    
    
    
    0.7Other, net
    
    
    (0.9
    )
    
    
    1.4
    
    
    
    1.933.6
    %
    
    
    34.0
    %
    
    
    34.0
    %
  51
    Table of Contents          9. RELATED PARTY TRANSACTIONS
   52
    Table of Contents  53
    Table of Contents  10. SELECTED QUARTERLY FINANCIAL DATA
 Fiscal Year Ended January 28, 20061st Qtr
    
    
    2nd Qtr
    
    
    3rd Qtr
    
    
    4th Qtr
    
    
    Year(In thousands, except per share amounts)Net sales
    
    $
    302,708
    
    
    $
    325,042
    
    
    $
    327,259
    
    
    $
    414,743
    
    
    $
    1,369,752Gross profit
    
    
    164,013
    
    
    
    173,194
    
    
    
    175,718
    
    
    
    230,961
    
    
    
    743,886Net income
    
    
    29,702
    
    
    
    35,458
    
    
    
    38,127
    
    
    
    69,056
    
    
    
    172,343Basic net income per shareNet income
    
    $
    0.30
    
    
    $
    0.36
    
    
    $
    0.38
    
    
    $
    0.70
    
    
    $
    1.74Diluted net income per shareNet income
    
    $
    0.30
    
    
    $
    0.36
    
    
    $
    0.38
    
    
    $
    0.69
    
    
    $
    1.73
 Fiscal Year Ended January 29, 20051st Qtr
    
    
    2nd Qtr
    
    
    3rd Qtr
    
    
    4th Qtr
    
    
    Year(In thousands, except per share amounts)Net sales
    
    $
    281,591
    
    
    $
    305,223
    
    
    $
    296,702
    
    
    $
    395,891
    
    
    $
    1,279,407Gross profit
    
    
    156,067
    
    
    
    163,303
    
    
    
    157,470
    
    
    
    214,880
    
    
    
    691,720Income from continuing operations
    
    
    27,692
    
    
    
    32,745
    
    
    
    27,158
    
    
    
    58,664
    
    
    
    146,259Loss on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,135
    
    
    
    3,135Net income
    
    
    27,692
    
    
    
    32,745
    
    
    
    27,158
    
    
    
    55,529
    
    
    
    143,124Basic net income per shareIncome from continuing operations
    
    $
    0.28
    
    
    $
    0.33
    
    
    $
    0.27
    
    
    $
    0.59
    
    
    $
    1.48Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.03
    )
    
    
    (0.03
    )Net income
    
    $
    0.28
    
    
    $
    0.33
    
    
    $
    0.27
    
    
    $
    0.56
    
    
    $
    1.45Diluted net income per shareIncome from continuing operations
    
    $
    0.28
    
    
    $
    0.33
    
    
    $
    0.27
    
    
    $
    0.59
    
    
    $
    1.47Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.03
    )
    
    
    (0.03
    )Net income
    
    $
    0.28
    
    
    $
    0.33
    
    
    $
    0.27
    
    
    $
    0.56
    
    
    $
    1.44
 11. SEGMENT REPORTING
  54
    Table of Contents  Fiscal Year2006
    
    
    2005
    
    
    2004Net sales:North America
    
    $
    964,008
    
    
    $
    906,071
    
    
    $
    820,332International
    
    
    405,744
    
    
    
    373,336
    
    
    
    312,502Total net sales
    
    $
    1,369,752
    
    
    $
    1,279,407
    
    
    $
    1,132,834Operating income:North America
    
    $
    226,269
    
    
    $
    195,518
    
    
    $
    165,279International
    
    
    68,062
    
    
    
    65,142
    
    
    
    48,948Total operating income
    
    $
    294,331
    
    
    $
    260,660
    
    
    $
    214,227Depreciation and amortization:North America
    
    $
    32,383
    
    
    $
    29,046
    
    
    $
    27,222International
    
    
    16,517
    
    
    
