##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year
ended January 31, 2004
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 Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredCommon Stock, $.05 par value
Rights to Purchase Series A Junior
Participating Preferred Stock
    
    New York Stock Exchange
New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: Title of each class   Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x  No o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes x  No o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o As of the last business day of the registrants most recently completed
second fiscal quarter, the aggregate market value of the shares of Class A
Common Stock and Common Stock held by non-affiliates of the registrant was
$1,173,142,739. All outstanding shares of Class A Common Stock and Common
Stock, except for shares held by executive officers and members of the Board of
Directors and their affiliates, are deemed to be held by non-affiliates. At March 31, 2004, there were outstanding 93,714,937 shares of
registrants Common Stock, $.05 par value, and 5,200,171 shares of the
registrants Class A Common Stock, $.05 par value. DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement for the 2004 Annual Meeting of Stockholders, to be
filed no later than 120 days after the end of the registrants fiscal year
covered by this report, is incorporated by reference into Part III of this
report.




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TABLE OF CONTENTS Item
    
    Page No.PART I
    
    
    3Item 1.Business
    
    
    3Item 2.Properties
    
    
    8Item 3.Legal Proceedings
    
    
    9Item 4.Submission of Matters to a Vote of Security Holders
    
    
    9PART II
    
    
    9Item 5.Market for Registrants Common Equity and Related Stockholder Matters
    
    
    9Item 6.Selected Financial Data
    
    
    11Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 8.Financial Statements and Supplementary Data
    
    
    46Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    46Item 9A.Controls and Procedures
    
    
    46PART III
    
    
    46Item 10.Directors and Executive Officers of the Registrant
    
    
    46Item 11.Executive Compensation
    
    
    46Item 12.Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    46Item 13.Certain Relationships and Related Transactions
    
    
    46Item 14.Principal Accountant Fees and Services
    
    
    46PART IV
    
    
    47Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    47SignaturesArticles of Amendment to Articles of IncorporationOffice LeaseRetirement Agreement w/ Rowland SchaeferLoan & Security AgreementSubsidiaries of the CompanyConsent of KPMG LLPSec. 302 Cert. of Co-Chief Executive OfficerSec. 302 Cert. of Co-Chief Executive OfficerSec. 302 Cert. of Chief Financial OfficerSec. 906 Cert. of Co-Chief Executive OfficerSec. 906 Cert. of Co-Chief Executive OfficerSec. 906 Cert. of Chief Financial Officer
  2




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PART I. 
 Item 1. Business General We are a leading specialty retailer of value-priced fashion accessories for
pre-teens and teenagers as well as young adults primarily through our two store
concepts, Claires Accessories and Icing by Claires. We are organized
based on our geographic markets, which include our North American operations
and our International operations. As of March 31, 2004 we operated a total of
2,953 stores in all 50 states of the United States, Puerto Rico, Canada, the
Virgin Islands, the United Kingdom, Switzerland, Austria, Germany, France,
Ireland and Japan. The stores are operated mainly under the trade names
Claires Boutiques, Claires Accessories, Icing by Claires,
Afterthoughts and The Icing. We are in the process of transitioning our
Afterthoughts stores to Icing by Claires stores to capitalize on the
Claires brand name. We incorporated in 1961 as a Delaware corporation. In June 2000, we completed
our reincorporation from the state of Delaware to the State of Florida through
a merger transaction with one of our wholly-owned subsidiaries. In May 2002,
we disposed of our apparel segment. Our executive offices are located at 3 S.W. 129 Avenue, Pembroke Pines, Florida
33027, our telephone number is (954) 433-3900 and our internet address is
www.claires.com. Through our website, we make available free of charge, as
soon as reasonably practicable after such information has been filed or
furnished to the Securities and Exchange Commission, our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports. In addition, we have made our Code of
Ethics available free of charge through our website. The reference to our website does not constitute
incorporation by reference of the information contained on our website, and the
information contained on the website is not part of this Form 10-K. Business Description We specialize in selling value-priced fashion accessories designed to
predominantly appeal to pre-teen and teenage females as well as young adults.
We have two store concepts: Claires Accessories, which caters to
fashion-conscious girls and teens in the 7 to 17 age range, and Icing by
Claires, which caters to fashion-conscious teens and young women in the 17 to
27 age range. Our merchandise typically ranges in price between $2 and $20,
with the average product priced at about $5. Our stores share a similar format
and our different store concepts and tradenames allow us to have multiple store
locations in a single mall. Although we face competition from a number of
small specialty store chains and other large department and chain stores that
sell fashion accessories, we believe that our stores comprise one of the
largest and are among the most successful chains of specialty retail stores
devoted to the sale of value-priced fashion accessories for pre-teen, teenage
and young adult females. Our sales are divided into two principal product categories:  
    
    JewelryCostume jewelry, earrings and ear piercing services; and  
    
    AccessoriesOther fashion accessories, hair ornaments, totebags and novelty items. The following table compares our sales of each product category for the last
three fiscal years (dollars in thousands): Fiscal Year EndedJan. 31, 2004
    
    Feb. 1, 2003
    
    Feb. 2, 2002Jewelry
    
    $
    603,564
    
    
    
    53.3
    %
    
    $
    481,686
    
    
    
    48.1
    %
    
    $
    423,321
    
    
    
    46.1
    %Accessories
    
    
    529,270
    
    
    
    46.7
    %
    
    
    519,851
    
    
    
    51.9
    %
    
    
    495,416
    
    
    
    53.9
    %$
    1,132,834
    
    
    
    100.0
    %
    
    $
    1,001,537
    
    
    
    100.0
    %
    
    $
    918,737
    
    
    
    100.0
    %
 3




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We refer to the fiscal years referenced above as Fiscal 2004, Fiscal 2003 and
Fiscal 2002, respectively. We are primarily organized based on geographic markets for which we operate.
Under this organizational structure, we have two reportable segments: North
America and International. A summary of North American and International
operations is presented below (dollars in thousands): Fiscal Year EndedJan. 31,
    
    Feb. 1,
    
    Feb. 2,2004
    
    2003
    
    2002REVENUESNorth America
    
    $
    820,332
    
    
    $
    740,838
    
    
    $
    711,299International
    
    
    312,502
    
    
    
    260,699
    
    
    
    207,438Total revenues
    
    $
    1,132,834
    
    
    $
    1,001,537
    
    
    $
    918,737INCOME FROM CONTINUING OPERATIONSNorth America
    
    $
    85,809
    
    
    $
    57,926
    
    
    $
    21,339International
    
    
    29,229
    
    
    
    20,053
    
    
    
    19,787Total income from continuing operations
    
    $
    115,038
    
    
    $
    77,979
    
    
    $
    41,126LONG-LIVED ASSETSNorth America
    
    $
    311,069
    
    
    $
    308,437
    
    
    $
    315,695International
    
    
    134,832
    
    
    
    108,084
    
    
    
    81,456Total long-lived assets
    
    $
    445,901
    
    
    $
    416,521
    
    
    $
    397,151
 Strategy Through our Claires Accessories and Icing by Claires store concepts, our
mission is to be the most profitable specialty retailer selling accessories and
costume jewelry to fashion-aware teens, tweens and young adults. We believe
our customers want to stay current with or ahead of fashion trends and
continually seek newness in their accessory wear. The key elements of our
strategy are as follows: Actively Manage Merchandise Trends and Display of Merchandise. We devote
considerable effort to identifying emerging fashion trends. Through constant
product testing and rapid placement of successful test items in our stores, we
are able to respond to emerging fashion trends. We also devote considerable
effort to how our merchandise is displayed in our stores, which we believe
commands our customers attention, supports our image and promotes a consistent
shopping environment for our customers. Our merchandising and distribution
systems enhance our ability to make quick responses to new fashion trends. We
typically deliver merchandise to our stores three to five times a week. Provide Attentive Customer Service. We are committed to offering courteous and
professional customer service. We strive to give our customers the same level
of respect that is generally given to adult customers at other retail stores,
and to provide friendly and informed customer service for parents.
Additionally, our stores provide a friendly and social atmosphere for our
customers. Store Growth Strategy. We opened our first store in Europe in 1996 and, as of
January 31, 2004, operated 700 stores in Europe. Our European stores are
typically smaller than our North American stores, which results in higher sales
per square foot than our North American stores. We intend to continue our
store growth through the opening of new stores in our international markets.
Any future store openings in Asia are currently subject to our 50/50 joint
venture arrangement under Claires Nippon. 4




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Licensing Arrangements.We entered into our first licensing arrangement with a
Kuwait company in Fiscal 2002. We intend to continue to seek suitable
licensees in order to open stores in certain international markets where we
desire a limited financial investment. Maintain Strong Supplier Relationships. We view our supplier relationships as
important to our success, and promote personal interaction with our suppliers.
We believe many of our suppliers view our stores as important distribution
channels. Capitalize on Our Brand Name.We believe that the Claires brand name is one
of our most important assets. We intend to develop our brand through, among
other things, in-store marketing and licensing arrangements. Stores Our stores in North America are located primarily in enclosed shopping malls.
Our stores in North America operating as Claires Boutiques and Claires
Accessories average approximately 1,000 square feet while those stores
operating as Icing by Claires, The Icing and Afterthoughts average
approximately 1,200 square feet. Our stores in the United Kingdom,
(Switzerland, Austria, Germany, or S.A.G.), France, Ireland and Japan average
approximately 600 square feet and are located primarily in enclosed shopping
malls and central business districts. Each store uses our proprietary displays,
which permit the presentation of a wide variety of items in a relatively small
space. Our stores are distinctively designed for customer identification, ease of
shopping and display of a wide selection of merchandise. Store hours are
dictated by the mall operators and the stores are typically open from 10:00
A.M. to 9:00 P.M., Monday through Saturday, and, where permitted by law, from
Noon to 5:00 P.M. on Sunday. Approximately 75% of sales are made in cash, with the balance made by credit
cards. We permit, with restrictions on certain items, returns for exchange or
refund. Purchasing and Distribution We purchase our merchandise from approximately 700 domestic and international
suppliers. Approximately 74% of the merchandise purchased for our North
American stores was purchased from outside the United States, including
approximately 45% purchased from China. We are not dependent on an individual
supplier for merchandise purchased. All merchandise is shipped from suppliers
to our distribution facility in Hoffman Estates, Illinois, a suburb of Chicago,
which services the North American stores, or the distribution facility in
Birmingham, England, which services the stores in the United Kingdom, Ireland
and France, or the distribution facilities in Zurich, Switzerland and Vienna,
Austria, which service the stores in Switzerland, Austria and Germany. After
inspection, merchandise is shipped via common carrier to the individual stores.
Stores typically receive three to five shipments a week, which provide our
stores with a steady flow of new merchandise. Our business fluctuates according to changes in customer preferences, which are
dictated in part by fashion and season. In addition, the cyclical nature of
the retail business requires us to carry a significant amount of inventory,
especially prior to peak selling seasons. As a result, we typically purchase
merchandise from our suppliers well in advance of the applicable selling
season, and sometimes before fashion trends are identified or evidenced by
customer purchases. We determine the allocation of merchandise to our stores based on an analysis
of various factors, including size, location, demographics, sales and inventory
history. Merchandise typically is sold at its original marked price, with the
length of time varying by item. We review our inventory levels to identify
slow-moving merchandise, and use markdowns to clear this merchandise.
Markdowns may be used if inventory exceeds client demand for reasons of
fashion, design, seasonal adaptation or changes in client preference, or if it
is otherwise determined that the inventory will not sell at its currently
marked price. 5




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Store Management Except as stated below, our Executive Vice President of Store Operations is
responsible for managing our North American stores and reports to our Chief
Operating Officer for North America, who in turn, reports to our Co-Chief
Executive Officers of Claires Stores, Inc., our parent company. Our stores are
organized and controlled on a district level. We currently employ 214 District
Managers in North America, each of
whom oversees and manages approximately 10 stores in his or her respective
geographic area and reports to one of 22 Regional Managers. Each Regional
Manager in North America reports to one of 6 Territorial Vice Presidents, who
reports to the Executive Vice President of Store Operations. Each store is
staffed by a Manager, an Assistant Manager and one or more part-time employees.
A majority of the District Managers have been promoted from within the
organization, while a majority of the Regional Managers were hired externally.
All of the Territorial Vice Presidents in North America were promoted from
within the organization. The reporting structure for our stores in the
international group is similar to the reporting structure in North America.
The Presidents of Claires UK and S.A.G. report to the Chief Operating Officer
of Europe. The President of Claires France reports to the President of S.A.G,
who also holds the title of Group President. The Chief Operating Officer of
Europe reports to our Co-Chief Executive Officer of Claires Stores, Inc., who
is responsible for our International segment. In the international group,
there are a total of 6 Regional Managers and 74 District Managers. The Chief
Operating Officer of Europe position is currently vacant. Store Openings, Closings and Future Growth For Fiscal 2004, we opened 148 stores and closed 125 stores, for a total
increase of 23 stores, net. For Fiscal 2004, we expanded our operations by 5
stores, net, in the United Kingdom, resulting in a total of 459 stores, by 1
store, net, in S.A.G., resulting in a total of 96 stores, and by 41 stores,
net, in France, resulting in a total of 145 stores. In North America, we
decreased our operations by 38 stores, net to 2,112 stores. We believe our
store growth will occur in our international markets, where we plan on opening
50 stores, net, in France and opening 4 stores, net, in S.A.G. during the
fiscal year ending February 1, 2005, which is referred to as Fiscal 2005. We
plan on opening approximately 5 stores, net, in North America in Fiscal 2005
and closing 9 stores, net, in the United Kingdom. In Fiscal 2004, we and our
joint venture partner, Aeon Co., Ltd. (formerly known as Jusco Co., Ltd.), a
Japanese company, increased our operations in Japan by 14 stores, net, to 123
stores (Claires Nippon). There are 25 store openings planned in Japan in
Fiscal 2005. Net stores refers to stores opened, net of closings, if any. We closed 444 stores in the last three fiscal years, primarily due to certain
locations not meeting our established profit benchmarks or the unwillingness of
landlords to renew leases on terms acceptable to us, and the elimination of
stores in connection with our acquisition of Afterthoughts. Most of these
stores were closed at or near lease expiration. We have not experienced any
substantial difficulty in renewing desired store leases and have no reason to
expect any such difficulty in the future. For each of the last three fiscal
years, no individual store accounted for more than one percent of total sales. We plan to continue opening stores when suitable locations are found and
satisfactory lease negotiations are concluded. Our initial investment in new
stores opened during Fiscal 2004, which includes leasehold improvements and
fixtures, averaged approximately $141,000 per store. In addition, certain
store locations in our International operations require the purchase of
intangible assets. In these cases, we invested approximately $237,000 per
store in Fiscal 2004. Our continued growth depends on our ability to open and operate stores on a
profitable basis. Our ability to expand successfully will be dependent upon a
number of factors, including sufficient demand for our merchandise in existing
and new markets, our ability to locate and obtain favorable store sites and
negotiate acceptable lease terms, obtain adequate merchandise supply and hire
and train qualified management and other employees. Trademarks and Service Marks We are the owner in the United States of various marks, including Claires,
Claires Accessories, Afterthoughts, Icing by Claires and The Icing.
We have also registered these marks outside of the 6




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United States. We believe
our rights in our marks are important to our business and intend to maintain
our marks and the related registrations. Information Systems The Companys headquarters (HQ) information systems serve as a repository
and full-scale integration for the merchandising, retail and financial
disciplines. A Combination of in-house developed systems along with third
party specialty packages are used to support company information technology
objectives. Retail stores utilize Point of Sale (POS), which captures sku level data in
sales related transactions, along with merchandise administrative functions.
This POS data along with payroll information is captured by HQ on a nightly
basis through polling. In addition, information is passed back to the store,
including price file updates, messages and reports. The HQ systems process the POS data nightly and records all updates so that
other functions including allocation, purchase order and price change
sub-systems have the latest information available to support decision support
logic. This allows merchandising to identify opportunities at the earliest
possible time. Summary highlights of the POS information is also available to field managers
(territorial vice presidents, regional and district managers) every morning to
allow for exception follow-up in the field. Distribution center systems leverage technologies including put-to-light and
radio frequency to ensure an efficient and accurate picking/shipping operation. In addition to supporting the base domestic operations, initiatives have been
launched to share best practices with our International division. A wide area
network has been set up through a VPN to allow interoffice connectivity. Key
product information is shared among the international offices to leverage the
US supply chain. The existing infrastructure is compared to new technologies and requirements to
determine feasibility for the business on an ongoing basis. Key information technology initiatives for Fiscal 2005 include:  
    
    major update for allocation/replenishment functions
    
    support for additional pick philosophies within the distribution center
    
    introduction of an automated travel/expense work flow package
    
    intranet enhancements for merchandise sharing with International division
    
    move towards infrastructure standardization across our
International division including POS and merchandising systems Competition The specialty retail business is highly competitive. We compete with
department stores and chains on a national and international level. We also
compete on a regional or local level with specialty and discount store chains
and independent retail stores. Our competition also includes internet and
catalog businesses. We cannot estimate the number of our competitors because
of the large number of companies in the retail industry that fall into one of
these categories. We believe the main competitive factors in our business are
fashion, price, merchandise, store location and customer service. Seasonality Sales of each category of merchandise vary from period to period depending on
current fashion trends. We experience traditional retail patterns of peak
sales during the Christmas, Easter and back-to-school 7




