News Column

CLAIRES STORES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 30, 2014

Management's Discussion and Analysis of Financial Condition and Results of Operations 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, and significant accounting policies and critical estimates. Management's Discussion and Analysis should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes thereto contained elsewhere in this document. We include a store in the calculation of same store sales once it has been in operation sixty weeks after its initial opening and, we include sales from e-commerce. A store which is temporarily closed, such as for remodeling, is removed from the same store sales computation if it is closed for one week or more. The removal is effective prospectively upon the completion of the first fiscal week of closure. A store which is closed permanently, such as upon termination of the lease, is immediately removed from the same store sales computation. We compute same store sales on a local currency basis, which eliminates any impact for changes in foreign currency rates.



Results of Consolidated Operations

Management Overview

We are one of the world's leading specialty retailers of fashionable jewelry and accessories for young women, teens, tweens, and kids. Our vision is to inspire girls and women around the world to become their best selves by providing products and experiences that empower them to express their own unique individual styles. We are organized into two operating segments: North America and Europe. We identify our operating segments by how we manage and evaluate our business activities. As of May 3, 2014, we operated a total of 3,071 owned stores, of which 1,884 were located in all 50 states of the United States, Puerto Rico, Canada, the U.S. Virgin Islands, and China (North America segment) and 1,187 stores were located in the United Kingdom, Ireland, France, Spain, Portugal, Belgium, Switzerland, Austria, Netherlands, Germany, Poland, Czech Republic, Hungary, Italy and Luxembourg (Europe segment). We operate our stores under two brand names: Claire's® and Icing®. In January 2014, we made a decision to close our China stores and closed 14 company-operated stores during the three months ended May 3, 2014. As of May 3, 2014, we also franchised or licensed 426 stores in Japan, the Middle East, Turkey, Greece, Guatemala, Malta, Ukraine, Mexico, India, Dominican Republic, El Salvador, Venezuela, Panama, Honduras, Indonesia, Philippines, Costa Rica, Colombia, Serbia, Sweden and Romania. We account for the goods we sell to third parties under franchising agreements within "Net sales" and "Cost of sales, occupancy and buying expenses" in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. The franchise fees we charge under the franchising agreements are reported in "Other (income) expense, net" in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. Claire's® is our primary global brand that we operate through company-operated or franchise stores. Claire's® offers a differentiated and fun store experience with a "treasure hunt" setting that encourages our customer to visit often to explore and find merchandise that appeals to her. We believe by maintaining a highly relevant merchandise assortment and offering a compelling value proposition, Claire's® has universal appeal to teens, pre-teens and kids. Claire's® target customer is a girl between 3-18 years old with a particular focus on a core demographic of girls between 10-14 years old. Icing® is our other brand which we currently operate in North America through company-operated stores. Icing® offers an inspiring merchandise assortment of fashionable products that helps a young woman to say something about herself, whatever the occasion. Our Icing® brand targets a young woman in the 18-35 year age group with a focus on our core 21-25 year olds who have recently entered the workforce. This customer is independent, fashion-conscious, and has enhanced spending ability. 18



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We provide our target customer groups with a significant selection of fashionable merchandise across a wide range of categories, all with a compelling value proposition. Our major categories of business are:

• Jewelry: Includes earrings, necklaces, bracelets, body jewelry and rings,

as well as our ear piercing service; and • Accessories: Includes fashion and seasonal accessories, including



headwear, legwear, hairgoods, handbags and small leather goods, attitude

glasses, scarves, armwear and belts, sunglasses, hats, gloves, slippers

and earmuffs; and our beauty product offerings.

In North America, our stores are located primarily in shopping malls. The differentiation of our Claire's® and Icing® brands allows us to operate multiple stores within a single location. In Europe, our stores are located primarily on high streets, in shopping malls and in high traffic urban areas.



Financial activity for the three months ended May 3, 2014 includes the following:

• Net sales decrease of 0.2%. • Same store sales percentages: Three Months Ended May 3, 2014 Consolidated (4.4 )% North America (5.6 )% Europe (2.4 )% • Operating income reduction of 48.6%. • Operating income margin of 4.7 %.



Operational activity for the three months ended May 3, 2014 includes the following:

• Opened 15 new company-operated stores.



• Closed 58 company-operated stores due to underperformance or lease renewal

terms that did not meet our criteria, including 14 stores in China.