    15,836
    
    
    
    14,229Total depreciation and amortization
    
    $
    48,900
    
    
    $
    44,882
    
    
    $
    41,451Interest expense:North America
    
    $
    
    
    
    $
    
    
    
    $
    2,530International
    
    
    
    
    
    
    
    
    
    
    31Total interest expense
    
    $
    
    
    
    $
    
    
    
    $
    2,561Interest and other income:North America
    
    $
    (10,669
    )
    
    $
    (3,851
    )
    
    $
    (2,860
    )International
    
    
    (3,571
    )
    
    
    (2,007
    )
    
    
    (1,347
    )Total interest and other income
    
    $
    (14,240
    )
    
    $
    (5,858
    )
    
    $
    (4,207
    )Income from continuing operations before income taxes:North America
    
    $
    204,554
    
    
    $
    170,323
    
    
    $
    138,387International
    
    
    55,117
    
    
    
    51,313
    
    
    
    36,035Total income from continuing operations before income taxes
    
    $
    259,671
    
    
    $
    221,636
    
    
    $
    174,422Income taxes:North America
    
    $
    81,794
    
    
    $
    68,484
    
    
    $
    52,578International
    
    
    5,534
    
    
    
    6,893
    
    
    
    6,806Total income taxes
    
    $
    87,328
    
    
    $
    75,377
    
    
    $
    59,384Income from continuing operations:North America
    
    $
    122,760
    
    
    $
    101,839
    
    
    $
    85,809International
    
    
    49,583
    
    
    
    44,420
    
    
    
    29,229Total income from continuing operations
    
    $
    172,343
    
    
    $
    146,259
    
    
    $
    115,038Goodwill:North America
    
    $
    170,650
    
    
    $
    170,650
    
    
    $
    170,650International
    
    
    27,988
    
    
    
    30,417
    
    
    
    29,152Total goodwill
    
    $
    198,638
    
    
    $
    201,067
    
    
    $
    199,802Long lived assets:North America
    
    $
    159,361
    
    
    $
    145,418
    
    
    $
    128,585International
    
    
    63,358
    
    
    
    59,108
    
    
    
    57,266Total long lived assets
    
    $
    222,719
    
    
    $
    204,526
    
    
    $
    185,851Total assets:North America
    
    $
    822,687
    
    
    $
    668,772
    
    
    $
    542,763International
    
    
    268,014
    
    
    
    297,357
    
    
    
    263,161Total assets
    
    $
    1,090,701
    
    
    $
    966,129
    
    
    $
    805,924Capital ExpendituresNorth America
    
    $
    46,895
    
    
    $
    46,930
    
    
    $
    33,331International
    
    
    26,549
    
    
    
    16,637
    
    
    
    15,507Total capital expenditures
    
    $
    73,444
    
    
    $
    63,567
    
    
    $
    48,838
 55
    Table of Contents  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
  
  Internal Control  Integrated Framework Internal Control  Integrated Framework
   
 Item 9B. Other Information
  56
    Table of Contents  PART III.
 
 Items 10, 11, 12, 13 and 14. Directors and Executive Officers of the Registrant; Executive
Compensation; Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters; Certain Relationships and Related Transactions; and Principal Accountant Fees
and Services.
  
 PART IV.
 
 Item 15. Exhibits, Financial Statement Schedules
  1. Financial Statements
 Page No.Reports of Independent Registered Public Accounting Firm
    
    
    31Consolidated Balance Sheets as of January 28, 2006 and
January 29, 2005
    
    
    33Consolidated Statements of Operations and Comprehensive Income
for the fiscal years ended January 28, 2006, January 29, 2005
and January 31, 2004
    
    
    34Consolidated Statements of Changes in Stockholders Equity for
the fiscal years ended January 28, 2006, January 29, 2005
and January 31, 2004
    
    
    35Consolidated Statements of Cash Flows for the fiscal years ended
January 28, 2006, January 29, 2005 and January 31, 2004
    