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periods. Sales, as a
percentage of total sales in each of the four quarters of the fiscal year ended
January 31, 2004 were 21%, 23%, 23% and 32% in the first, second, third and
fourth quarters, respectively. Employees On March 31, 2004, we had approximately 16,000 employees, 56% of whom were
part-time. Part-time employees typically work up to 20 hours per week. We do
not have collective bargaining agreements with any labor unions and we consider
employee relations to be good. 
 Item 2. Properties Our stores are located in all 50 states of the United States, Puerto Rico,
Canada, the Virgin Islands, the United Kingdom, Switzerland, Austria, Germany,
France, Ireland and Japan. We lease all of our 2,953 store locations,
generally for terms of five to twenty-five years. Under the leases, we pay a
fixed minimum rent and/or rentals based on gross sales in excess of specified
amounts. We also pay certain other expenses (e.g., common area maintenance
charges and real estate taxes) under the leases. The internal layout and
fixtures of each store are designed by management and constructed under
contracts with third parties. Most of our stores in North America and most of our stores in the International
division are located in enclosed shopping malls, while some stores are located
within central business districts and others are located in open-air outlet
malls or strip centers. Our criteria for new stores includes geographic
location, demographic aspects of communities surrounding the store site,
quality of anchor tenants, advantageous location within a mall, appropriate
space availability and proposed rental rates. We believe that sufficient
desirable locations are available to accommodate our expansion plans. We
refurbish our existing stores on a regular basis. We own central buying and store operations offices and the North American
distribution center located in Hoffman Estates, Illinois which is on
approximately 24.8 acres of land. The property has buildings with
approximately 520,000 total square feet of space, of which 404,000 square feet
is devoted to receiving and distribution and 116,000 square feet is devoted to
office space. Our subsidiary, Claires Accessories UK Ltd., or UK, leases distribution and
office space in Birmingham, England. The facility consists of 25,000 square
feet of office space and 60,000 square feet of distribution space. The lease
expires in December 2024 and UK has the right to assign or sublet this lease at
any time during the term of the lease. Our stores operated by our subsidiaries, Claires Switzerland, Claires Austria
and Claires Germany, are serviced by distribution centers and offices in
Zurich, Switzerland and Vienna, Austria. The facility maintained in Zurich,
Switzerland consists of 13,700 square feet devoted to distribution and 8,500
square feet devoted to offices. The lease for this location expires on
December 31, 2006. In Vienna, Austria, the facility consists of 18,100 square
feet devoted to distribution and 3,400 square feet devoted to offices. The
lease on this facility does not have an expiration date but can be terminated
by Claires Austria with six months notice to the landlord. We lease from Rowland Schaefer & Associates approximately 35,000 square feet in
Pembroke Pines, Florida, where we maintain our executive, accounting and
finance offices. We executed a new lease in January 2004 which now expires on
December 31, 2013. The lease provides for the payment of annual base rent of
approximately $883,000, which is subject to annual cost-of-living increases,
and a proportionate share of all taxes and operating expenses of the building.
See Note 10 entitled Related Party Transactions to our consolidated financial
statements included in this report of Form 10-K. We also own 10,000 square feet of warehouse space in Miami, Florida. The
property is being utilized as a storage facility. We also lease executive
office space in New York City and are the owner of a cooperative apartment in
New York City. 8




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Item 3. Legal Proceedings We are, from time to time, involved in routine litigation incidental to the
conduct of our business, including litigation instituted by persons injured
upon premises under our control, litigation regarding the merchandise that we
sell, including product and safety concerns regarding metal content in our
merchandise, litigation with respect to various employment matters, including
litigation with present and former employees, and litigation to protect our
trademark rights. Although litigation is routine and incidental to the conduct
of our business, like any business of our size and employing a significant
number of employees, such litigation can result in large monetary awards when
judges, juries or other finders of facts do not agree with managements
evaluation of possible liability or outcome of litigation. On November 7,
2003, the Official Committee of Unsecured Creditors of Lux Corporation, d/b/a
Mr. Rags, filed a complaint against us in the United States Bankruptcy Court
for the Central District of California. The complaint alleges that certain
payments made to us in connection with the sale of the stock of Lux Corporation
in May 2002 should be repaid to the bankruptcy estate because the payments are
avoidable, as such term is used under general bankruptcy laws. On December 8,
2003, we filed a Motion to Dismiss with the Bankruptcy Court, which was denied
on February 24, 2004. We filed an answer to the complaint on March 15, 2004.
We believe the claims are without merit and intend to defend the litigation
vigorously. We believe that current pending litigation will not have a
material adverse effect on our financial position, earnings or cash flows. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth
quarter of Fiscal 2004. 
 PART II 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters We have two classes of common stock, par value $.05 per share, outstanding:
common stock having one vote per share and Class A common stock having ten
votes per share. The common stock is traded on the New York Stock Exchange,
Inc. under the symbol CLE. The Class A common stock has only limited
transferability and is not traded on any stock exchange or in any organized
market. However, the Class A common stock is convertible on a share-for-share
basis into common stock and may be sold, as common stock, in open market
transactions. In December 2003, the Companys Board of Directors declared a
2-for-1 stock split of the Companys Common stock and Class A common stock in
the form of a 100% stock dividend. As a result, all share and per share
amounts have been restated to reflect the stock split. The following table
sets forth, for each quarterly period within the last two fiscal years, the
high and low closing prices of the common stock on the NYSE Composite Tape. At
March 31, 2004, the number of record holders of shares of common stock and
Class A common stock was 1,319 and 442, respectively. Closing of Common StockHigh
    
    LowYear Ended January 31, 2004First Quarter
    
    $
    13.15
    
    
    $
    10.56Second Quarter
    
    
    15.67
    
    
    
    12.68Third Quarter
    
    
    20.25
    
    
    
    13.77Fourth Quarter
    
    
    23.20
    
    
    
    18.06Year Ended February 1, 2003First Quarter
    
    $
    11.13
    
    
    $
    8.93Second Quarter
    
    
    11.48
    
    
    
    8.35Third Quarter
    
    
    12.95
    
    
    
    8.23Fourth Quarter
    
    
    13.15
    
    
    
    10.95
 We have paid regular quarterly dividends to our shareholders on the common
stock since 1985 and on the Class A common stock since July 1994. Our Board of
Directors, in its sole discretion, has determined the distribution rate based
on our results of operations, economic conditions, tax considerations and other 9




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factors. In Fiscal 2003, we paid quarterly cash dividends in the amount of
$.02 per share on our common
stock and $.01 per share on our Class A common stock, or a total of $.08 per
share on our common stock and $.04 per share on our Class A common stock. In
Fiscal 2004, we paid quarterly cash dividends on our common stock (one in the
amount of $.06 per share, two in the amount of $.03 per share and one in the
amount of $.02 per share) and Class A common stock (one in the amount of $.03
per share, two in the amount of $.015 per share and one in the amount of $.01
per share), or a total of $.14 per share on our common stock and $.07 per share
on our Class A common stock. As of March 31, 2004 our current dividend
distribution amount per share is $.06 and $.03 each quarter for common stock
and Class A common stock, respectively. We expect to continue paying
dividends. However, there is no assurance that we will be able to continue to
do so because the declaration and payment of dividends are subject to various
factors, including contingencies such as our earnings and financial condition
and other factors our Board of Directors consider relevant as well as certain
limitations on our ability to make dividend distributions under our credit
facility. See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Liquidity and Capital Resources. The following table provides information as of January 31, 2004 with respect to
compensation plans (including individual compensation arrangements) under which
our common stock and Class A common stock are authorized for issuance. Equity Compensation Plan InformationNumber ofsecurities to be
    
    
    
    
    
    Number of securitiesissued upon
    
    Weighted-average
    
    remaining available forexercise of
    
    exercise price of
    
    future issuance underoutstanding
    
    outstanding
    
    equity compensation plansoptions, warrants
    
    options, warrants
    
    (excluding securitiesPlan Category
    
    and rights
    
    and rights
    
    reflected in column (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    1,266,868
    
    
    $
    14.23
    
    
    
    7,609,292Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,266,868
    
    
    $
    14.23
    
    
    
    7,609,292
 
 Item 6. Selected Financial Data The balance sheet and income statement data set forth below is derived from our
consolidated financial statements and should be read in conjunction with our
consolidated financial statements included in Part II, Item 8 of this report on
Form 10-K, and in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations included in this report. The
consolidated Balance Sheet data as of February 2, 2002, February 3, 2001, and
January 29, 2000 and the consolidated Statements of Operations and
Comprehensive Income for each of the two fiscal years in the period ended
February 3, 2001 and January 29, 2000 are derived from our consolidated
financial statements, which are not included herein. These amounts include
certain reclassifications of prior year amounts in order to conform to current
year presentation. 10




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##### Table of Contents



Fiscal Year EndedJan. 31,
    
    Feb. 1,
    
    Feb. 2,
    
    Feb. 3,
    
    Jan. 29,2004
    
    2003
    
    2002(2)
    
    2001(1)(2)
    
    2000(2)(In thousands except per share amounts)Operating Statement Data:Net Sales
    
    $
    1,132,834
    
    
    $
    1,001,537
    
    
    $
    918,737
    
    
    $
    946,715
    
    
    $
    764,848Income from continuing operations
    
    
    115,038
    
    
    
    77,979
    
    
    
    41,126
    
    
    
    67,772
    
    
    
    93,203Net Income
    
    
    115,038
    
    
    
    77,744
    
    
    
    19,583
    
    
    
    64,975
    
    
    
    87,935Income Per Share:Basic:From continuing operations
    
    $
    1.17
    
    
    $
    0.80
    
    
    $
    0.42
    
    
    $
    0.68
    
    
    $
    0.92Net income
    
    
    1.17
    
    
    
    0.80
    
    
    
    0.20
    
    
    
    0.65
    
    
    
    0.86Diluted:From continuing operations
    
    $
    1.17
    
    
    $
    0.80
    
    
    $
    0.42
    
    
    $
    0.68
    
    
    $
    0.91Net income
    
    
    1.17
    
    
    
    0.80
    
    
    
    0.20
    
    
    
    0.65
    
    
    
    0.86Cash Dividends Per
Share:Common stock
    
    $
    0.14
    
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.08Class A Common stock
    
    
    0.07
    
    
    
    0.04
    
    
    
    0.04
    
    
    
    0.04
    
    
    
    0.04Balance Sheet Data:Current assets
    
    $
    360,023
    
    
    $
    321,608
    
    
    $
    214,424
    
    
    $
    265,964
    
    
    $
    297,283Current liabilities
    
    
    143,326
    
    
    
    141,010
    
    
    
    82,536
    
    
    
    94,452
    
    
    
    91,676Working capital
    
    
    216,697
    
    
    
    180,598
    
    
    
    131,888
    
    
    
    171,512
    
    
    
    205,607Total assets
    
    
    805,924
    
    
    
    738,129
    
    
    
    611,575
    
    
    
    660,261
    
    
    
    695,292Long-term debt
    
    
    
    
    
    
    70,000
    
    
    
    110,104
    
    
    
    151,374
    
    
    
    192,000Stockholders equity
    
    
    632,450
    
    
    
    501,254
    
    
    
    404,188
    
    
    
    399,700
    
    
    
    398,786
  (1)
    
    Consists of 53 weeks.  (2)
    
    We adopted a plan to discontinue the operations of Mr. Rags (Lux Corp.)
in January 2002. See Note 3 to the consolidated financial statements for
additional information. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Managements Discussion and Analysis is designed to provide the reader of the
financial statements with a narrative on our results of operations, financial
position and liquidity, risk management activities, significant accounting
policies and critical estimates, and the future impact of accounting standards
that have been issued but are not yet effective. Managements Discussion and
Analysis is presented in five sections: Overview and Consolidated Operations,
Critical Accounting Policies and Estimates, Segment Operations and Analysis of Consolidated
Financial Condition. It is useful to read Managements Discussion
and Analysis in conjunction with the Consolidated Financial Statements and
related notes thereto contained elsewhere in this document. Our fiscal years end on the Saturday closest to January 31. As a result, our
Fiscal 2004, Fiscal 2003 and Fiscal 2002 results consisted of 52 weeks. All
references to earnings per share relate to diluted earnings per share from
continuing operations. 11




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##### Table of Contents



Overview and Consolidated Operations We are a leading specialty retailer of value-priced fashion accessories and
jewelry for pre-teens and teenagers as well as young adults. We are primarily
organized based on our geographic markets, which include our North American
operations and our International operations. As of March 31, 2004 we operated
a total of 2,953 stores in all 50 states of the United States, Puerto Rico,
Canada, the Virgin Islands, the United Kingdom, (Switzerland, Austria, Germany,
or S.A.G.), France, Ireland and Japan. The stores are operated mainly under
the trade names Claires Boutiques, Claires Accessories, Icing by
Claires, Afterthoughts and The Icing. We are in the process of
transitioning our Afterthoughts stores to Icing by Claires stores to
capitalize on the Claires brand name. We have two store concepts: Claires Accessories, which caters to
fashion-conscious girls and teens in the 7 to 17 age range, and Icing by
Claires, which caters to fashion-conscious teens and young women in the 17 to
27 age range. Our merchandise typically ranges in price between $2 and $20,
with the average product priced at about $5. Our stores share a similar format
and our different store concepts and trade-names allow us to have multiple
store locations in a single mall. Although we face competition from a number
of small specialty store chains and others selling fashion accessories, we
believe that our stores comprise the largest and are among the most successful
chain of specialty retail stores in the world, devoted to the sale of
value-priced fashion accessories for pre-teen, teenage and young adult females. Fundamentally, our business model is to offer the customer a compelling
price/value relationship and a wide array of products to choose from. We seek
to deliver a high level of profitability and cash flow by:  
    
    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
    
    returning profits to shareholders through dividends and increased
share price While our financial results have grown steadily and record sales performance
was achieved during Fiscal 2004, the retail environment remains very
competitive. Managements plan for future growth is dependent on:  
    
    our ability to successfully identify merchandise appealing to our
customers
    
    displaying our merchandise at convenient, accessible locations
staffed with personnel that provide courteous and professional customer
service
    
    sourcing our merchandise to achieve a positive value/price relationship
    
    increasing sales at existing store locations
    
    expanding our sales, especially in our international segment, through additional store locations Our ability to achieve these objectives will be dependent on various factors,
including those outlined in Cautionary Note Regarding Forward-Looking
Statements and Risk Factors. 12




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##### Table of Contents



Critical Accounting Policies and Estimates The preparation of financial statements requires us to estimate the effect of
various matters that are inherently uncertain as of the date of the financial
statements. Each of these required estimates varies in regard to the level of
judgment involved and its potential impact on our reported financial results.
Estimates are deemed critical when a different estimate could have reasonably
been used or where changes in the estimate are reasonably likely to occur from
period to period, and would materially impact our financial condition, changes
in financial condition, or results of operations. Our significant accounting
policies are discussed in Note 1 of the Notes to Consolidated Financial
Statements; critical estimates inherent in these accounting policies are
discussed in the following paragraphs. Inventory Valuation Our inventories in North America and S.A.G. are valued at the lower of cost or
market, with cost determined using the retail method. Inherent in the retail
inventory calculation are certain significant management judgments and
estimates including, among others, merchandise markups, markdowns and
shrinkage, which impact the ending inventory valuation at cost as well as
resulting gross margins. The methodologies used to value merchandise
inventories include the development of the cost to retail ratios, the groupings
of homogeneous classes of merchandise, development of shrinkage reserves and
the accounting for retail price changes. The inventories in our United
Kingdom, Irish and French stores are accounted for under the lower of cost or
market method, with cost determined using the average cost method. Inventory
valuation is impacted by the estimation of slow moving goods, shrinkage and
markdowns. Valuation of long-lived assets We evaluate the carrying value of long-lived assets whenever events or changes
in circumstances indicate that a potential impairment has occurred. A potential
impairment has occurred if the projected future undiscounted cash flows are
less than the carrying value of the assets. The estimate of cash flows
includes managements assumptions of cash inflows and outflows directly
resulting from the use of the asset in operations. When a potential impairment
has occurred, an impairment charge is recorded if the carrying value of the
long-lived asset exceeds its fair value. Fair value is measured based on a
projected discounted cash flow model using a discount rate we feel is
commensurate with the risk inherent in our business. Our impairment analyses
contain estimates due to the inherently judgmental nature of forecasting
long-term estimated cash flows and determining the ultimate useful lives of
assets. Actual results may differ, which could materially impact our
impairment assessment. During Fiscal 2003, we recorded impairment charges of $2.7 million relating to
fixed assets in our International segment due to those assets not being
recoverable by estimated discounted cash flows. We recorded no impairment
during Fiscal 2004. Goodwill Impairment We continually evaluate whether events and changes in circumstances warrant
revised estimates of the useful lives or recognition of an impairment loss of
unamortized goodwill. The conditions that would trigger an impairment
assessment of unamortized goodwill include a significant, sustained negative
trend in our operating results or cash flows, a decrease in demand for our
products, a change in the competitive environment and other industry and
economic factors. We measure impairment of unamortized goodwill utilizing the
discounted cash flow method. The estimated discounted cash flows are then
compared to our goodwill amounts. If the unamortized balance of the goodwill
exceeds the estimated discounted cash flows, the excess of the unamortized
balance is written off. Future cash flows may not meet projected amounts, which
could result in impairment. We performed these analyses during Fiscal 2004 and
2003 and no impairment was recorded. 13