A summary of our consolidated results of operations for the three months ended May 3, 2014 and May 4, 2013 are as follows (dollars in thousands):

Three Months Three Months Ended Ended May 3, 2014 May 4, 2013 Net sales $ 353,343$ 354,006 (Decrease) increase in same store sales (4.4 )% 2.9 % Gross profit percentage 47.1 % 49.6 % Selling, general and administrative expenses as a percentage of net sales 35.6 % 35.4 % Depreciation and amortization as a percentage of net sales 6.6 % 4.4 % Operating income $ 16,755$ 32,589 Loss on early debt extinguishment $ - $ 1,674 Net loss $ (38,137 )$ (26,584 ) Number of stores at the end of the period (1) 3,071 3,085



(1) Number of stores excludes stores operated under franchise agreements.

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Net sales

Net sales for the three months ended May 3, 2014 decreased $0.7 million, or 0.2%, from the three months ended May 4, 2013. The decrease was attributable to a decrease in same store sales of $15.1 million and the effect of store closures of $9.6 million, partially offset by new store sales of $16.7 million, favorable foreign currency translation effect of our non-U.S. net sales of $6.6 million, and increased shipments to franchisees of $0.7 million. Net sales would have decreased 2.0% excluding the impact from foreign currency exchange rate changes. For the three months ended May 3, 2014, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 3.1% and a decrease in average transaction value of 0.2%.



The following table compares our sales of each product category for each of the periods presented:

Percentage of Total Three Months Three Months Ended Ended Product Category May 3, 2014 May 4, 2013 Jewelry 50.4 51.2 Accessories 49.6 48.8 100.0 100.0 Gross profit In calculating gross profit and gross profit percentages, we exclude the costs related to our distribution center and depreciation and amortization expense. These costs are included instead in "Selling, general and administrative" expenses in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. Other retail companies may include these costs in cost of sales, so our gross profit percentages may not be comparable to those retailers. During the three months ended May 3, 2014, gross profit percentage decreased 250 basis points to 47.1% compared to 49.6% during the three months ended May 4, 2013. The decrease in gross profit percentage consisted of a 210 basis point increase in occupancy costs and a decrease in merchandise margin of 50 basis points, partially offset by a 10 basis point decrease in buying and buying-related costs. The increase in occupancy costs, as a percentage of net sales, was primarily caused by the effect of a decrease in same store sales combined with normal occupancy cost increases. The decrease in merchandise margin resulted primarily from an increase in markdowns. Markdowns fluctuate based upon many factors including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns or shrink that would materially affect our merchandise margin.



Selling, general and administrative expenses

During the three months ended May 3, 2014, selling, general and administrative expenses increased $0.6 million, or 0.5%, compared to the three months ended May 4, 2013. As a percentage of net sales, selling, general and administrative expenses increased 20 basis points compared to the three months ended May 4, 2013. Excluding an unfavorable $2.8 million foreign currency translation effect, selling, general, and administrative expenses would have decreased $2.2 million. This decrease primarily resulted from reductions in incentive compensation and previously recorded non-cash stock compensation expense.



Depreciation and amortization expense

During the three months ended May 3, 2014, depreciation and amortization expense increased $7.9 million to $23.5 million compared to $15.6 million for the three months ended May 4, 2013. Excluding an unfavorable $0.3 million foreign currency translation effect, the increase in depreciation and amortization expense would have been $7.6 million. 20



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Other (income) expense, net

The following is a summary of other (income) expense activity for the three months ended May 3, 2014 and May 4, 2013 (in thousands):

Three Months Three Months Ended Ended May 3, 2014 May 4, 2013 Royalty income $ (1,186 )$ (1,105 ) Foreign currency exchange (gain) loss, net (257 ) 2,029 Other income (43 ) - $ (1,486 ) $ 924



Loss on early debt extinguishment

There was no debt repurchase activity for the three months ended May 3, 2014. The following is a summary of the Company's debt repurchase activity for the three months ended May 3, 2014 (in thousands). All debt repurchases in the three months ended May 4, 2013, were pursuant to the tender offer and note redemptions. Three Months Ended May 4, 2013 Principal Repurchase Recognized Notes Repurchased Amount Price Loss (1)



9.25% Senior Fixed Rate Notes due 2015 (the "Senior Fixed Rate Notes")

$ 39,011$ 38,543$ 1,103 9.625%/10.375% Senior Toggle Notes due 2015 (the "Senior Toggle Notes")

21,523 21,281 571 $ 60,534$ 59,824$ 1,674



(1) Net of deferred financings cost write-offs of $353 for the Senior Fixed Rate

Notes and $140 for the Senior Toggle Notes and tender premiums and fees of

$1,218 for the Senior Fixed Rate Notes and $673 for the Senior Toggle Notes.