    
    36Notes to Consolidated Financial Statements
    
    
    37
 2. Financial Statement Schedules
  3. Exhibits
 (2)(a)
    
    Agreement and Plan of Merger dated as of March 9, 1998 among the Company, CSI
Acquisition Corp., Lux Corporation, and David Shih, Eva Shih, Daniel Shih,
Douglas Shih, the Shih Irrevocable Trust and Crestwood Partners LLC, as amended
by letter amendment dated March 23, 1998 and addendum thereto dated March 24,
1998 (incorporated by reference to exhibit 2 (a) to the Companys Annual Report
on Form 10-K for the fiscal year ended January 30, 1999).(2)(b)
    
    Asset Purchase Agreement, dated as of November 1, 1999, by and between the
Company, Venator Group, Inc., Venator Group Specialty, Inc., Venator Group
Canada, Inc., Afterthoughts Boutiques, Inc. and Afterthoughts
(incorporated by reference to Exhibit 2.1 to the Companys Current Report
on Form 8-K dated December 1, 1999).
 57
    Table of Contents  (2)(c)
    
    Agreement and Plan of Merger, dated as of April 28, 2000, by and between
Claires Stores, Inc. and CSI Florida Acquisition, Inc. (incorporated by
reference to Appendix A to the Companys Proxy Statement relating to the 2000
Annual Meeting of Stockholders).(2)(d)
    
    Stock Purchase Agreement, dated as of May 17, 2002, by and among Mr. Rags
Acquisition, Inc., Claires Stores, Inc. and Lux Corporation d/b/a Mr. Rags
(omitted schedules will be furnished supplementally to the Commission upon
request) (incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on June 3, 2002).(3)(a)
    
    Amended and Restated Articles of Incorporation of Claires Stores, Inc.
(formerly known as CSI Florida Acquisition, Inc.) (incorporated by reference to
Exhibit 3.1 to the Companys Current Report on Form 8-K dated June 30, 2000).(3)(b)
    
    Amended and Restated Bylaws of Claires Stores, Inc. (formerly known as CSI
Florida Acquisition, Inc.)(incorporated by reference to Exhibit 3.1
to the Companys Quarterly Report on Form 10-Q filed on September 2, 2004).(3)(c)
    
    Articles of Amendment to the Amended and Restated Articles of Incorporation of
Claires Stores, Inc. (incorporated by reference to Exhibit 3(c) to the Companys
Annual Report on Form 10-K filed on April 15, 2004).(4)(a)
    
    Rights Agreement, effective May 30, 2003 between Claires Stores, Inc. and
Wachovia Bank, N.A., as Rights Agent, together with the following exhibits
thereto: Exhibit A  Form of Articles of Amendment Designating the Series A
Junior Participating Preferred Stock of Claires Stores, Inc.; Exhibit B  Form
of Right Certificate; Exhibit C  Summary of Rights to Purchase Shares of
Preferred Shares of Claires Stores, Inc. (incorporated by reference to Exhibit
4.1 to the Companys Registration Statement on Form 8-A filed on June 23, 2003).(10)(a)
    
    Amended and Restated 1996 Incentive Compensation Plan of the Company
(incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q filed on June 8, 2005 relating to the 2003 Annual Meeting of
Stockholders).(10)(b)
    
    401(k) Profit Sharing Plan, as amended (incorporated by reference to Exhibit
10(e) to the Companys Annual Report on Form 10-K for the fiscal year ended
February 1, 1992).(10)(c)
    
    2005 Management Deferred Compensation Plan effective as of February 4, 2005
(incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q filed on June 8, 2005).(10)(d)
    
    Amended and Restated Office Lease dated January 1, 2004 between the Company
and Rowland Schaefer Associates (incorporated by reference to Exhibit 10(x) to
the Companys Annual Report on Form 10-K filed on April 15, 2004).
 58
    Table of Contents  (10)(e)
    