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##### Table of Contents



Intangible Asset Impairment We continually evaluate whether events and changes in circumstances warrant
revised estimates of the useful lives or recognition of an impairment loss for
intangible assets. Future adverse changes in market and legal conditions, or
poor operating results of underlying assets could result in losses or an
inability to recover the carrying value of the intangible asset, thereby
possibly requiring an impairment charge in the future. The Company has
concluded that certain intangible assets, comprised primarily of lease rights,
qualify as indefinite-life intangible assets. Fair market value of the lease
rights was determined through the use of third-party valuation. In addition,
we make investments through our international subsidiaries in intangible assets
upon the opening and acquisition of many of our store locations in Europe.
These other intangible assets, which are subject to amortization, are amortized
over the useful lives of the respective leases, not to exceed 25 years. We
evaluate the market value of these assets periodically and record the
impairment charge when we believe the asset has experienced a decline in value
that is other than temporary. We recorded impairment charges of approximately
$1.0 million in Fiscal 2003 because the market value of certain lease rights
included in our international segment were determined to be less than their
carrying values. We recorded no impairment during Fiscal 2004. Income Taxes We are subject to income taxes in many jurisdictions, including the US,
individual states and localities and abroad. We must first determine which
revenues and expenses should be included in each taxing jurisdiction. This
process involves the estimation of our actual current tax exposure, together
with the assessment of temporary differences resulting from differing treatment
of income or expense items for tax and accounting purposes. We establish
deferred tax assets and liabilities as a result of these temporary differences.
If we adjust our estimates in the future such that we would not expect to
realize all or part of our net deferred tax assets, we may need to establish,
or adjust a valuation allowance against our deferred tax assets, which could
also materially affect our effective tax rate. We establish tax reserves in our
consolidated financial statements based on our estimation of current tax
exposures. If we prevail in tax matters for which reserves have been
established or we are required to settle matters in excess of established
reserves, our effective tax rate for a particular period could be materially
affected. Income tax expense also reflects our best estimate and assumptions regarding,
among other things, the level of future taxable income, interpretation of tax
laws, and tax planning. Future changes in tax laws, changes in projected
levels of taxable income and tax planning could affect the effective tax rate
and tax balances recorded by us. On an on-going basis, we evaluate our estimates. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances at the time, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Although management believes
that the estimates discussed above are reasonable and the related calculations
conform to generally accepted accounting principles, actual results could
differ from these estimates, and such differences could be material. Management has discussed the development and selection of these critical
accounting policies with the Audit Committee of the Board of Directors and the
Audit Committee has reviewed our disclosures relating to them. 14




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##### Table of Contents



Overall, our operating results for Fiscal 2004 were a record in terms of sales
and profitability. A summary of our consolidated results of operations is as
follows (dollars in thousands, except per share data): Fiscal Year2004
    
    2003
    
    2002Net sales
    
    $
    1,132,834
    
    
    $
    1,001,537
    
    
    $
    918,737Comparable store sales
    
    
    7.0
    %
    
    
    5.0
    %
    
    
    (2.0
    )%Gross profit percentage
    
    
    53.7
    %
    
    
    51.4
    %
    
    
    48.4
    %Selling, general and administrative expenses as a
percentage of net sales
    
    
    34.8
    %
    
    
    35.5
    %
    
    
    36.0
    %Income from continuing operations
    
    $
    115,038
    
    
    $
    77,979
    
    
    $
    41,126Net income
    
    $
    115,038
    
    
    $
    77,744
    
    
    $
    19,583Income from continuing operations per diluted share
    
    $
    1.17
    
    
    $
    0.80
    
    
    $
    0.42Number of stores at the end of the period
(excludes Claires Nippon)
    
    
    2,812
    
    
    
    2,803
    
    
    
    2,778
 Results of Consolidated Operations Net sales in Fiscal 2004 increased by $131.3 million, or 13%, from Fiscal 2003,
which in turn was $82.8 million, or 9% higher than Fiscal 2002. The increase
in net sales was primarily attributable to comparable store sales increases of
7.0% and 5.0% during Fiscal 2004 and Fiscal 2003, respectively, new stores
opened in our International division which produced higher average store sales
than the stores we closed in our North American division, and the effects of
the weak US Dollar when translating our foreign operations at higher exchange
rates. The positive comparable sales experienced in our North American division were
across most merchandise categories, most notably in the jewelry related areas.
We believe we experienced this trend through successfully meeting our
customers demand for current fashion trends in jewelry and superior customer
service in our stores. We noted a deterioration of comparable sales during the
second half of Fiscal 2004 within our International division, while comparable
sales in North America continued the positive trends experienced throughout the
year. We are actively employing strategic initiatives in an attempt to reverse
the negative comparable store sales trend in our International division. These
initiatives include sharing best practices employed in our North American
division for merchandise selection, store operations and attentive customer
service. The following table compares our sales of each product category for the last
three fiscal years (dollars in thousands): Fiscal Year EndedJan. 31, 2004
    
    Feb. 1, 2003
    
    Feb. 2, 2002Jewelry
    
    $
    603,564
    
    
    
    53.3
    %
    
    $
    481,686
    
    
    
    48.1
    %
    
    $
    423,321
    
    
    
    46.1
    %Accessories
    
    
    529,270
    
    
    
    46.7
    %
    
    
    519,851
    
    
    
    51.9
    %
    
    
    495,416
    
    
    
    53.9
    %$
    1,132,834
    
    
    
    100.0
    %
    
    $
    1,001,537
    
    
    
    100.0
    %
    
    $
    918,737
    
    
    
    100.0
    %
 Gross profit percentages increased by 230 basis points and 300 basis points
during Fiscal 2004 and Fiscal 2003, respectively. The increase during Fiscal
2004 was caused primarily by improved merchandise margins relating to the shift
in business from accessories to jewelry, as jewelry carries a higher initial
markup and profit margin than that of accessories. In addition, comparable
sales increased at a rate faster than the increase in our occupancy related
costs, creating positive leverage on those costs. The increased gross profit
percentages during Fiscal 2003 were the result of improved merchandise margins
made possible through reduced promotional activity and markdowns during the
year due to managing inventories more efficiently than the prior year. 15




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##### Table of Contents



Selling, general and administrative expenses increased $39.1 million and $24.1
million in Fiscal 2004 and Fiscal 2003, respectively. These increases are
primarily attributable to the increases in compensation paid to store personnel
due to average wage increases and additional hours worked in our North American
stores and the effects of the weak US Dollar when translating our foreign
operations at higher exchange rates. Additional hours worked in the North
American stores were necessary to achieve the resulting positive comparable
store sales experienced during these periods. In addition, during Fiscal 2004,
increased store, field and corporate bonuses were earned in North America due
to the positive comparable store sales and profit results during the period.
We also recorded a charge of $8.7 million in the fourth quarter of Fiscal 2004
related to the retirement compensation package of our founder and former
Chairman of the Board. As a percentage of sales, however, selling, general and
administrative expenses improved by 70 basis points and 50 basis points during
Fiscal 2004 and Fiscal 2003, respectively. This improvement was primarily due
to comparable store increases greater than the overall increases in the
underlying expenses. Income taxes for Fiscal 2004 includes the benefit of approximately $2.8 million
attributable to recently concluded tax examinations that were settled more
favorably than anticipated. Our tax rate in future years will depend on
several variables, including the mix of earnings between domestic and
international operations and our overall level of earnings, and could also be
affected by the resolution of tax contingencies for amounts different from our
current estimates. Income from continuing operations increased by approximately $37 million during
each of Fiscal 2004 and Fiscal 2003. These increases were made possible
primarily by the increase in comparable store sales and improved merchandise
margins achieved during the period, as well as the leverage attained on our
fixed costs. Net income for Fiscal 2002 includes approximately $21.5 million after tax loss
from the discontinuation of our Mr. Rags apparel stores. We sold Mr. Rags in
Fiscal 2003; please refer to Note 3 to our consolidated financial statements
for further information. Seasonality and Quarterly Results Our business is seasonal by nature, with the Christmas, Easter and
back-to-school periods historically accounting for the largest percentage of
annual net sales. In Fiscal 2004, the Christmas, Easter and back-to-school
periods together accounted for approximately 30% of our annual net sales. See
Note 11 of our consolidated financial statements for our quarterly results of
operations. Impact of Inflation Inflation impacts several of our operating costs including, but not limited to
cost of goods and supplies, occupancy costs and labor expenses. We seek to
mitigate these effects by passing along inflationary increases in costs through
increased sales prices of our products or by increasing sales volumes. Matters Affecting Comparability Included within interest and other income during Fiscal 2004 is approximately
$1.2 million of income recognized on our investment in Claires Nippon. We
recorded no income during Fiscal 2003 and Fiscal 2002 as our portion of losses
incurred by Claires Nippon were in excess of our investment and advances.
Under the equity method of accounting, those losses would not be reflected in
our financial statements once our investment and advances were reduced to zero.
Store counts for the three years included in the tables above and below
exclude Claires Nippon stores. We adopted Statement of Financial Accounting Standards (SFAS) 142, Goodwill
and Other Intangible Assets in the beginning of Fiscal 2003. SFAS 142
requires that goodwill and certain other intangible assets deemed to have
indefinite useful lives are no longer amortized but are reviewed annually for
impairment. Had the provision of SFAS 142 been applicable to Fiscal 2002,
income from continuing operations would have been $.48 as compared to $.42 per
diluted share. Refer to Note 1 to our consolidated financial statements for
further information. 16




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##### Table of Contents



Foreign currency movements within our International division increased net
sales by $29.8 million and $18.8 million and income from continuing operations
by $5.0 million and $3.2 million in Fiscal 2004 and Fiscal 2003, respectively.
These increases were due primarily to the further weakening of the US Dollar
against the Euro and the British Pound during Fiscal 2004. These items had a significant impact on continuing operations in the periods
reported. We believe that an understanding of our reported results and our
ongoing financial performance is not complete without considering the impact of
these items and other transactions, as described within Managements Discussion
and Analysis. Segment Operations We are organized into two business segments  North America and International.
Following is a discussion of results of operations by business segment. North America Key statistics and results of operations for our North American division are as
follows (dollars in thousands): Fiscal Year2004
    
    2003
    
    2002Net sales
    
    $
    820,332
    
    
    $
    740,838
    
    
    $
    711,299Comparable store sales
    
    
    10.0
    %
    
    
    6.0
    %
    
    
    (3.0
    )%Gross profit percentage
    
    
    54.5
    %
    
    
    52.1
    %
    
    
    48.4
    %Number of stores at the end of the period
    
    
    2,112
    
    
    
    2,150
    
    
    
    2,220
 It is our objective to increase sales in North America primarily through
generating comparable store sales increases and also by increasing our quantity
of profitable store locations. Net sales in North America during Fiscal 2004 increased by $79.5 million, or
11%, from Fiscal 2003, which in turn was $29.5 million, or 4% higher than
Fiscal 2002. The increase in net sales was primarily attributable to
comparable store sales increases of 10.0% and 6.0% during Fiscal 2004 and
Fiscal 2003, respectively, partially offset by a decrease of 38 and 70 stores
during the respective periods. We acquired 768 Afterthoughts stores in
December 1999. Since that time, it has been our objective to close, or not
renew, a number of under-performing or duplicative stores, and to re-name, upon
lease renewal or landlord approval, the remaining Afterthoughts stores to Icing
by Claires in order to capitalize on the Claires brand. Since we acquired
the Afterthoughts stores, 406 have been closed or not renewed and 204 have been
renamed to either Claires or Icing by Claires. We believe that the re-naming
of these stores has contributed to the comparable store increases experienced
during Fiscal 2004, and we plan to continue to re-name the remaining stores
upon lease renewal or as landlords permit. The positive comparable sales experienced in North America were across most
merchandise categories, most notably in the jewelry related areas. We believe
we experienced this trend through successfully meeting our customers demand
for current fashion trends in jewelry and superior customer service in our
stores. In addition, best practices in merchandise buying, planning and
allocation from Claires have been shared with the Icing by Claires and
Afterthoughts stores, which we believe have contributed significantly to the
comparable store sales increases experienced during Fiscal 2004. The higher concentration of sales in jewelry as compared to accessories
experienced during Fiscal 2004 has had the result of improved gross profit
percentages due to the higher initial markup realized on jewelry. The
increased gross profit percentages during Fiscal 2003 were the result of
improved merchandise margins made possible through reduced promotional activity
and markdowns during the year as a result of managing inventories more
efficiently than the prior year. 17




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##### Table of Contents



International Division Key statistics and results of operations for our International division are as
follows (dollars in thousands): Fiscal Year2004
    
    2003
    
    2002Net sales
    
    $
    312,502
    
    
    $
    260,699
    
    
    $
    207,438Comparable store sales
    
    
    (2.0
    )%
    
    
    2.0
    %
    
    
    1.0
    %Gross profit percentage
    
    
    51.7
    %
    
    
    49.3
    %
    
    
    48.5
    %Number of stores at the end of the period
    
    
    700
    
    
    
    653
    
    
    
    558
 It is our objective to increase sales in the International division primarily
through store growth and also through comparable store sales increases. We
also continue to explore adding operations in countries in which we do not
currently operate. Net sales in our International division during Fiscal 2004 increased by $51.8
million, or 20%, from Fiscal 2003, which in turn was $53.3 million, or 26%
higher than Fiscal 2002. The increase in net sales during Fiscal 2004 was
primarily attributable to the net addition of 47 stores, the effects of the
weak US Dollar when translating our foreign operations at higher exchange rates
of approximately $29.8 million, offset by comparable store sales decreases of
2.0% during the period. We believe that the deterioration of comparable store
sales during Fiscal 2004 was caused both by the difficult economic environments
in several European countries for which we have store locations and also the
deviation from best practices learned and practiced in North America. We are
actively employing strategic initiatives in an attempt to reverse the negative
comparable store sales trend in our International division. These initiatives
include sharing best practices for merchandise selection, store operations and
attentive customer service. In addition, investment in operational systems
infrastructure is being made in order to facilitate the greater level of
complexity and precision now required of the business. The increase in net
sales during Fiscal 2003 was primarily attributable to the net addition of 95
stores, the effects of the weak US Dollar when translating our foreign
operations at higher exchange rates, and by comparable store sales increases of
2.0% during the period. The increase in comparable store sales during Fiscal
2003 was primarily attributable to more units per customer and higher average
transaction amounts, offset by a lower number of total transactions. Gross profit percentages improved by 240 basis points in Fiscal 2004 and by 80
basis points in Fiscal 2003. The primary source of this improvement during
both fiscal years was the ability of our International division to source a
significant portion of goods at a lower cost due to those goods being purchased
from our vendors in US dollars. The lower cost was available due to the
weakness in the US Dollar as compared to the British Pound and the Euro. Most
of the goods sourced for sale in our International division are purchased in US
Dollars. Analysis of Consolidated Financial Condition A summary of cash flows from operating, investing and financing activities is
outlined in the table below (dollars in thousands): Fiscal Year EndedJanuary 31, 2004
    
    February 1, 2003
    
    February 2, 2002Operating activities
    
    $
    204,407
    
    
    $
    167,235
    
    
    $
    108,989Investing activities
    
    
    (58,709
    )
    
    
    (51,122
    )
    
    
    (57,725
    )Financing activities
    
    
    (113,980
    )
    
    
    (24,833
    )
    