Interest expense, net During the three months ended May 3, 2014, net interest expense aggregated $54.8 million compared to $58.2 million for the three months ended May 4, 2013. The decrease of $3.4 million is primarily due to a lower rate of interest on the indebtedness used to refinance our former Senior Fixed Rate Notes and Senior Toggle Notes. Income taxes The effective income tax rate for the three months ended May 3, 2014 was (0.3)% compared to 2.6% for the three months ended May 4, 2013. These effective income tax rates differed from the statutory federal income tax rate of 35% primarily from increases in the valuation allowance recorded for additional deferred tax assets generated primarily from operating losses in the three months ended May 3, 2014 and May 4, 2013, respectively, by our U.S. operations. 21



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Segment Operations

We have two reportable segments - North America and Europe. The following is a discussion of results of operations by reportable segment.

North America

Key statistics and results of operations for our North America segment are as follows (dollars in thousands):

Three Months Three Months Ended Ended May 3, 2014 May 4, 2013 Net sales $ 214,198$ 225,957 (Decrease) increase in same store sales (5.6 )% 2.3 % Gross profit percentage 46.8 % 51.7 % Number of stores at the end of the period (1) 1,884 1,920



(1) Number of stores excludes stores operated under franchise agreements and

includes 3 and 7 China stores as of May 3, 2014 and May 4, 2013,

respectively.

During the three months ended May 3, 2014, net sales in North America decreased $11.8 million, or 5.2%, from the three months ended May 4, 2013. The decrease was attributable to a decrease in same store sales of $12.0 million, the effect of store closures of $5.6 million and an unfavorable foreign currency translation effect of our non-U.S. net sales of $1.4 million, partially offset by new store sales of $6.5 million and increased shipments to franchisees of $0.7 million. Sales would have decreased 4.6% excluding the impact from foreign currency exchange rate changes. For the three months ended May 3, 2014, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 4.5% and a decrease in average transaction value of 0.5%. During the three months ended May 3, 2014, gross profit percentage decreased 490 basis points to 46.8% compared to 51.7% during the three months ended May 4, 2013. The decrease in gross profit percentage consisted of a 290 basis point increase in occupancy costs and a 210 basis point decrease in merchandise margin, partially offset by a 10 basis point decrease in buying and buying-related costs. The increase in occupancy costs, as a percentage of net sales, was primarily caused by the effect of a decrease in same store sales combined with normal occupancy cost increases. The decrease in merchandise margin resulted primarily from an increase in markdowns and higher freight costs. Markdowns fluctuate based upon many factors including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns or shrink that would materially affect our merchandise margin.



The following table compares our sales of each product category in North America for each of the periods presented:

Percentage of Total Three Months Three Months Ended Ended Product Category May 3, 2014 May 4, 2013 Jewelry 55.6 55.5 Accessories 44.4 44.5 100.0 100.0 22



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Europe

Key statistics and results of operations for our Europe segment are as follows (dollars in thousands): Three Months Three Months Ended Ended May 3, 2014 May 4, 2013 Net sales $ 139,145$ 128,049 (Decrease) increase in same store sales (2.4 )% 4.0 % Gross profit percentage 47.4 % 45.8 % Number of stores at the end of the period (1) 1,187 1,165



(1) Number of stores excludes stores operated under franchise and licensing

agreements.

During the three months ended May 3, 2014, net sales in Europe increased $11.1 million, or 8.7%, from the three months ended May 4, 2013. The increase was attributable to new store sales of $10.2 million and a favorable foreign currency translation effect of our non-U.S. net sales of $8.0 million, partially offset by the effect of store closures of $4.0 million and a decrease in same stores sales of $3.1 million. Sales would have increased 2.3% excluding the impact from foreign currency exchange rate changes. For the three months ended May 3, 2014, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 2.1%, partially offset by an increase in average transaction value of 1.3%. During the three months ended May 3, 2014, gross profit percentage increased 160 basis points to 47.4% compared to 45.8% during the three months ended May 4, 2013. The increase in gross profit percentage consisted of a 200 basis point increase in merchandise margin and a 10 basis point decrease in buying and buying-related costs, partially offset by a 50 basis point increase in occupancy costs. The increase in merchandise margin resulted primarily from lower markdowns and lower freight costs. The increase in occupancy costs, as a percentage of net sales, was primarily caused by the effect of a decrease in same store sales combined with normal occupancy cost increases. We do not anticipate a significant change in the level of shrink that would materially affect our merchandise margin.