    Retirement Agreement dated December 2003 between Claires Stores, Inc. and
Rowland Schaefer (incorporated by reference to Exhibit 10(y) to the Companys
Annual Report on Form 10-K filed on April 15, 2004).(10)(f)
    
    Loan and Security Agreement dated March 31, 2004 by and among, the Company,
as lead borrower for BMS Distributing Corp., Claires Boutiques, Inc., CBI
Distributing Corp., and Claires Puerto Rico Corp., Fleet Retail Group, Inc., as
administrative agent for and the revolving credit lenders and other financial
institutions or entities from time to time parties thereto, and Fleet National
Bank as issuer (incorporated by reference to Exhibit 10(z) to the Companys
Annual Report on Form 10-K filed on April 15, 2004).(10)(g)
    
    Employment Agreement, dated February 11, 2005, between the Company and E.
Bonnie Schaefer (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed on February 17, 2005).(10)(h)
    
    Employment Agreement, dated February 11, 2005, between the Company and Marla
Schaefer (incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K filed on February 17, 2005).(10)(i)
    
    2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10 (c)
to the Companys Annual Report on Form 10-K filed on April 13, 2005).(21)
    
    Subsidiaries of the Company.(1)(23)
    
    Consent of KPMG LLP.(1)(24)
    
    Power of Attorney (included on signature page).Each management contract or compensatory plan or arrangement to be filed
as an exhibit to this report pursuant to Item 14(c) is listed in exhibit
nos. (10)(a), (10)(b), (10)(c), (10)(e), (10)(g), (10)(h) and (10)(i).(31.1)
    
    Certification of Co-Chief Executive Officerpursuant to Rules
13a-14(a) and 15d-14(a).(1)(31.2)
    
    Certification of Co-Chief Executive Officer pursuant to Rules 13a-14(a) and
15d-14(a).(1)(31.3)
    
    Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and
15d-14(a).(1)(32.1)
    
    Certification of Co-Chief Executive Officer pursuant to 18 USC Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(2)(32.2)
    
    Certification of Co-Chief Executive Officer pursuant to 18 USC Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(2)(32.3)
    
    Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(2)
 
 (1) Filed herewith.(2) Furnished herewith. 59
    Table of Contents  SIGNATURES
  CLAIRES STORES, INC.April 12, 2006
    By:

/s/ Marla L. SchaeferMarla L. Schaefer, Co-Chief Executive OfficerApril 12, 2006
    By:

/s/ E. Bonnie SchaeferE. Bonnie Schaefer, Co-Chief Executive OfficerApril 12, 2006
    By:

/s/ Ira D. KaplanIra D. Kaplan, Senior Vice President and ChiefFinancial Officer POWER OF ATTORNEY
   April 12, 2006
    /s/ Marla L. SchaeferMarla L. Schaefer, Co-Chairman of the Board ofDirectors (principal co-executive officer and
director)April 12, 2006
    /s/ E. Bonnie SchaeferE. Bonnie Schaefer, Co-Chairman of the Board ofDirectors (principal co-executive officer and
director)April 12, 2006
    /s/ Ira D. KaplanIra D. Kaplan, Senior Vice President, ChiefFinancial Officer and Director (principal
financial and accounting officer and director)April 12, 2006
    /s/ Martha Clark GossMartha Clark Goss, DirectorApril 12, 2006
    /s/ Ann Spector LieffAnn Spector Lieff, DirectorApril 12, 2006
    /s/ Bruce G. MillerBruce G. Miller, DirectorApril 12, 2006
    /s/ Steven H. TishmanSteven H. Tishman, Director 60
    Table of Contents  INDEX TO EXHIBITS
 EXHIBIT NO.
    
    DESCRIPTION21
    
    Subsidiaries of the Company.23
    
    Consent of KPMG LLP.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 USC 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 USC 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 USC Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 61