    
    (59,016
    )
 18




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##### Table of Contents



We have consistently satisfied operating liquidity needs and planned capital
expenditure programs through our normal conversion of sales to cash. Over the
three years ended in Fiscal 2004, we generated over $472.9 million of cash
flows from operating activities from continuing operations. We ended the year
with approximately $224.6 million in cash and cash equivalents, an increase of
$29.1 million from the prior year. We ended the year with no debt outstanding,
a reduction of $110.9 million from the prior year. The increase in cash and
cash equivalents was due to cash generated from operations, offset by the
repayment of debt, capital expenditures and the payment of dividends. Our major source of cash from operations is store sales, nearly all of which
are generated on a cash or credit card basis. Our primary outflow of cash from
operations is the purchase of inventory, net of customary credit arrangements
with vendors, operational costs, the payment of current taxes and capital
expenditures. Cash flows provided by operating activities in Fiscal 2004
reflect higher net income as compared to Fiscal 2003 due to changes in working
capital and depreciation. Working capital at the end of Fiscal 2004 was $216.7 million compared to $180.6
million at the end of Fiscal 2003. Changes in working capital reflect higher
accounts payable, which is due to the timing of inventory payments and
increased accrued expenses, which reflects the increased bonuses earned by
store, field and corporate employees that were not yet paid at the end of the
year. In addition, accrued expenses include the retirement compensation
package granted to our founder and former Chairman of the Board in the fourth
quarter of Fiscal 2004. Our $50.1 million of capital expenditures were made primarily to remodel
existing stores, but also to open new stores. We generally experience a
noticeable increase in sales in locations where a store has been recently
remodeled. We also invested approximately $8.6 million in intangible assets
within our International division which generally represents acquired lease
rights on new store locations in certain countries. We expect to fund between
$50.0 million and $60.0 million of capital expenditures and $10.0 million to
$15.0 million of purchased lease rights in Fiscal 2005 in an effort to continue
to expand and remodel our store base. As a result of our $110.9 million in debt repayments made during Fiscal 2004,
we have no borrowed debt at January 31, 2004. This represents a milestone to
us as the debt was originally incurred in Fiscal 2000 in connection with the
acquisition of the Afterthoughts stores. We also paid dividends of $13.3
million during Fiscal 2004, an increase of approximately $5.8 million from the
prior year. Dividends were increased again at the end of Fiscal 2004, so we
now expect to pay at least $23.1 million in dividends in Fiscal 2005. We also
received proceeds from the exercise of stock options of approximately $10.3
million, most of which was in connection with the retirement of our founder and
former Chairman of the Board. Liquidity and Capital Resources We entered into a new credit facility in March 2004. This credit facility is a
revolving line of credit of up to $60.0 million, is secured by inventory in the
United States and is due to expire March 31, 2009. The borrowings under this
facility are limited based on certain calculations of availability, based
primarily on the amount of inventory on hand in the United States. At March
31, 2004, the entire amount of $60.0 million would have been available for
borrowing by us, subject to reduction for $1.8 million of outstanding letters
of credit. The credit facility is cancelable by us without penalty and bears
interest at an initial margin of 75 basis points over the London Interbank
Borrowing Rate (LIBOR). The margin is then adjusted periodically based on
certain liquidity measurements. The credit facility also contains other
restrictive covenants which limit, among other things, our ability to make
dividend distributions. This credit facility replaced our prior credit
facility, which included a $40.0 million revolving line of credit and a $175.0
million five year term loan. On January 31, 2004 no borrowings were outstanding under our prior credit
facility and we were in compliance with all debt covenants. 19




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##### Table of Contents



Our non-US subsidiaries have credit facilities totaling approximately $795,000
with banks. The facilities are used for working capital requirements, letters
of credit and various guarantees. These credit facilities have been arranged in
accordance with customary lending practices in their respective countries of
operation. At January 31, 2004, there were no borrowings under these credit
facilities. Management believes that our present ability to borrow is greater than our
established credit lines. However, if market conditions change and sales were
to dramatically decline or we could not control operating costs or other
expenses, our cash flows and liquidity could be reduced, and we could
experience an increase in borrowing costs, or even a reduction in or
elimination of our access to debt and/or equity markets. Contractual Obligations At January 31, 2004, we remain as a guarantor on 12 real estate leases for Mr.
Rags store locations with future rental payments of approximately $10.2
million. At January 31, 2004, we also had a contingent liability as lessee
under a master lease agreement on $1.5 million of gross future lease payments
for operating leases of equipment and leasehold improvements of Mr. Rags that
were assigned to Mr. Rags at the time of the sale. Based on the bankruptcy
filing by Lux Corp. in January 2003 and the related impact on Mr. Rags ability
to fulfill the commitments under these real estate and operating leases, we
accrued a liability of $6.2 million at February 1, 2003, of which $3.6 million
remains accrued at January 31, 2004. We finance certain leasehold improvements and equipment used in our stores
through transactions accounted for as non-cancelable operating leases. As a
result, the rental expense for these leasehold improvements and equipment is
recorded during the term of the lease contract in our consolidated financial
statements, generally over four to seven years. In the event that any of the
real property leases where leasehold improvements or equipment are located that
are subject to these non-cancelable operating leases are terminated by us or
our landlord prior to the scheduled expiration date of the real property lease,
we will be required to accrue all future rent payments under these operating
leases. At January 31, 2004, we had $421,000 accrued related to future payment
obligations on leasehold improvement leases for closed stores. As of January 31, 2004, our future financial commitments under these
arrangements were as follows: Payments Due by PeriodContractualObligations
    
    
    
    
    
    Less than 1
    
    
    
    
    
    
    
    
    
    More than(in millions)
    
    Total
    
    year
    
    1-3 years
    
    3-5 years
    
    5 yearsReal estate
obligations
    
    $
    817.6
    
    
    $
    145.4
    
    
    $
    260.2
    
    
    $
    213.4
    
    
    $
    198.6Operating leases
for equipment and
leasehold
improvements
    
    
    18.9
    
    
    
    10.3
    
    
    
    7.1
    
    
    
    1.5
    
    
    
    Letters of credit
    
    
    1.8
    
    
    
    1.8
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    838.3
    
    
    $
    157.5
    
    
    $
    267.3
    
    
    $
    214.9
    
    
    $
    198.6
 20




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Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board, (FASB) issued
Interpretation No. 46 Consolidation of Variable Interest Entities. The
interpretation defines a variable interest entity as a corporation,
partnership, trust or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the equity to
support its activities. A variable interest entity often holds financial
assets, including loans or receivables, real estate or other property. A
variable interest entity may be essentially passive or it may engage in
research and development or other activities on behalf of another company.
This interpretation requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. We would have to consolidate any of our
variable interest entities that meet the above criteria as of July 1, 2003.
The interpretation also requires disclosures about variable interest entities
that we are not required to consolidate but in which we have a significant
variable interest. We have determined that none of our interests in
unconsolidated entities qualify as variable interest entities. In December 2003, the FASB issued Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities (FIN 46R), which
replaced FIN 46. FIN 46R addresses how a business enterprise should evaluate
whether it has a controlling interest in an entity through means other than
voting rights. This interpretation requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entitys activities or is entitled to
receive a majority of the entitys residual returns or both. The
interpretation also requires disclosures about variable interest entities that
we are not required to consolidate but in which we have a significant variable
interest. We are required to adopt FIN 46R by the end of the first reporting
period ending after March 15, 2004. We have completed our initial evaluation
of FIN 46R, and have concluded that adoption of FIN 46R is not expected to have
a material impact on our results of operations or financial condition. Cautionary Note Regarding Forward-Looking Statements and Risk Factors The Private Securities Litigation Reform Act of 1995, or the Act, provides a
safe harbor for forward-looking statements made by or on our behalf. We and
our representatives may from time to time make written or verbal
forward-looking statements, including statements contained in this and other
filings with the Securities and Exchange Commission and in our press releases
and reports to shareholders. All statements which address operating
performance, events or developments that we expect or anticipate will occur in
the future, including statements relating to our future financial performance,
planned capital expenditures and new store openings for Fiscal 2005, are
forward-looking statements within the meaning of the Act and as defined in
Section 21E of the Securities Exchange Act of 1934, as amended. The
forward-looking statements are and will be based on managements then current
views and assumptions regarding future events and operating performance and we
assume no obligation to update any forward-looking statement. Forward-looking
statements involve known or unknown risks, uncertainties and other factors,
including changes in estimates and judgments discussed under Critical
Accounting Policies and Estimates which may cause our actual results,
performance or achievements, or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. 21




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##### Table of Contents



We believe that the following factors, among others, that are specific to our
business, could cause or contribute to our actual results, performance or
achievements differing from the future results, performance or achievements
expressed or implied in our forward-looking statements:  
    
    inability to respond to emerging fashion trends including decreased
demand for jewelry
    
    changes in customer preference after merchandise has been purchased
by us, which could result in markdowns of our sales prices
    
    inability to adequately stock inventory to meet demand
    
    inability to execute our international expansion or successfully
integrate our international operations
    
    inability to increase comparable store sales at recent historical rates
    
    loss of one or more members of our senior management team
    
    disruption in the operation of our North American or International distribution centers
    
    inability to negotiate favorable lease terms for new leases or renewal leases
    
    changes in tax rules or regulations applicable to us
    
    adverse determinations on litigation matters not covered by insurance We believe that the following factors, among others, that are general to our
business, could cause or contribute to our actual results, performance or
achievements differing from the future results, performance or achievements
expressed or implied in our forward-looking statements:  
    
    changes in economic conditions, including, but not limited to,
recessionary or inflationary trends, increased gasoline prices
affecting travel to our retail locations, and overall consumer
confidence
    
    potential new competition from both retail stores and alternative
methods or channels of distribution
    
    changes in the cost or availability of a suitable workforce to
manage and support our operating strategies
    
    potential tariffs imposed on products that we import
    
    fluctuation of the US dollar against foreign currencies
    
    adjustments to the exchange rate of the Chinese Yuan from a fixed
exchange rate against the US dollar to a flexible exchange rate which
would cause our cost of merchandise imported from China to fluctuate
    
    terrorist activities in the US, as well as the international war on
terrorism
    
    disruption of international, national or regional transportation
systems, including dock strikes or increased security measures
    
    lack of availability or access to sources of inventory 22




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##### Table of Contents




    
    imposition of new restrictions or regulations regarding importation
of our merchandise or on the composition of the merchandise that we
sell
    
    occurrence of severe weather events or natural disasters, which
could significantly damage or destroy retail locations or prohibit
customers from traveling to our retail locations, especially during
peak holiday seasons
    
    increases in ocean freight rates
    
    inability to timely receive Asian shipments due to the potential emergence of a disease 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Foreign Currency We are exposed to market risk from foreign currency exchange rate fluctuations
on the US dollar value of foreign currency denominated transactions and our
investment in foreign subsidiaries. We manage this exposure to market risk
through our regular operating and financing activities, and foreign currency
options. Exposure to market risk for changes in foreign exchange rates relates
primarily to foreign operations buying, selling and financing in currencies
other than local currencies and to the carrying value of net investments in
foreign subsidiaries. We manage our exposure to foreign exchange rate risk
related to our foreign operations buying, selling and financing in currencies
other than local currencies by using foreign currency options from
time to time to hedge foreign currency transactional exposure. At January 31,
2004, we had entered into foreign currency options with notional amounts of
$30.2 million, which are accounted for as cash-flow hedges. We do not
generally hedge the translation exposure related to our net investment in
foreign subsidiaries, since we generally have no near term intent to repatriate
funds from such subsidiaries. During Fiscal 2004, included in comprehensive
income and stockholders equity is $12.9 million reflecting the unrealized gain
on foreign currency translation. Based on our average net currency positions
in Fiscal 2004, the potential gain or loss due to a 10% adverse change on
foreign currency exchange rates could be significant to our operations. As of the date of this filing, there has been significant speculation that
China may elect to adjust the exchange rate of the Chinese Yuan against the US
dollar. While there have been no official decisions made, or timetables
established, current press reports indicate that it is possible that some form
of re-evaluation is likely in Fiscal 2005. Currently, the Chinese Yuan has a
fixed exchange rate against the US dollar. If China adjusts the exchange rate
or allows the value to float, we may experience changes in our cost of
merchandise imported from China. See notes to our consolidated financial statements. Interest Rates Our exposure to market risk for changes in interest rates is limited to our
cash, cash equivalents and debt. Based on our average invested cash balances
and outstanding debt during Fiscal 2004, a 10% increase in the average
effective interest rate in Fiscal 2004 would not have materially impacted our
annual interest income or expense. 23




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data Page No.Independent Auditors Report
    
    
    25Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003
    
    
    26Consolidated Statements of Operations and Comprehensive Income for the
fiscal years ended January 31, 2004, February 1, 2003 and February 2, 2002
    
    
    27Consolidated Statements of Changes in Stockholders Equity for the fiscal
years ended January 31, 2004, February 1, 2003 and February 2, 2002
    
    
    28Consolidated Statements of Cash Flows for the fiscal years ended
January 31, 2004, February 1, 2003 and February 2, 2002
    
    
    29Notes to Consolidated Financial Statements
    
    
    30
 24




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##### Table of Contents



INDEPENDENT AUDITORS REPORT The Board of Directors and Stockholders
Claires Stores, Inc.: We have audited the accompanying consolidated balance sheets of Claires
Stores, Inc. and subsidiaries (the Company) as of January 31, 2004 and February
1, 2003 and the related consolidated statements of operations and comprehensive
income, changes in stockholders equity, and cash flows for the fiscal years
ended January 31, 2004, February 1, 2003, and February 2, 2002. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Claires Stores,
Inc. and subsidiaries as of January 31, 2004 and February 1, 2003, and the
results of their operations and their cash flows for the fiscal years ended
January 31, 2004, February 1, 2003, and February 2, 2002 in conformity with
accounting principles generally accepted in the United States of America. As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and intangible assets in the
fiscal year ended February 1, 2003. /S/KPMG LLP
Fort Lauderdale, Florida
March 8, 2004 25




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##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 Jan. 31,
    
    Feb. 1,2004
    
    2003(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    224,630
    
    
    $
    195,482Inventories
    
    
    92,498
    
    
    
    88,334Prepaid expenses and other current assets
    
    
    42,895
    
    
    
    37,792Total current assets
    
    
    360,023
    
    
    
    321,608Property and equipment:Land and building
    
    
    18,151
    
    
    
    18,041Furniture, fixtures and equipment
    
    
    227,278
    
    
    
    206,529Leasehold improvements
    
    
    186,760
    
    
    
    161,240432,189
    
    
    
    385,810Less accumulated depreciation and amortization
    
    
    (244,789
    )
    
    
    (211,328
    )187,400
    
    
    
    174,482Intangible assets, net
    
    
    42,348
    
    
    
    29,576Other assets
    
    
    16,351
    
    
    
    14,588Goodwill
    
    
    199,802
    
    
    
    197,875258,501
    
    
    
    242,039Total Assets
    
    $
    805,924
    
    
    $
    738,129LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    40,916Trade accounts payable
    
    
    48,943
    
    
    
    43,185Income taxes payable
    
    
    29,148
    
    
    
    13,153Accrued expenses
    
    
    65,235
    
    
    
    43,756Total current liabilities
    
    
    143,326
    
    
    
    141,010Long term liabilities:Long term debt, excluding current portion
    
    
    
    
    
    
    70,000Deferred tax liability
    
    
    12,148
    
    
    
    9,602Deferred rent expense
    
    
    18,000
    
    
    
    16,26330,148
    
    
    
    95,865Commitments 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 $.05 per share;
authorized 20,000,000 shares, issued and
outstanding 5,221,660 shares and 5,385,650
shares, respectively
    
    
    261
    
    
    
    135Common stock par value $.05 per share; authorized
150,000,000 shares, issued and outstanding
93,693,448 shares and 92,293,124 shares,
respectively
    
    
    4,685
    
    
    
    2,307Additional paid-in capital
    
    
    49,392
    
    
    
    32,834Accumulated other comprehensive income, net of tax
    
    
    20,109
    
    
    
    7,219Retained earnings
    
    
    558,003
    
    
    
    458,759632,450
    
    
    
    501,254Total Liabilities and Stockholders Equity
    
    $
    805,924
    
    
    $
    738,129
 See accompanying notes to consolidated financial statements. 26




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CLAIRES STORES, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 Fiscal Year EndedJan. 31, 2004
    
    Feb. 1, 2003
    
    Feb. 2, 2002(In thousands, except share and per share amounts)Net sales
    
    $
    1,132,834
    
    
    $
    1,001,537
    
    
    $
    918,737Cost of sales, occupancy and buying expenses
    
    
    524,455
    
    
    
    486,858
    
    
    
    473,785Gross profit
    
    
    608,379
    
    
    
    514,679
    
    
    
    444,952Other expenses:Selling, general and administrative
    
    
    394,152
    
    
    
    355,093
    
    
    
    330,993Depreciation and amortization
    
    
    41,451
    
    
    
    37,897
    
    
    
    42,931Interest expense
    
    
    2,561
    
    
    
    4,435
    
    
    
    10,415Interest and other income
    
    
    (4,207
    )
    
    
    (2,869
    )
    
    
    (3,983
    )433,957
    
    
    
    394,556
    
    
    
    380,356Income from continuing operations before income taxes
    
    
    174,422
    
    
    
    120,123
    
    
    
    64,596Income taxes
    
    
    59,384
    
    
    
    42,144
    
    
    
    23,470Income from continuing operations
    
    
    115,038
    
    
    
    77,979
    
    
    
    41,126Discontinued operation:Loss from discontinued operation of Lux Corp. to
February 1, 2003 less applicable income tax benefit
of 0, 0 and ($5,152), respectively
    
    
    
    
    
    
    
    
    
    
    (8,588
    )Loss on disposal of Lux Corp., less income tax
benefit of 0, ($141) and ($7,773), respectively
    
    
    
    
    
    
    (235
    )
    
    
    (12,955
    )Net loss from discontinued operations
    
    
    
    
    
    
    (235
    )
    
    
    (21,543
    )Net income
    
    
    115,038
    
    
    
    77,744
    
    
    
    19,583Foreign currency translation adjustments
    
    
    12,890
    
    
    
    23,928
    
    
    
    (9,488
    )Comprehensive income
    
    $
    127,928
    
    
    $
    101,672
    
    
    $
    10,095Net income (loss) per share:Basic:Income from continuing operations
    
    $
    1.17
    
    
    $
    .80
    
    
    $
    0.42Loss from operations of discontinued operation
    
    
    
    
    
    
    
    
    
    
    (0.09
    )Loss from disposal of discontinued operation
    
    
    
    
    
    
    
    
    
    
    (0.13
    )Net loss from discontinued operation
    
    
    
    
    
    
    
    
    