The following table compares our sales of each product category in Europe for each of the periods presented:

Percentage of Total Three Months Three Months Ended Ended Product Category May 3, 2014 May 4, 2013 Jewelry 42.5 43.8 Accessories 57.5 56.2 100.0 100.0



Liquidity and Capital Resources

We anticipate that cash generated from operations, borrowings under our $115.0 million Credit Facility (as described below) and future refinancings of our indebtedness will be sufficient to allow us to satisfy payments of interest and principal on our indebtedness as they become due, to fund new store expenditures, and future working capital requirements in both the next twelve months and over the longer term. Interest on the outstanding Notes (as described below) will be approximately $206.1 million in Fiscal 2014, and we expect to fund these interest payments through a combination of cash from operations and borrowings under our Credit Facility. No principal is due on the Notes until Fiscal 2017, when our Senior Subordinated Notes will mature. We expect to pay the outstanding principal amount of these Notes at maturity through a combination of new indebtedness, cash from operations and other available sources. In addition, we anticipate the cash generated from operations and borrowings under the Credit Facility will be sufficient to allow us to fund new store expenditures and future working capital requirements in both the next twelve months and over the longer term. However, our ability to make 23



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interest payments and meet operational liquidity needs, as well as our ability to refinance the Senior Subordinated Notes when they mature in Fiscal 2017, will depend, in part, on our future operating performance. Our future operating performance and liquidity, as well as our ability to refinance our indebtedness, may also be adversely affected by general economic, financial, and other factors beyond our control, including those disclosed in "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014. A summary of cash flows provided by (used in) operating, investing and financing activities for the three months ended May 3, 2014 and May 4, 2013 is outlined in the table below (in thousands): Three Months Three Months Ended Ended May 3, 2014 May 4, 2013 Operating activities $ (48,599 )$ (47,965 ) Investing activities (19,386 ) (20,616 ) Financing activities 34,410 144,286



Cash flows from operating activities

For the three months ended May 3, 2014, cash used in operations increased $0.6 million compared to the prior year period. The primary reason for the increase was a net decrease in operating income and other items of $11.8 million, partially offset by a decrease in working capital of $11.2 million, excluding cash equivalents. For the three months ended May 4, 2013, cash provided by operations decreased $56.0 million compared to the prior year period. The primary reason for the decrease was an increase in interest payments of $43.9 million and an increase in working capital and other items, excluding cash equivalents, of $12.1 million



Cash flows from investing activities

For the three months ended May 3, 2014, cash used in investing activities was $19.4 million and consisted of $19.4 million for capital expenditures. During the remainder of Fiscal 2014, we expect to spend between $20.0 million and $25.0 million of capital expenditures.



Cash flows from financing activities

For the three months ended May 3, 2014, cash provided by financing activities was $34.4 million, which consisted primarily of net borrowings of $34.6 million under the revolving Credit Facility, partially offset by payment of $0.2 million in financing costs. For the three months ended May 4, 2013, cash provided by financing activities was $144.3 million which consisted primarily of proceeds of $210.0 million from the issuance of 6.125% Senior Secured First Lien Notes, note repurchases of $59.8 million to retire $39.0 million aggregate principal amount of Senior Fixed Rate Notes and $21.5 million aggregate principal amount of Senior Toggle Notes pursuant to a tender offer, payment of $1.9 million in tender premiums and fees, and payment of $4.0 million in financing costs.



We or our affiliates have purchased and may, from time to time, purchase portions of our indebtedness in privately-negotiated, open market transactions.

Cash Position

As of May 3, 2014, we had cash and cash equivalents and restricted cash of $26.9 million and all cash equivalents were maintained in one money market fund invested exclusively in U.S. Treasury Securities.