    
    (0.22
    )Net income per share
    
    $
    1.17
    
    
    $
    .80
    
    
    $
    0.20Diluted:Income from continuing operations
    
    $
    1.17
    
    
    $
    .80
    
    
    $
    0.42Loss from operations of discontinued operation
    
    
    
    
    
    
    
    
    
    
    (0.09
    )Loss from disposal of discontinued operation
    
    
    
    
    
    
    
    
    
    
    (0.13
    )Net loss from discontinued operation
    
    
    
    
    
    
    
    
    
    
    (0.22
    )Net income per share
    
    $
    1.17
    
    
    $
    .80
    
    
    $
    0.20Weighted average number of shares outstanding:Basic
    
    
    97,955
    
    
    
    97,434
    
    
    
    97,342Diluted
    
    
    98,440
    
    
    
    97,782
    
    
    
    97,502
 See accompanying notes to consolidated financial statements. 27




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CLAIRES STORES, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN 
STOCKHOLDERS EQUITY
 AccumulatedClass A
    
    
    
    
    
    Additional
    
    OtherCommon
    
    Common
    
    Paid-In
    
    Comprehensive
    
    Retained
    
    TreasuryStock
    
    Stock
    
    Capital
    
    Income
    
    Earnings
    
    Stock
    
    Total(In thousands, except for share amounts)Balance: February 3, 2001
    
    $
    142
    
    
    $
    2,297
    
    
    $
    29,825
    
    
    $
    (7,221
    )
    
    $
    375,109
    
    
    $
    (452
    )
    
    $
    399,700Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,583
    
    
    
    
    
    
    
    19,583Stock options exercised
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Cash dividends ($.08 per Common share
and $.04 per Class A Common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,653
    )
    
    
    
    
    
    
    (5,653
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,488
    )
    
    
    
    
    
    
    
    
    
    
    (9,488
    )Balance: February 2, 2002
    
    
    142
    
    
    
    2,297
    
    
    
    29,871
    
    
    
    (16,709
    )
    
    
    389,039
    
    
    
    (452
    )
    
    
    404,188Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,744
    
    
    
    
    
    
    
    77,744Class A Common stock converted to
Common stock
    
    
    (2
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    
    
    
    
    8
    
    
    
    2,963
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,971Cash dividends ($.08 per Common share
and $.04 per Class A Common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,577
    )
    
    
    
    
    
    
    (7,577
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,928
    
    
    
    
    
    
    
    
    
    
    
    23,928Retirement of treasury stock
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (447
    )
    
    
    452
    
    
    
    Balance: February 1, 2003
    
    
    135
    
    
    
    2,307
    
    
    
    32,834
    
    
    
    7,219
    
    
    
    458,759
    
    
    
    
    
    
    
    501,254Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,038
    
    
    
    
    
    
    
    115,038Class A Common stock converted to
Common stock
    
    
    (5
    )
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect of 2 for 1 stock split
    
    
    131
    
    
    
    2,323
    
    
    
    
    
    
    
    
    
    
    
    (2,454
    )
    
    
    
    
    
    
    Stock options exercised, including tax
benefit
    
    
    
    
    
    
    50
    
    
    
    16,558
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,608Cash dividends ($.14 per Common share
and $.07 per Class A Common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,340
    )
    
    
    
    
    
    
    (13,340
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,890
    
    
    
    
    
    
    
    
    
    
    
    12,890Balance: January 31, 2004
    
    $
    261
    
    
    $
    4,685
    
    
    $
    49,392
    
    
    $
    20,109
    
    
    $
    558,003
    
    
    $
    
    
    
    $
    632,450
 See accompanying notes to consolidated financial statements. 28




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CLAIRES STORES, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Year EndedJan. 31, 2004
    
    Feb. 1, 2003
    
    Feb. 2, 2002(In thousands)Cash flows from operating activities:Net income
    
    $
    115,038
    
    
    $
    77,744
    
    
    $
    19,583Adjustments to reconcile net income to net cash
provided by operating activities:Loss from discontinued operations, net of tax benefit
    
    
    
    
    
    
    
    
    
    
    8,588Loss on disposal of discontinued operations, net of tax benefit
    
    
    
    
    
    
    235
    
    
    
    12,955Impairment of intangible assets
    
    
    
    
    
    
    961
    
    
    
    (Gain) loss on sale of intangible assets
    
    
    (409
    )
    
    
    137
    
    
    
    Depreciation and amortization
    
    
    41,451
    
    
    
    37,897
    
    
    
    42,931Amortization of intangible assets
    
    
    1,211
    
    
    
    726
    
    
    
    849Loss on retirement of property and equipment
    
    
    2,923
    
    
    
    2,262
    
    
    
    1,763Impairment of long-lived assets
    
    
    
    
    
    
    2,728
    
    
    
    2,220Tax benefit of stock options
    
    
    3,900
    
    
    
    
    
    
    
    Stock option compensation expense
    
    
    2,416
    
    
    
    
    
    
    
    (Increase) decrease in -
Inventories
    
    
    (1,192
    )
    
    
    (6,784
    )
    
    
    14,569Prepaid expenses and other assets
    
    
    (1,330
    )
    
    
    2,663
    
    
    
    (6,819
    )Increase (decrease) in -
Trade accounts payable
    
    
    3,765
    
    
    
    11,153
    
    
    
    4,026Income taxes payable
    
    
    15,638
    
    
    
    8,086
    
    
    
    2,524Accrued expenses
    
    
    18,828
    
    
    
    15,892
    
    
    
    (5,814
    )Deferred income taxes
    
    
    797
    
    
    
    12,300
    
    
    
    3,858Deferred rent expense
    
    
    1,371
    
    
    
    1,121
    
    
    
    130Net cash provided by continuing operations
    
    
    204,407
    
    
    
    167,121
    
    
    
    101,363Net cash provided by discontinued operations
    
    
    
    
    
    
    114
    
    
    
    7,626Net cash provided by operating activities
    
    
    204,407
    
    
    
    167,235
    
    
    
    108,989Cash flows from investing activities:Acquisition of property and equipment
    
    
    (50,089
    )
    
    
    (45,499
    )
    
    
    (45,055
    )Acquisition of intangible assets, net of cash received from sale
    
    
    (8,620
    )
    
    
    (6,834
    )
    
    
    (8,504
    )Sale (purchase) of short-term investments
    
    
    
    
    
    
    1,563
    
    
    
    (1,563
    )Capital expenditures of discontinued operations
    
    
    
    
    
    
    (352
    )
    
    
    (2,603
    )Net cash used in investing activities
    
    
    (58,709
    )
    
    
    (51,122
    )
    
    
    (57,725
    )Cash flows from financing activities:Principal payments on term loan
    
    
    (85,932
    )
    
    
    (20,227
    )
    
    
    (51,493
    )Principal payments on lines of credit
    
    
    (25,000
    )
    
    
    
    
    
    
    Proceeds from stock options exercised
    
    
    10,292
    
    
    
    2,971
    
    
    
    46Dividends paid
    
    
    (13,340
    )
    
    
    (7,577
    )
    
    
    (7,569
    )Net cash used in financing activities
    
    
    (113,980
    )
    
    
    (24,833
    )
    
    
    (59,016
    )Effect of foreign currency exchange rate changes on cash
and cash equivalents
    
    
    (2,570
    )
    
    
    4,290
    
    
    
    (4,196
    )Net increase (decrease) in cash and cash equivalents
    
    
    29,148
    
    
    
    95,570
    
    
    
    (11,948
    )Cash and cash equivalents at beginning of period
    
    
    195,482
    
    
    
    99,912
    
    
    
    111,860Cash and cash equivalents at end of period
    
    $
    224,630
    
    
    $
    195,482
    
    
    $
    99,912
 See accompanying notes to consolidated financial statements. 29




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CLAIRES STORES, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations - Claires Stores, Inc., a Florida corporation, and
subsidiaries (collectively the Company), is a leading retailer of
value-priced fashion accessories targeted towards pre-teens, teenagers and
young adults. The Company operates stores throughout the United States, Puerto
Rico, Canada, the Virgin Islands, the United Kingdom, (Switzerland, Austria,
Germany, or S.A.G.), France, Ireland and Japan. Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The Companys 50%
ownership interest in its Japanese joint venture (Claires Nippon) is accounted
for under the equity method. All material intercompany balances and
transactions have been eliminated in consolidation. In January 2002, the
Company adopted a plan to discontinue its Mr. Rags (Lux Corp.) apparel
division. The consolidated financial statements and notes thereto have been
restated and reclassified for all periods presented. Use of Estimates - These statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
require management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The most
significant estimates include valuation of inventories, provisions for income
taxes and the recoverability of non-consolidated investments and long-lived
assets. Actual results could differ from these estimates. Periodically, the
Company reviews all significant estimates and assumptions affecting the
financial statements relative to current conditions and records the effect of
any necessary adjustments. Reclassifications - The consolidated financial statements include certain
reclassifications of prior year amounts in order to conform to current year
presentation. Fiscal Year - The Companys fiscal year ends on the Saturday closest to January
31. Fiscal year 2004 consisted of 52 weeks and ended on January 31, 2004,
Fiscal year 2003 consisted of 52 weeks and ended on February 1, 2003 and Fiscal
year 2002 consisted of 52 weeks and ended on February 2, 2002. Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with an original maturity of ninety days or less to be
cash equivalents. Those instruments with an original maturity of greater than
three months are classified as short term investments. Inventories - Merchandise inventories are stated at the lower of cost or
market. Cost is determined by the first-in, first-out basis using the retail
method in North America and S.A.G., while the UK and France use average cost.
Approximately 16% and 22% of the Companys inventory was maintained using the
average cost method, in Fiscal 2004 and 2003, respectively. Prepaid Expenses and Other Current Assets - Prepaid expenses and other current
assets include the following components as of the period indicated (dollars in
thousands): Jan. 31,
    
    Feb. 1,2004
    
    2003Prepaid Rent
    
    $
    25,843
    
    
    $
    22,737Deferred tax asset
    
    
    3,544
    
    
    
    2,876Other
    
    
    13,508
    
    
    
    12,179$
    42,895
    
    
    $
    37,792
 30




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Property and Equipment - Property and equipment are recorded at cost.
Depreciation is computed on the straight-line method over the estimated useful
lives of the building and the furniture, fixtures and equipment, which range
from three to twenty-five years. Amortization of leasehold improvements is
computed on the straight-line method based upon the shorter of the estimated
useful lives of the assets or the terms of the respective leases. Maintenance
and repair costs are charged to earnings while expenditures for major
improvements are capitalized. Upon the disposition of property, plant and
equipment, the accumulated depreciation is deducted from the original cost and
any gain or loss is reflected in current earnings. In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
statement retains the requirements of SFAS 121 to (a) recognize an impairment
loss only if the carrying amount of a long lived asset is not recoverable from
its discounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and fair value of the asset. This statement
requires that a long-lived asset to be abandoned, exchanged for a similar
productive asset, or distributed to owners in a spin-off be considered held and
used until it is disposed of. This statement requires that the depreciable
life of a long-lived asset to be abandoned be revised and that an impairment
loss be recognized at the date a long-lived asset is exchanged for a similar
productive asset or distributed to owners in a spin-off if the carrying amount
of the asset exceeds its fair value. The accounting model for long-lived
assets to be disposed of by sale is used for all long-lived assets, whether
previously held and used or newly acquired. That accounting model measures a
long-lived asset classified as held for sale at the lower of its carrying
amount or fair value less cost to sell and requires depreciation (amortization)
to cease. Discontinued operations are no longer measured on a net realizable
value basis, and future operating losses are no longer recognized before they
occur. This statement retains the basic provisions of Accounting Principles
Board Opinion 30 for the presentation of discontinued operations in the income
statement but broadens that presentation to include a component of an entity
(rather than a segment of a business). A component of an entity comprises
operations and cash flows that can be clearly distinguished, operationally and
for financial reporting purposes, from the rest of the entity. A component of
an entity that is classified as held for sale or that has been disposed of is
presented as a discontinued operation if the operations and cash flows of the
component will be (or have been) eliminated from the ongoing operations of the
entity and the entity will not have any significant continuing involvement in
the operations of the component. The Company adopted SFAS 144 on February 3,
2002. Management has determined that the adoption of SFAS 144 did not have a
material effect on the Companys financial statements. The Company recorded no
impairment charges during the year ended January 31, 2004. The Company
recorded approximately $2.7 million during the year ended February 1, 2003
related to fixed assets in the international segment due to those assets not
being recoverable by discounted cash flows and recorded approximately $2.2
million during the year ended February 2, 2002 relating to fixed assets within
the North American segment. These impairment charges are included within the
financial statement caption Selling, general and administrative expenses
within the Companys Consolidated Statements of Operations and Comprehensive
Income. Goodwill - Effective February 3, 2002, the Company adopted Statement of
Financial Accounting Standards 142 (SFAS 142), Goodwill and Other Intangible
Assets. In accordance with SFAS 142, the Company ceased amortizing its
goodwill effective February 3, 2002. The Company recorded $8.7 million the
year ended February 2, 2002 and would have recorded $8.6 million of
amortization during the years ended January 31, 2004 and February 1, 2003. Net
income for the year ended February 2, 2002 would have been $25.2 million and
$0.26 per diluted share without goodwill amortization expense during that
period. The Company had $199.8 million and $197.9 million of unamortized
goodwill at January 31, 2004 and February 1, 2003, respectively. The Company
had $18.1 million and $17.9 million of accumulative goodwill amortization at
January 31, 2004 and February 1, 2003, respectively. In addition, the adoption
of SFAS 142 had no impact on discontinued operations per share amounts. 31




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SFAS 142 required the Company upon its adoption to reassess the value of, and
useful lives assigned to, intangible assets including goodwill to determine
whether the value of one or more intangible assets is impaired. The first step
of this impairment test required the Company, within the first six months of
Fiscal 2003, to determine the fair value of the reporting unit, as defined by
SFAS 142, and compare it to the carrying value of the net assets allocated to
the reporting unit. If this fair value exceeded the carrying value, no further
analysis was required. If the fair value of the reporting unit was less than
the carrying value of the net assets, the Company was required to perform step
two of the impairment test, which required the Company to allocate the implied
fair value of the reporting unit to all underlying assets and liabilities,
including both recognized and unrecognized tangible and intangible assets,
based on their fair value. The Company performed a transitional goodwill
impairment test as required and determined that no goodwill impairment existed
at February 3, 2002. SFAS 142 also requires the Company to perform a goodwill and intangible assets
impairment test on an annual basis. Any impairment charges resulting from the
application of this test in the future would be immediately recorded as a
charge to earnings in the Companys statement of operations. The Company
performed these impairment tests during Fiscal 2004 and determined that no
impairment exists. Other Assets - Other assets primarily include deposits and the non-current
portion of prepaid lease payments on leasehold improvements and equipment
financed under non-cancelable operating leases. The prepaid lease payments are
amortized on a straight line basis over the respective lease terms, typically
ranging from four to seven years. Also included is the Companys equity in
earnings from unconsolidated subsidiaries in the amount of $1.2 million at
January 31, 2004. Intangible Assets - The Company has concluded that certain intangible assets,
comprised primarily of lease rights, qualify as indefinite-life intangible
assets under SFAS 142. Fair market value of the lease rights was determined
through the use of third-party valuations. In addition, the Company makes
investments through our international subsidiaries in intangible assets upon
the opening and acquisition of many of our store locations in Europe. These
other intangible assets which are subject to amortization are amortized over
the useful lives of the respective leases, not to exceed 25 years. The Company
evaluates the market value of intangible assets periodically and records the
impairment charge when the Company believes the asset has experienced a decline
in value that is other than temporary. The Company recorded impairment charges
of approximately $1.0 million in Fiscal 2003, included within selling, general
and administrative expenses, because the market value of certain lease rights
included in its international segment were determined to be less than their
carrying values. No impairment charges related to these assets were recorded
during Fiscal 2004. The following table summarizes certain information
regarding intangible assets at the respective periods, (dollars in thousands): Jan. 31,
    
    Feb. 1,2004
    
    2003Gross
    
    Accumulated
    
    Gross
    
    AccumulatedCarrying Amount
    
    Amortization
    
    Carrying Amount
    
    AmortizationAmortized lease rights
    
    $
    17,693
    
    
    $
    8,695
    
    
    $
    13,638
    
    
    $
    5,639Unamortized lease rights
    
    
    33,350
    
    
    
    
    
    
    
    21,577
    
    
    
    $
    51,043
    
    
    $
    8,695
    
    
    $
    35,215
    
    
    $
    5,639
 Amount
    
    Weighted AverageAmortizable Lease Right Acquisitions
    
    Acquired
    
    Amortization Period(in years)January 31, 2004
    
    $
    582
    
    
    
    10February 1, 2003
    
    
    492
    
    
    
    16February 2, 2002
    
    
    1,547
    
    
    
    21
 32




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Amortization expense on these intangible assets is expected to be approximately
$700,000 for each of the next five years. The weighted average amortization
period of amortized intangible assets as of January 31, 2004 approximates
fifteen years. Accrued Expenses - Accrued expenses include the following components as of the
period indicated (dollars in thousands): Jan. 31,
    
    Feb. 1,2004
    
    2003Compensation and benefits
    
    $
    30,068
    
    
    $
    19,268Sales and local taxes
    
    
    9,171
    
    
    
    7,744Other
    
    
    25,996
    
    
    
    16,744$
    65,235
    
    
    $
    43,756
 Revenue Recognition - The Company recognizes sales as the customer takes
possession of the merchandise. The estimated liability for sales returns is
based on the historical return levels, which is included in accrued expenses. Basic and Diluted Shares - Basic net income per share is based on the weighted
average number of shares of Class A Common Stock and Common Stock outstanding
during the period (97,955,000 shares in Fiscal 2004, 97,434,000 shares in
Fiscal 2003 and 97,342,000 shares in Fiscal 2002). Diluted net income per
share includes the dilutive effect of stock options plus the number of shares
included in basic net income per share (98,440,000 shares in Fiscal 2004,
97,782,000 shares in Fiscal 2003 and 97,502,000 shares in Fiscal 2002).
Options to purchase 326,604, 328,346 and 2,313,021 shares of common stock, at
prices ranging from $16.93 per share, $10.78 to $15.13 per share and $8.66 to
$15.13 per share, respectively, were outstanding for the years ended January
31, 2004, February 1, 2003 and February 2, 2002, respectively, but were not
included in the computation of diluted earnings per share because the options
exercise prices were greater than the average market price of the common shares
for the respective fiscal year. Income Taxes - The Company accounts for income taxes under the provisions of
SFAS 109 which generally requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Foreign Currency Translation - The financial statements of the Companys
foreign operations are translated into US dollars. Assets and liabilities are
translated at current exchange rates while income and expense accounts are
translated at the average rates in effect during the year. Equity accounts are
translated at historical exchange rates. Resulting translation adjustments are
accumulated as a component of other comprehensive income. Foreign currency
gains and losses resulting from transactions denominated in foreign currencies,
including intercompany transactions, except for intercompany loans of a
long-term investment nature, are included in results of operations. Fair Value of Financial Instruments - The Companys financial instruments
consist primarily of current assets, current liabilities and long term debt.
Current assets and liabilities approximate fair market value. Long term debt
is considered to approximate market value due to the interest rate being
variable. Derivative Instruments and Hedging Activities - The Company accounts for
derivatives and hedging activities in accordance with SFAS 133, Accounting for
Derivative Instruments and Certain Hedging 33




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##### Table of Contents



Activities, as amended, which
requires that all derivative instruments be recorded on the balance sheet at
their respective fair values. The Company is exposed to market risk from foreign exchange rates. The Company
continues to regularly evaluate these risks and continues to take measures to
mitigate these risks, including, among other measures, entering into derivative
financial instruments to hedge risk exposures to currency rates. The Company
enters into foreign currency options to minimize and manage the currency
related to its import merchandise purchase program. The counter-party to these
contracts is a highly rated financial institution. These foreign
currency options are designated as cash flow hedges, as defined by SFAS 133, and are
effective as hedges. Accordingly, changes in the effective portion of the fair
value of these foreign currency options are included in other comprehensive
income. Once the hedged transactions are completed, or when merchandise is
sold, the unrealized gains and losses on the foreign currency options are
reclassified from accumulated other comprehensive income and recognized in
earnings. The unrealized losses related to the import merchandise purchase
program contracts, which were recorded in other comprehensive income, were not
material at January 31, 2004. The losses from these transactions are limited
to the fees paid to purchase foreign currency options. Stock Options - SFAS 123, Accounting for Stock Based Compensation, as amended
by SFAS 148, Accounting for Stock Based Compensation-Transition and
Disclosure, allows entities to choose between a fair value based method of
accounting for employee stock options or similar equity instruments and the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion 25 (APB 25), Accounting for Stock Issued to Employees.
Entities electing to account for employee stock options or similar equity
instruments under APB 25 must make pro forma disclosures of net income and
earnings per share as if the fair value method of accounting had been applied.
The Company has elected to apply the provisions of APB 25 in the preparation of
its consolidated financial statements and provide pro forma disclosure of net
income and earnings per share as required under SFAS 123 (dollars in thousands,
except share data). Fiscal Year Ended2004
    
    2003
    
    2002Net income  as reported
    
    $
    115,038
    
    
    $
    77,744
    
    
    $
    19,583Stock-based employee compensation
expense not included in reported
net income, net of tax
    
    
    1,659
    
    
    
    840
    
    
    
    1,074Net income  pro forma
    
    
    113,379
    
    
    
    76,904
    
    
    
    18,509Basic net income per share  as reported
    
    
    1.17
    
    
    
    0.80
    
    
    
    0.20Basic net income per share  pro forma
    
    
    1.16
    
    
    
    0.79
    
    
    
    0.19Diluted net income per share  as reported
    
    
    1.17
    
    
    
    0.80
    
    
    
    0.20Diluted net income per share  pro forma
    
    
    1.15
    
    
    
    0.79
    
    
    
    0.19
 Recent Accounting Pronouncements - In January 2003, the FASB issued
Interpretation No. 46 Consolidation of Variable Interest Entities. The
interpretation defines a variable interest entity as a corporation,
partnership, trust or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the equity to
support its activities. A variable interest entity often holds financial
assets, including loans or receivables, real estate or other property. A
variable interest entity may be essentially passive or it may engage in
research and development or other activities on behalf of another company.
This interpretation requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. The Company would have to consolidate any
of its variable interest entities that meet the above criteria as of July 1,
2003. The interpretation also requires disclosures about variable interest
entities that the Company is not required to consolidate but in which we have a
significant variable interest. The Company has determined that its interests
in unconsolidated entities do not qualify as variable interest entities. 34




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In December 2003, the FASB issued Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities (FIN 46R), which
replaced FIN 46. FIN 46R addresses how a business enterprise should evaluate
whether it has a controlling interest in an entity through means other than
voting rights. This interpretation requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entitys activities or is entitled to
receive a majority of the entitys residual returns or both. The
interpretation also requires disclosures about variable interest entities that
the Company is not required to consolidate but in which it has a significant
variable interest. The Company is required to adopt FIN 46R by the end of the
first reporting period ending after March 15, 2004. The Company has completed
its initial evaluation of FIN 46R, and has concluded that adoption of FIN 46R
is not expected to have a material impact on the Companys results of
operations or financial condition. 2. STATEMENTS OF CASH FLOWS Payments of income taxes were $43.6 million in Fiscal 2004, $20.5 million in
Fiscal 2003 and $15.0 million in Fiscal 2002. Payments of interest were $2.7
million in Fiscal 2004, $4.5 million in Fiscal 2003 and $12.6 million in Fiscal
2002. 3. DISCONTINUED OPERATIONS In January 2002, the Companys Board of Directors authorized the disposition of
Lux Corp., which represented the Companys apparel segment. In connection with
the plan to dispose of Lux Corp., the Company recorded a loss on disposal of
$13.0 million, net of tax, in the consolidated financial statements as of
February 2, 2002. On May 17, 2002, the Company sold the stock of Lux
Corporation, d/b/a Mr. Rags for (i) an initial payment of $5.0 million, (ii)
deferred payments to be paid aggregating $10.0 million payable as 1% of net
sales during the first year and 2% of net sales thereafter, and (iii) an amount
to be paid equal to approximately 48% of the gross sales of the inventory of
Mr. Rags as of the closing date. Through the date of disposition, the
operations of Lux Corp. were accounted for as a discontinued operation in the
Companys consolidated financial statements. The deferred payments aggregating
$10.0 million were not included in the Companys estimate of loss on
disposition as the timing and amount could not be reasonably estimated due to
the uncertainty of the financial condition of the acquired business. In
January 2003, Lux Corp. filed a voluntary petition for relief under Chapter 11
of the Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of California. As a result, no deferred payments have been made to
the Company since the date of the bankruptcy filing, and it is unlikely that
the Company will receive any future deferred payments. In order to conform to
the separate presentation of the net assets and operating results of Mr. Rags
as a discontinued operation, certain prior period amounts have been
reclassified to conform to current period presentation. During the twelve
months ended February 1, 2003, the Company recorded approximately $235,000, net
of tax, loss on disposal of Lux Corp. As of January 31, 2004, the Company remains as a guarantor on 12 real estate
leases for Mr. Rags store locations with future rental payments of
approximately $10.2 million. As of January 31, 2004, the Company also had a
contingent liability as lessee under a master lease agreement on $1.5 million
of gross future lease payments on operating leases for equipment and leasehold
improvements of Lux Corp. that were assigned to Lux Corp. at the time of the
sale. Based on the bankruptcy filing by Lux Corp. in January 2003 and the
related impact on Lux Corp.s ability to fulfill the commitments under these
real estate and operating leases, $6.2 million was accrued as a liability at
February 1, 2003, of which $3.6 million remains accrued at January 31, 2004.
The Company had also entered into a transitional services agreement with the
new owner of Lux Corp. in May 2002 under which the Company performed certain
transition services for the benefit of Mr. Rags. The Company had no
decision-making authority under the terms of the agreement. The service
agreement was for an initial period of one year with two, three month options.
Lux Corp. exercised the first renewal option, so the service agreement
terminated in August 2003. During Fiscal 2004 and 2003, the Company received
approximately $400,000 and $1.0 million, respectively for these services and
included them within Interest and other income within the Consolidated
Statement of Operations and Comprehensive Income. 35




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##### Table of Contents



4. CREDIT FACILITIES The Company entered into a new credit facility in March 2004. This credit
facility is a revolving line of credit of up to $60.0 million, is secured by
inventory in the United States and is due to expire March 31, 2009. The
borrowings under this facility are limited based on certain calculations of
availability, primarily on the amount of inventory on hand in the United
States. At March 31, 2004, the entire amount of $60.0 million would have been
available for borrowing by the Company. The credit facility is cancelable
without penalty and bears interest at a margin of 75 basis points over the
London Interbank Borrowing Rate (LIBOR). The margin is adjusted periodically
based on certain liquidity measurements. In December of 1999, the Company entered into a credit facility pursuant to
which the Company financed $200.0 million of the purchase price for
Afterthoughts. The credit facility included a $40.0 million revolving line of
credit which would have matured on December 1, 2004, and a $175.0 million five
year term loan, the first installment of which was paid on December 31, 2000,
with future installments, thereafter, payable on a quarterly basis through
December 1, 2004. The credit facility was prepayable without penalty and bore
interest at a margin of 100 basis points over the London Interbank Borrowing
Rate. The margin was adjusted periodically based on the Companys performance
as it related to certain financial covenants. On January 31, 2004 no
borrowings were outstanding on this line of credit, and no borrowings were
outstanding under the term loan. The Company was in compliance with all debt
covenants at January 31, 2004. As of January 31, 2004, the Company had $40.0
million of availability under the revolving line of credit. The Company also
had $1.8 million of issued letters of credit which are supported and considered
drawn against the line of credit. The Company terminated this facility on
March 31, 2004. The Companys non-US subsidiaries have credit facilities totaling approximately
$795,000 with banks. The facilities are used for working capital requirements,
letters of credit and various guarantees. These credit facilities have been
arranged in accordance with customary lending practices in their respective
countries of operation. At January 31, 2004, there were no borrowings on these
credit facilities. 5. COMMITMENTS AND CONTINGENCIES Leasing - The Company leases retail stores, offices and warehouse space and
certain equipment under operating leases which expire at various dates through
the year 2028 with options to renew certain of such leases for additional
periods. The lease agreements covering retail store space provide for minimum
rentals and/or rentals based on a percentage of net sales. Rental expense for
each of the three fiscal years ended January 31, 2004 is set forth below (in
thousands): Fiscal 2004
    
    Fiscal 2003
    
    Fiscal 2002Minimum store rentals
    
    $
    143,067
    
    
    $
    132,981
    
    
    $
    123,186Store rentals based on net sales
    
    
    3,767
    
    
    
    2,951
    
    
    
    1,712Other rental expense
    
    
    22,605
    
    
    
    23,260
    
    
    
    22,788Total rental expense from
continuing operations
    
    $
    169,439
    
    
    $
    159,192
    
    
    $
    147,686
 36




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##### Table of Contents



Minimum aggregate rental commitments under non-cancelable operating leases are
summarized by fiscal year ending as follows (in thousands): FromContinuingOperations2005
    
    $
    151,4912006
    
    
    137,5552007
    
    
    125,5302008
    
    
    114,4672009
    
    
    98,808Thereafter
    
    
    198,436$
    826,287
 Certain leases provide for payment of real estate taxes, insurance and other
operating expenses of the properties. In other leases, some of these costs are included in the basic contractual
rental payments. Certain leases contain escalation clauses resulting from the
pass-through of increases in operating costs, property taxes and the effect on
costs from changes in consumer price indexes. SFAS 143, Accounting for Asset Retirement Obligations, which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs, was adopted by the Company on February 2, 2003. SFAS 143 requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value
can be made and that the associated asset retirement costs be capitalized as
part of the carrying amount of the long-lived asset. The retirement obligation
relates to costs associated with the retirement of leasehold improvements under
store and warehouse leases, within the International division. The cumulative
effect adjustment recognized upon adoption of this standard and its impact on
our results of operations or financial condition for each of the earlier
periods presented was not material. Foreign Currency Options - At January 31, 2004, the Company has entered into
foreign currency options with notional amounts of $30.2 million to hedge
exposure to currency fluctuations between the British Pound and the US dollar,
expiring in January 2005. These contracts are accounted for as cash-flow
hedges. These contracts are accounted for by adjusting the carrying amount of the
contracts to market and recognizing any gain or loss in the accumulated other
comprehensive income. The amount recognized in relation to these contracts was
not material. The counterparty to the Companys foreign currency options is a major financial
institution. The credit ratings and concentration of risk of the financial
institution is monitored on a continuing basis. In the unlikely event that the
counterparty fails to meet the terms of a foreign currency contract, the
Companys exposure is limited to the foreign currency rate difference. Other - The Company is, from time to time, involved in litigation incidental to
the conduct of its business, including personal injury litigation, litigation
regarding merchandise sold, including product and safety concerns regarding
metal content in merchandise, litigation with respect to various employment
matters, including litigation with present and former employees, and litigation
to protect trademark rights. On November 7, 2003, the Official Committee of
Unsecured Creditors of Lux Corporation, d/b/a Mr. Rags, filed a complaint
against the Company in the United States Bankruptcy Court for the Central
District of California. The complaint alleges that certain payments made to
the Company in connection with the sale of the stock of Lux Corporation in May
2002 should be repaid to the bankruptcy estate because the payments are
avoidable, as such term is used under general bankruptcy laws. On December 8,
2003, the 37




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##### Table of Contents



Company filed a Motion to Dismiss with the Bankruptcy Court, which was denied
on February 24, 2004. The Company filed an answer to the complaint on March
15, 2004. The Company believes the claims are without merit and intends to
defend the litigation vigorously. The Company believes that current pending
litigation will not have a material adverse effect on its financial position,
earnings or cash flows. Approximately 45% of the merchandise purchased by the Company in North America
was manufactured in China. Any event causing a sudden disruption of imports
from China, or other foreign countries, could have a material adverse effect on
the Companys operations. In November 2003, the Companys Board of Directors authorized a retirement
compensation package for the Companys founder and former Chairman of the
Board. Management estimated that the retirement package will cost the Company
approximately $8.7 million, which was recorded in the Companys Statement of
Operations within expenses titled Selling, general and administrative. 6. STOCKHOLDERS EQUITY Stock Split - On November 4, 2003, the Companys Board of Directors announced a
2-for-1 stock split of its Common stock and Class A common stock in the form of
a 100% stock dividend distribution. On December 19, 2003, 46,471,815 shares of
Common stock and 2,611,989 shares of Class A common stock were distributed to
stockholders. Stockholders equity has been adjusted to give recognition of
the stock split by reclassifying from retained earnings to the Common stock and
Class A common stock accounts the par value of the additional shares arising
from the split. In addition, all references in the financial statements to
number of shares, per share amounts, stock option data and market prices of the
Companys stock have been restated. Preferred Stock - The Company has authorized 1,000,000 shares of $1 par value
preferred stock, none of which have been issued. The rights and preferences of
such stock may be designated in the future by the Board of Directors. Class A Common Stock - The Class A common stock has only limited
transferability and is not traded on any stock exchange or any organized
market. However, the Class A common stock is convertible on a share-for-share
basis into Common stock and may be sold, as Common stock, in open market
transactions. The Class A common stock has ten votes per share. Dividends
declared on the Class A common stock are limited to 50% of the dividends
declared on the Common stock. Treasury Stock - Treasury stock acquired is recorded at cost. Occasionally, the
Company uses treasury stock to fulfill its obligations under its stock option
plans. When stock is issued pursuant to the stock option plans, the difference
between the cost of treasury stock issued and the option price is charged or
credited to additional paid-in capital. In January 2002, the Company retired
these shares. Rights to Purchase Series A Junior Participating Preferred Stock - The
Companys Board of Directors adopted a stockholder rights plan (the Rights
Plan) in May 2003. The Rights Plan has certain anti-takeover provisions that
may cause substantial dilution to a person or group that attempts to acquire
the Company on terms not approved by the Board of Directors. Under the Rights
Plan, each stockholder is issued one right to acquire one one-thousandth of a
share of Series A Junior Participating Preferred Stock at an exercise price of
$130.00, subject to adjustment, for each outstanding share of Common Stock and
Class A Common Stock they own. These rights are only exercisable if a single
person or company acquires 15% or more of the outstanding shares of the
Companys common stock. If the Company were acquired, each right, except those
of the acquirer, would entitle its holder to purchase the number of shares of
common stock having a then-current market value of twice the exercise price.
The Company may redeem the rights for $0.01 per right at any time prior to a
triggering acquisition and, unless redeemed earlier, the rights would expire on
May 30, 2013. 38




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##### Table of Contents



7. STOCK OPTIONS In August 1996, the Board of Directors of the Company adopted, and on June 16,
1997 the Companys stockholders approved, the Claires Stores, Inc. 1996 Stock
Option Plan and then, on June 8, 2000, the first amendment thereto. On March
12, 2003, the Claires Stores, Inc. 1996 Stock Option Plan was amended and
restated to, among other things, change the name of the 1996 Plan to the
Claires Stores, Inc. 1996 Incentive Compensation Plan (as amended and
restated, the 1996 Plan). The 1996 Plan replaced the Companys 1991 Stock
Option Plan (the 1991 Plan), which had replaced the Companys 1982 Incentive
Stock Option Plan (the 1982 Plan) and the Companys 1985 Non-Qualified Stock
Option Plan (the 1985 Plan), although options granted under the 1991 Plan
remain outstanding. Under the 1996 Plan, the Company may grant either
incentive stock options or non-qualified stock options to purchase up to
8,000,000 shares of Common Stock, plus any shares unused or recaptured under
the 1982 Plan, the 1985 Plan or the 1991 Plan. Incentive stock options granted
under the 1996 Plan are exercisable at prices equal to the fair market value of
shares at the date of grant, except that incentive stock options granted to any
person holding 10% or more of the total combined voting power or value of all
classes of capital stock of the Company, or any subsidiary of the Company,
carry an exercise price equal to 110% of the fair market value at the date of
grant. The aggregate number of shares granted to any one person may not exceed
1,000,000. Each incentive stock option or non-qualified stock option will
terminate ten years after the date of grant (or such shorter period as
specified in the grant) and may not be exercised thereafter. Incentive stock options currently outstanding are exercisable at various rates
beginning one year from the date of grant, and expire five to ten years after
the date of grant. Non-qualified stock options currently outstanding are
exercisable at prices equal to the fair market value of the shares at the date
of grant and expire five to ten years after the date of grant. Options to purchase an additional 1,077,336 shares were outstanding, but not
yet exercisable, at January 31, 2004 under the 1991 Plan and the 1996 Plan.
There were 7,609,292 shares of Common stock available for future option grants
under the 1996 Plan at January 31, 2004 (which includes shares recaptured from
the previous plans). A summary of the activity in the Companys stock option plans is presented
below: Fiscal 2004
    
    Fiscal 2003
    
    Fiscal 2002Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageNumber of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of
period
    
    
    1,669,096
    
    
    $
    8.52
    
    
    
    2,569,954
    
    
    $
    9.40
    
    
    
    2,720,528
    
    
    $
    9.62Options granted
    
    
    900,000
    
    
    $
    16.77
    
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    $
    6.95Options exercised
    
    
    (1,235,728
    )
    
    $
    8.30
    
    
    
    (337,612
    )
    
    $
    8.39
    
    
    
    (7,500
    )
    
    $
    6.08Options canceled
    
    
    (66,500
    )
    
    $
    15.34
    
    
    
    (563,246
    )
    
    $
    12.63
    
    
    
    (223,074
    )
    
    $
    11.29Outstanding at end of period
    
    
    1,266,868
    
    
    $
    14.23
    
    
    
    1,669,096
    
    
    $
    8.52
    
    
    
    2,569,954
    
    
    $
    9.40Exercisable at end of period
    
    
    189,534
    
    
    $
    8.73
    
    
    
    978,648
    
    
    $
    8.14
    
    
    
    1,093,660
    
    
    $
    8.78Weighted average fair value
of options granted during the period (see below)
    
    
    
    
    
    $
    8.98
    
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    $
    3.85
 39




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##### Table of Contents



The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: Fiscal
    
    Fiscal
    
    Fiscal2004
    
    2003
    
    2002Expected dividend yield
    
    
    0.65
    %
    
    
    N/A
    
    
    
    0.65
    %Expected stock price volatility
    
    
    50.00
    %
    
    
    N/A
    
    
    
    50.00
    %Risk-Free interest rate
    
    
    1.15
    %
    
    
    N/A
    
    
    
    2.97
    %Expected life of options
    
    4.5 and 9.5 years
    
    
    N/A
    
    
    4.5 and 9.5 years
 The following table summarizes information about stock options outstanding at
January 31, 2004: Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedNumber of
    
    Remaining
    
    Average
    
    
    
    
    
    AverageShares
    
    Contractual
    
    Exercise
    
    Number of
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life
    
    Price
    
    Shares
    
    Price$  4.00 to $10.19
    
    
    410,704
    
    
    
    4.53
    
    
    $
    9.08
    
    
    
    188,034
    
    
    $
    8.71$10.63 to $10.63
    
    
    6,664
    
    
    
    2.65
    
    
    $
    10.63
    
    
    
    
    
    
    $
    $10.88 to $10.88
    
    
    1,500
    
    
    
    5.93
    
    
    $
    10.88
    
    
    
    1,500
    
    
    $
    10.88$13.40 to $13.40
    
    
    40,000
    
    
    
    9.40
    
    
    $
    13.40
    
    
    
    
    
    
    $
    $16.93 to $16.93
    
    
    808,000
    
    
    
    9.62
    
    
    $
    16.93
    
    
    
    
    
    
    $
    $  4.00 to $16.93
    
    
    1,266,868
    
    
    
    7.92
    
    
    $
    14.23
    
    
    
    189,534
    
    
    $
    8.73
 The Company adopted SFAS 123, Accounting for Stock-Based Compensation, issued
in October 1995. As permitted under the provisions of SFAS 123, the Company
applies the principles of APB 25 and related interpretations in accounting for
its stock option plans and, accordingly, does not recognize compensation cost. In December 2003, the Companys Board of Directors authorized the acceleration
of the vesting period on 240,000 options to purchase the Companys common stock
in connection with the retirement compensation package granted to the Companys
founder and former Chairman of the Board. As a result of this acceleration,
$2.4 million of compensation expense was recorded by the Company during the
year ended January 31, 2004. 8. EMPLOYEE BENEFIT PLANS Profit Sharing Plan - The Company has adopted a Profit Sharing Plan under
Section 401(k) of the Internal Revenue Code. This plan allows employees who
serve more than 1,000 hours per year to defer up to 18% of their income through
contributions to the plan. In line with the provisions of the plan, for every
dollar the employee contributes the Company will contribute an additional $.50,
up to 2% of the employees salary. In Fiscal 2004, Fiscal 2003 and Fiscal
2002, the cost of Company matching contributions was $603,000, $507,000 and
$493,000, respectively. 40




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##### Table of Contents



Deferred Compensation Plans - In August 1999, the Company adopted a deferred
compensation plan that enables certain associates of the Company to defer a
specified percentage of their cash compensation. The plan generally provides
for payments upon retirement, death, or termination of employment.
Participants may elect to defer a percentage of their cash compensation while
the Company contributes a specified percentage of the participants cash
compensation based on the participants number of years of service. All
contributions are immediately vested. The Companys obligations under this
plan are funded by making contributions to a rabbi trust. Assets held under
this plan are included in cash and cash equivalents on the Companys balance
sheet and totaled $2.4 million and $1.3 million at January 31, 2004 and
February 1, 2003, respectively. The obligations under the plan are included in
accrued expenses. Total Company contributions were $197,000, $151,000 and
$194,000 in Fiscal 2004, 2003 and 2002, respectively. Incentive Compensation Plan - In Fiscal 2001, the Company adopted, which was
also approved by the Companys shareholders, an incentive compensation plan for
the Chairman of the Board. Under this plan, a percentage equal to twice the
percentage increase in the consolidated pretax income of the Company over the
prior fiscal year, will be applied against the Chairman of the Boards base
salary in determining the amount of incentive compensation earned.
Approximately $1.0 million and $1.7 million was earned pursuant to this plan in
Fiscal 2004 and Fiscal 2003, respectively. No amounts were paid or accrued
during Fiscal 2002 by the Company pursuant to this plan. 9. INCOME TAXES Income before income taxes from continuing operations is as follows (in
thousands): Fiscal Year2004
    
    2003
    
    2002Domestic
    
    $
    125,567
    
    
    $
    97,239
    
    
    $
    48,449Foreign
    
    
    48,855
    
    
    
    22,884
    
    
    
    16,147$
    174,422
    
    
    $
    120,123
    
    
    $
    64,596
 The components of income tax expense (benefit) consist of the following (in
thousands): Fiscal Year EndedJan. 31, 2004
    
    Feb. 1, 2003
    
    Feb. 2, 2002Federal:Current
    
    $
    38,307
    
    
    $
    26,880
    
    
    $
    14,547Deferred
    
    
    5,664
    
    
    
    5,881
    
    
    
    3,62643,971
    
    
    
    32,761
    
    
    
    18,173State:Current
    
    
    3,970
    
    
    
    3,783
    
    
    
    2,065Deferred
    
    
    587
    
    
    
    700
    
    
    
    4324,557
    
    
    
    4,483
    
    
    
    2,497Foreign:Current
    
    
    9,373
    
    
    
    4,900
    
    
    
    2,800Deferred
    
    
    1,483
    
    
    
    
    
    
    
    10,856
    
    
    
    4,900
    
    
    
    2,800Total income tax expense from
continuing operations
    
    
    59,384
    
    
    
    42,144
    
    
    
    23,470Tax benefit of discontinued operations
    
    
    
    
    
    
    (141
    )
    
    
    (12,925
    )Total income tax expense
    
    $
    59,384
    
    
    $
    42,003
    
    
    $
    10,545
 41




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##### Table of Contents



The approximate tax effects on the significant components of the Companys net
deferred tax asset (liability) are as follows (in thousands): Fiscal Year EndedJan. 31,
    
    Feb. 1,
    
    Feb. 2,2004
    
    2003
    
    2002Deferred tax assets:Depreciation
    
    
    
    
    
    $
    88
    
    
    $
    1,605Accrued expenses
    
    
    2,647
    
    
    
    2,555
    
    
    
    1,754Deferred rent
    
    
    3,265
    
    
    
    2,844
    
    
    
    2,796Discontinued operations
    
    
    1,250
    
    
    
    1,589
    
    
    
    8,251Other
    
    
    5,036
    
    
    
    1,829
    
    
    
    2,092Net operating loss carryforwards
    
    
    5,236
    
    
    
    4,096
    
    
    
    2,828Total gross deferred tax assets
    
    
    17,434
    
    
    
    13,001
    
    
    
    19,326Valuation allowance
    
    
    (5,236
    )
    
    
    (4,096
    )
    
    
    (2,828
    )Total deferred tax assets, net
    
    
    12,198
    
    
    
    8,905
    
    
    
    16,498Deferred tax liabilities:Depreciation
    
    
    3,804
    
    
    
    
    
    
    
    Operating leases
    
    
    2,069
    
    
    
    3,564
    
    
    
    4,441Intangible amortization
    
    
    12,962
    
    
    
    11,809
    
    
    
    6,230Other
    
    
    848
    
    
    
    233
    
    
    
    222Total deferred tax liabilities
    
    
    19,683
    
    
    
    15,606
    
    
    
    10,893Net deferred tax asset (liability)
    
    $
    (7,485
    )
    
    $
    (6,701
    )
    
    $
    5,605
 The provision for income taxes from continuing operations differs from an
amount computed at the statutory federal rate as follows: Jan. 31, 2004
    
    Feb. 1, 2003
    
    Feb. 2, 2002US income taxes at statutory federal rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Foreign income tax benefit at less than domestic rate
    
    
    (5.3
    )
    
    
    (5.5
    )
    
    
    (6.2
    )State and local income taxes, net of federal tax benefit
    
    
    1.7
    
    
    
    2.3
    
    
    
    2.1Other, net
    
    
    2.6
    
    
    
    3.3
    
    
    
    5.434.0
    %
    
    
    35.1
    %
    
    
    36.3
    %
 The Company believes that the realization of the deferred tax assets is more
likely than not, based on the expectation that the Company will generate the
necessary taxable income in future periods. As of January 31, 2004, there are
accumulated unremitted earnings from the Companys foreign subsidiaries on
which deferred taxes have not been provided as the undistributed earnings of
the foreign subsidiaries are indefinitely reinvested. Based on the current
United States and foreign subsidiaries income tax rates, it is estimated that
United States taxes, net of foreign tax credits, of approximately $24.3 million
would be due upon repatriation. Accumulated Other Comprehensive Income at
January 31, 2004 includes $5.8 million related to the income tax effect of
unrealized gains on foreign currency translation within the Companys foreign
subsidiaries. As of January 31, 2004, foreign subsidiaries of the Company had available net
operating loss (NOL) carryforwards of approximately $14.6 million for foreign
income tax purposes, of which $14.3 million has an indefinite expiration. The
remaining $300,000 expires in Fiscal 2006. Generally, a valuation allowance
has been established for these carryforwards because the ability to utilize
them is uncertain. The Company utilized $2.2 million of pre-acquisition
foreign NOLs which were recorded to Goodwill. 42




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##### Table of Contents



The change in the valuation allowance of $1.1 million from Fiscal 2003 to
Fiscal 2004 was primarily the result of an increase in NOL carryforwards for
current year losses in the Companys foreign subsidiaries, net of utilization.
The net change in the total valuation allowance for the years ended Fiscal
2004, 2003 and 2002 was an increase of $1.1 million, $1.3 million and $664,000,
respectively. Our effective income tax rate for Fiscal 2004 was 34.0% as compared to 35.1% in
Fiscal 2003. During Fiscal 2004, the Company recorded net benefits to the
provision for income taxes totaling $2.8 million attributable to concluded
United States and foreign tax examinations that were settled more favorably
than anticipated. In addition, our tax rate is impacted by tax planning,
marginally lower worldwide tax rates and the change in the mix of income
attributed to the various countries in which we do business. 10. RELATED PARTY TRANSACTIONS Leasing Transactions - The Company leases its executive offices located in
Pembroke Pines, Florida from Rowland Schaefer & Associates, a general
partnership owned by two corporate general partners. Each of our two
Co-Chairmen have an approximately 32% ownership interest in the general
partnership, and our Chief Financial Officer has an approximately 5% ownership
interest in the general partnership. During Fiscal 2004, 2003, and 2002, the
Company paid Rowland Schaefer & Associates, Inc. $900,000, $874,000, and
$847,000, respectively, for rent, real estate taxes, and operating expenses as
required under the lease. After obtaining approval of the Companys Audit
Committee, the Company executed a new lease in January 2004 which expires on
December 31, 2013. The Company leases retail space for a Claires Boutiques store in New York City
from 720 Lexington Realty LLC, a limited liability corporation that is
controlled by the Companys two Co-Chairmen and another sister of the Companys
Co-Chairmen. During Fiscal 2004, 2003 and 2002, the Company paid $282,000,
$281,000 and $256,000, respectively, for rent to 720 Lexington Realty LLC. The
terms under the lease with 720 Lexington Realty LLC are the same terms as were
in effect when the Company leased the retail space from an unaffiliated third
party prior to the purchase by 720 Lexington Realty LLC. The lease expires on
January 31, 2005. Management believes that these lease arrangements are on no less favorable
terms than we could obtain from unaffiliated third parties. Loans to Officers - During Fiscal 2003, the Company had an outstanding loan to
its Chairman in the principal amount of $750,000 which was repaid in Fiscal
2003. During Fiscal 2003, the Company had an outstanding loan in the principal amount
of $600,000 to the Companys Chief Financial Officer. The loan was repaid in
Fiscal 2003. 43




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11. SELECTED QUARTERLY FINANCIAL DATA
(Unaudited) Fiscal Year Ended January 31, 20041st Qtr
    
    2nd Qtr
    
    3rd Qtr
    
    4th Qtr
    
    Year(In thousands except per share amounts)Net sales
    
    $
    239,756
    
    
    $
    264,949
    
    
    $
    264,146
    
    
    $
    363,983
    
    
    $
    1,132,834Gross profit
    
    
    124,616
    
    
    
    137,865
    
    
    
    139,212
    
    
    
    206,686
    
    
    
    608,379Net income
    
    
    15,565
    
    
    
    22,181
    
    
    
    25,253
    
    
    
    52,039
    
    
    
    115,038Basic net income per share
    
    $
    0.16
    
    
    $
    0.23
    
    
    $
    0.26
    
    
    $
    0.53
    
    
    $
    1.17Diluted net income per share
    
    $
    0.16
    
    
    $
    0.23
    
    
    $
    0.26
    
    
    $
    0.53
    
    
    $
    1.17
 Fiscal Year Ended February 1, 20031st Qtr
    
    2nd Qtr
    
    3rd Qtr
    
    4th Qtr
    
    Year(In thousands except per share amounts)Net sales
    
    $
    210,360
    
    
    $
    238,740
    
    
    $
    230,043
    
    
    $
    322,394
    
    
    $
    1,001,537Gross profit
    
    
    102,580
    
    
    
    117,630
    
    
    
    115,065
    
    
    
    179,404
    
    
    
    514,679Income from continuing operations
    
    
    8,280
    
    
    
    15,078
    
    
    
    12,081
    
    
    
    42,540
    
    
    
    77,979Net income
    
    
    8,280
    
    
    
    16,874
    
    
    
    12,362
    
    
    
    40,228
    
    
    
    77,744Basic net income (loss) per share:Income from continuing operations
    
    $
    0.09
    
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.44
    
    
    $
    0.80Loss from discontinued operations
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    (0.03
    )
    
    
    Net income
    
    $
    0.09
    
    
    $
    0.18
    
    
    $
    0.13
    
    
    $
    0.41
    
    
    $
    0.80Diluted net income (loss) per share:Income from continuing operations
    
    $
    0.09
    
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.44
    
    
    $
    0.80Loss from discontinued operations
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    (0.03
    )
    
    
    Net income
    
    $
    0.09
    
    
    $
    0.18
    
    
    $
    0.13
    
    
    $
    0.41
    
    
    $
    0.80
 Included in Net income during the fourth quarter of the Fiscal year ended
January 31, 2004 is approximately $8.7 million attributable to the retirement
compensation package awarded to the Companys founder and former Chairman of
the Board. 44




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12. SEGMENT REPORTING The Company is primarily organized based on the geographic markets in which it
operates. Under this organizational structure, the Company currently has two
reportable segments: North America and International. In Fiscal 2002, the
Company has accounted for its Apparel stores segment as a discontinued
operation. Information about the Companys operations by segment is as follows (in
thousands): Fiscal Year Ended2004
    
    2003
    
    2002Net sales:North America
    
    $
    820,332
    
    
    $
    740,838
    
    
    $
    711,299International
    
    
    312,502
    
    
    
    260,699
    
    
    
    207,438Total net sales
    
    $
    1,132,834
    
    
    $
    1,001,537
    
    
    $
    918,737Operating income:North America
    
    $
    165,279
    
    
    $
    126,370
    
    
    $
    85,617International
    
    
    48,948
    
    
    
    33,216
    
    
    
    28,342Total operating income
    
    $
    214,227
    
    
    $
    159,586
    
    
    $
    113,959Depreciation and amortization:North America
    
    $
    27,222
    
    
    $
    26,295
    
    
    $
    32,394International
    
    
    14,229
    
    
    
    11,602
    
    
    
    10,537Total depreciation and amortization
    
    $
    41,451
    
    
    $
    37,897
    
    
    $
    42,931Interest expense:North America
    
    $
    2,530
    
    
    $
    4,094
    
    
    $
    10,259International
    
    
    31
    
    
    
    341
    
    
    
    156Total interest expense
    
    $
    2,561
    
    
    $
    4,435
    
    
    $
    10,415Interest and other income:North America
    
    $
    (2,860
    )
    
    $
    (1,868
    )
    
    $
    (1,176
    )International
    
    
    (1,347
    )
    
    
    (1,001
    )
    
    
    (2,807
    )Total interest and other income
    
    $
    (4,207
    )
    
    $
    (2,869
    )
    
    $
    (3,983
    )Income from continuing operations before income taxes:North America
    
    $
    138,387
    
    
    $
    97,849
    
    
    $
    44,140International
    
    
    36,035
    
    
    
    22,274
    
    
    
    20,456Total income from continuing operations before income taxes
    
    $
    174,422
    
    
    $
    120,123
    
    
    $
    64,596Income taxes:North America
    
    $
    52,578
    
    
    $
    39,923
    
    
    $
    22,803International
    
    
    6,806
    
    
    
    2,221
    
    
    
    667Total income taxes
    
    $
    59,384
    
    
    $
    42,144
    
    
    $
    23,470Income from continuing operations:North America
    
    $
    85,809
    
    
    $
    57,926
    
    
    $
    21,337International
    
    
    29,229
    
    
    
    20,053
    
    
    
    19,789Total income from continuing operations
    
    $
    115,038
    
    
    $
    77,979
    
    
    $
    41,126Goodwill:North America
    
    $
    170,650
    
    
    $
    170,650
    
    
    $
    170,650International
    
    
    29,152
    
    
    
    27,225
    
    
    
    22,490Total Goodwill
    
    $
    199,802
    
    
    $
    197,875
    
    
    $
    193,140Total assets:North America
    
    $
    542,763
    
    
    $
    536,132
    
    
    $
    463,261International
    
    
    263,161
    
    
    
    201,997
    
    
    
    148,314Total assets
    
    $
    805,924
    
    
    $
    738,129
    
    
    $
    611,575
 45




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##### Table of Contents



Fiscal Year Ended2004
    
    2003
    
    2002Capital
expenditures:North America
    
    $
    33,491
    
    
    $
    29,103
    
    
    $
    31,205International
    
    
    16,598
    
    
    
    16,396
    
    
    
    13,850Discontinued operation
    
    
    
    
    
    
    352
    
    
    
    2,603Total capital expenditures
    
    $
    50,089
    
    
    $
    45,851
    
    
    $
    47,658
 Identifiable assets are those assets that are identified with the operations of
each segment. Corporate assets consist mainly of cash and cash equivalents,
investments in affiliated companies and other assets. These assets are
included within North America. Operating income represents gross profit less
selling, general and administrative costs. Approximately 19%, 19% and 18% of
the Companys net sales were in the United Kingdom for Fiscal Years 2004, 2003
and 2002, respectively. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure None. 
 Item 9A. Controls and Procedures  (a)
    
    Evaluation of Disclosure Controls and Procedures  Based on their evaluation of the end of the period covered by this annual
report on Form 10-K, our co-Chief Executive Officers and our Chief Financial
Officer have concluded that our disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, are effective to ensure that the information required to be disclosed
by us in reports that we file under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and that such information is
accumulated and communicated to our management, including our co-Chief
Executive Officers and Chief Financial Officer as appropriate to allow
timely decisions regarding required disclosure.  (b)
    
    Changes in Internal Controls  There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses. 
 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. The information called for by Items 10, 11, 12, 13 and 14 will be contained in
our definitive Proxy Statement for our 2004 Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of our fiscal year covered by this report pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended, and is incorporated
herein by reference. 46




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##### Table of Contents



PART IV. 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) List of documents filed as part of this report.  1.
    
    Financial Statements Page No.Independent Auditors Report
    
    
    25Consolidated Balance Sheets as of January 31, 2004 and
February 1, 2003
    
    
    26Consolidated Statements of Operations and Comprehensive Income
for the fiscal years ended January 31, 2004, February 1,
2003 and February 2, 2002
    
    
    27Consolidated Statements of Changes in Stockholders Equity for
the fiscal years ended January 31, 2004, February 1, 2003 and February 2, 2002
    
    
    28Consolidated statements of Cash Flows for the fiscal years ended
January 31, 2004, February 1, 2003 and February 2, 2002
    
    
    29Notes to Consolidated Financial Statements
    
    
    30
  2.
    
    Financial Statement Schedules All schedules have been omitted because the required information is included in
the consolidated financial statements or the notes thereto, or the omitted
schedules are not applicable.  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)
    
    Stock Purchase Agreement dated as of November 11, 1998
between the Company and Peter Bossert, an individual, for any
and all shares/Company contributions of: Bijoux One AG, Zurich,
Switzerland, Claires Austria AG, Zurich, Switzerland, Claires
Austria GesmbH, Brunn am Gebirge, Austria and Bosco GmbH,
Stuttgart, Germany (omitted schedules will be furnished
supplementally to the Commission upon request (incorporated by
reference to exhibit 2 (b) to the Companys Annual Report on
form 10-K for the fiscal year ended January 30, 1999).(2)(c)
    
    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).(2)(d)
    
    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).
 47




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##### Table of Contents



(2)(e)
    
    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(b) to the Companys Annual Report on
Form 10-K filed on May 2, 2003).(3)(c)
    
    Articles of Amendment to the Amended and Restated Articles of
Incorporation of Claires Stores, Inc.(1)(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)
    
    Credit Agreement, dated as of December 1, 1999, by and
among, the Company, the several banks and other financial
institutions or entities from time to time parties thereto,
Bear Stearns & Co., Inc., as sole lead arranger and sole book
manager, Bear Stearns Corporate Lending, Inc., as syndication
agent, Suntrust Banks South Florida, N.A., as documentation
agent (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K dated December 1, 1999).(10)(b)
    
    Form of Note (incorporated by reference to Exhibit 4.2 to
the Companys Current Report on Form 8-K dated December 1,
1999).(10)(c)
    
    Form of Guarantee (incorporated by reference to Exhibit 4.3
to the Companys Current Report on Form 8-K dated December 1,
1999).(10)(d)
    
    Incentive Stock Option Plan of the Company, as amended
(incorporated by reference to Exhibit 10(a) to the Companys
Annual Report on Form 10-K for the fiscal year ended February
1, 1986).(10)(e)
    
    Non-Qualified Stock Option Plan of the Company, 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, 1986).(10)(f)
    
    1991 Stock Option Plan of the Company (incorporated by
reference to Appendix A to the Companys Proxy Statement
relating to the 1991 Annual Meeting of Stockholders).(10)(g)
    
    1996 Incentive Compensation Plan of the Company
(incorporated by reference to Appendix B to the Companys Proxy
Statement relating to the 2003 Annual Meeting of Stockholders).
 48




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##### Table of Contents



(10)(h)
    
    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)(i)
    
    Office Lease Agreement dated September 8, 1989 between the
Company and Rowland Schaefer and Associates (formerly Two
Centrum Plaza Associates) (incorporated by reference to Exhibit
10(h) to the Companys Annual Report on Form 10-K for the
fiscal year ended February 2, 1991).(10)(j)
    
    Amendment of Office Lease Agreement dated July 31, 1990
between the Company and Rowland Schaefer and Associates
(formerly Two Centrum Plaza Associates) (incorporated by
reference to exhibit 10 (g) to the Companys Annual Report on
form 10-K for the fiscal year ended January 30, 1999).(10)(k)
    
    Addendum to Office Lease dated September 8, 1989 between the
Company and Rowland Schaefer and Associates (formerly Two
Centrum Plaza Associates) (incorporated by reference to Exhibit
10(j) to the Companys Annual Report on Form 10-K for the
fiscal year ended February 2, 1991).(10)(l)
    
    Second addendum to office lease dated January 30, 1997
between the Company and Rowland Schaefer and Associates
(formerly Two Centrum Plaza Associates) (incorporated by
reference to Exhibit 10(g) to the Companys Annual Report on
Form 10-K for the fiscal year ended February 1, 1997).(10)(m)
    
    Claires Stores, Inc. Management Deferred Compensation Plan
effective as of July 26, 1999, as amended (incorporated by
reference to Exhibit 10(m) to the Companys Annual Report on
Form 10-K filed on May 2, 2003).(10)(n)
    
    Consent and Waiver, dated as of June 13, 2000, to the Credit
Agreement, dated as of December 1, 1999, by and among the
Company, the several banks and other financial institutions or
entities from time to time parties thereto, Bear Stearns & Co.,
Inc., Bear Stearns Corporate Lending, Inc., SunTrust Banks
South Florida, N.A. and Fleet National Bank (incorporated by
reference to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q for the quarterly period ended July 29, 2000).(10)(o)
    
    First Amendment to 1996 Stock Option Plan of the Company
(incorporated by reference to Appendix D of the Companys Proxy
Statement relating to the 2000 Annual Meeting of Stockholders).(10)(p)
    
    2000 Incentive Compensation Plan for the Chairman of the
Board of the Company (incorporated by reference to Appendix E
of the Companys Proxy Statement relating to the 2000 Annual
Meeting of Stockholders).(10)(q)
    
    Promissory Note dated January 23, 2002 in the principal
amount of $600,000 by the Companys Chief Financial Officer
(incorporated by reference to Exhibit (10)(q) to the Companys
Annual Report on Form 10-K for the fiscal year ended February
2, 2002).(10)(r)
    
    Deed (Promissory Note) dated December 1997 in the principal
amount of £300,000 by the Companys Chief Executive of Europe
(incorporated by reference to Exhibit (10)(r) to the Companys
Annual Report on Form 10-K for the fiscal year ended February
2, 2002).
 49




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##### Table of Contents



(10)(s)
    
    Promissory Note dated January 23, 2002 in the Principal
amount of $250,000 by the wife of the Companys Chairman
(incorporated by reference to Exhibit (10)(s) to the Companys
Annual Report on Form 10-K for the fiscal year ended February
2, 2002).(10)(t)
    
    First Amendment and Consent, dated February 1, 2002, to the
Credit Agreement, dated as of December 1, 1999, by and among
the Company, the several banks and other financial institutions
or entities from time to time parties thereto, Bear Stearns &
Co., Inc., Bear Stearns Corporate Lending, Inc., SunTrust Banks
South Florida, N.A. and Fleet National Bank (incorporated by
reference to Exhibit (10)(t) to the Companys Annual Report on
Form 10-K for the fiscal year ended February 2, 2002).(10)(u)
    
    Employment Agreement, dated December 4, 2002, between
Claires Stores, Inc. and Rowland Schaefer (incorporated by
referenced to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q for the quarterly period ended November 2, 2002).(10)(v)
    
    Promissory Note, dated April 2002, in the principal amount
of $750,000, by the Companys Chairman (incorporated by
reference to Exhibit 10(v) to the Companys Annual Report on
Form 10-K filed on May 2, 2003).(10)(w)
    
    Clarification to Employment Agreement dated April 28, 2003,
between Claires Stores, Inc. and Rowland Schaefer
(incorporated by reference to Exhibit 10(w) to the Companys
Annual Report on Form 10-K filed on May 2, 2003).(10)(x)
    
    Amended and Restated office lease dated January 1, 2004
between the Company and Rowland Schaefer Associates.(1)(10)(y)
    
    Retirement Agreement dated December 2003 between Claires
Stores, Inc. and Rowland Schaefer. (1)(10)(z)
    
    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.(1)(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)(d),
(10)(e), (10)(f), (10)(g), (10)(h), (10)(m), (10)(o),
(10)(p), (10)(u) and (10)(w).(31.1)
    
    Certification of Co-Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a).(1)(31.2)
    
    Certification of Co-Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a).(1)
 50




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##### Table of Contents



(31.3)
    
    Certification of Chief Financial Officer pursuant to Rule
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.(1)(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.(1)(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.(1)
   (1) Filed herewith. (b) Reports on Form 8-K Other than Current Reports on Form 8-K under Item 12, which are not deemed
to be filed for purpose of the Securities Exchange Act of 1934, as amended,
the Company filed the following Current Reports on Form 8-K during the
quarterly period ended January 31, 2004. Form 8-K filed on November 5, 2003 announcing that the Board of Directors
of the Registrant had declared a two-for-one stock split on the Registrants
common and Class A Common stock. Form 8-K filed on November 20, 2003 announcing the appointment of Rowland
Schaefer as Chairman Emeritus, the approval of his retirement package and the
election of Marla Schaefer and Bonnie Schaefer as Co-Chairmen and Co-Chief
Executive Officers. 51




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SIGNATURE Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized. CLAIRES STORES, INC.April 15, 2004
    
    By:
    
    /s/Marla SchaeferMarla Schaefer, Co-Chief Executive OfficerApril 15, 2004
    
    By:
    
    /s/E. Bonnie SchaeferE. Bonnie Schaefer, Co-Chief Executive OfficerApril 15, 2004
    
    By:
    
    /s/Ira D. KaplanIra D. Kaplan, Senior Vice President
and Chief Financial Officer
 POWER OF ATTORNEY We, the undersigned, hereby constitute Ira D. Kaplan and Michael
Rabinovitch, or either of them, our true and lawful attorneys-in-fact with full
power to sign for us in our name and in the capacity indicated below any and
all amendments and supplements to this report, and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes, each acting alone, may lawfully do
or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. April 15, 2004
    
    /s/Marla SchaeferMarla Schaefer, Co-Chairman of the Board
of Directors (principal co-executive
officer and director)April 15, 2004
    
    /s/E. Bonnie SchaeferE. Bonnie Schaefer, Co-Chairman of the
Board of Directors (principal
co-executive officer and director)April 15, 2004
    
    /s/Ira D. KaplanIra D. Kaplan, Senior Vice President,
Chief Financial Officer and Director
(principal financial and accounting
officer and director)April 15, 2004
    
    /s/Todd D. JickTodd D. Jick, DirectorApril 15, 2004
    
    /s/Ann Spector LieffAnn Spector Lieff, DirectorApril 15, 2004
    
    /s/Bruce G. MillerBruce G. Miller, DirectorApril 15, 2004
    
    /s/Steven H. TishmanSteven H. Tishman, DirectorApril 15, 2004
    
    /s/Carl M. YoungmanCarl M. Youngman, Director
 52




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##### Table of Contents



INDEX TO EXHIBITS EXHIBIT NO.
    
    DESCRIPTION3(c)
    
    Articles of Amendment to the Amended and Restated Articles
of Incorporation of Claires Stores, Inc.10(x)
    
    Amended and Restated Office Lease dated January 1, 2004
between the Company and Rowland Schaefer Associates10(y)
    
    Retirement Agreement dated December 2003 between Claires
Stores, Inc. and Rowland Schaefer.10(z)
    
    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.21
    
    Subsidiaries of the Company23
    
    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.
 53