As of May 3, 2014, our foreign subsidiaries held cash and cash equivalents and restricted cash of $19.6 million. During the three months ended May 3, 2014, we repatriated cash held by foreign subsidiaries but did not accrue U.S. income taxes since the amount of our remaining U.S. net operating loss carry forwards was sufficient to offset the associated income tax liability. During the remainder of Fiscal 2014, 24



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we expect a portion of our foreign subsidiaries' future cash flow generation to be repatriated to the U.S. to meet certain liquidity needs. Based upon the amount of our remaining U.S. net operating loss carryforwards as of May 3, 2014, we do not expect to pay U.S. income tax on future Fiscal 2014 repatriations. When our U.S. net operating loss carryforwards are no longer available, we would be required to accrue and pay U.S. income taxes, net of any foreign tax credit benefit, on any such repatriation. We anticipate that cash generated from operations, borrowings under our Credit Facility (as described below), and future refinancings of our indebtedness will be sufficient to allow us to satisfy payments of interest and principal on our indebtedness as they become due, to fund new store expenditures, and future working capital requirements in both the next twelve months and over the longer term. However, this will depend, in part, on our future operating performance. Our future operating performance and liquidity, as well as our ability to refinance our indebtedness, may be adversely affected by general economic, financial, and other factors beyond our control, including those disclosed in "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.



Credit Facility

On September 20, 2012, we entered into an Amended and Restated Credit Agreement by and among Claire's Inc. ("Parent"), the Company, Credit Suisse AG, as Administrative Agent, and the other Lenders named therein (as amended, the "Credit Facility"), pursuant to which we replaced our existing $200.0 million senior secured former revolver maturing May 29, 2013 with a $115.0 million five-year senior secured revolving credit facility, maturing September 20, 2017. On April 30, 2014, the Company entered into Amendment No. 1 to its Credit Facility (the "Amendment"). The Amendment increased the maximum permitted Total Net Secured Leverage Ratio from 5.50 to 1.00 to 6.00 to 1.00 for purposes of the covenant described below. Borrowings under the Credit Facility bear interest at a rate equal to, at our option, either (a) an alternate base rate determined by reference to the higher of (1) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR rate plus 1.00%, or (b) a LIBOR rate with respect to any Eurodollar borrowing, determined by reference to the costs of funds for U.S. dollar deposits in the London Interbank Market for the interest period relevant to such borrowing, adjusted for certain additional costs, in each case plus an applicable margin of 4.50% for LIBOR rate loans and 3.50% for alternate base rate loans. We also pay a facility fee of 0.50% per annum of the committed amount of the Credit Facility whether or not utilized.



All obligations under the Credit Facility are unconditionally guaranteed by (i) Parent, prior to an initial public offering of our stock, and (ii) our existing and future direct or indirect wholly-owned domestic subsidiaries, subject to certain exceptions.

All obligations under the Credit Facility, and the guarantees of those obligations, are secured, subject to certain exceptions and permitted liens, by a first priority lien on, (i) all of our capital stock, prior to an initial public offering of our stock, and (ii) substantially all of our material owned assets and the material owned assets of subsidiary guarantors, limited in the case of equity interests held by us or any subsidiary guarantor in a foreign subsidiary, to 100% of the non-voting equity interests and 65% of the voting equity interests of such foreign subsidiary held directly by us or a subsidiary guarantor. The liens securing the Credit Facility rank equally to the liens securing the 6.125% Senior Secured First Lien Notes and the "9.0% Senior Secured First Lien Notes" due 2019 (the "9.0% Senior Secured First Lien Notes"). The Credit Facility contains customary provisions relating to mandatory prepayments, voluntary payments, affirmative and negative covenants, and events of default; however, it does not contain any covenants that require us to maintain any particular financial ratio or other measure of financial performance except that so long as the revolving loans and letters of credit outstanding exceed $15 million, we will be required to comply, at each borrowing date measured at the end of the prior fiscal quarter (but reflecting borrowings and repayments under the Credit Facility through the measurement date), and at the end of each fiscal quarter, with a maximum Total Net Secured Leverage Ratio of 6.0 to 25



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1.0 based upon the ratio of our net senior secured first lien debt to adjusted earnings before interest, taxes, depreciation and amortization for the period of four consecutive fiscal quarters most recently ended. As of May 3, 2014, our revolving loans and letters of credit outstanding exceeded $15.0 million, and our Total Net Secured Leverage Ratio was 5.2 to 1.0. The Credit Facility also contains various covenants that limit our ability to engage in specified types of transactions. These covenants, subject to certain exceptions and other basket amounts, limit our and our subsidiaries' ability to, among other things: • incur additional indebtedness or issue certain preferred shares; • pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments; • make certain investments; • sell certain assets; • create liens;



• consolidate, merge, sell or otherwise dispose of all or substantially all

of our assets; and • enter into certain transactions with our affiliates. A breach of any of these covenants could result in an event of default. Upon the occurrence of an event of default, the Lenders could elect to declare all amounts outstanding under the Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. Such actions by those Lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the Lenders under the Credit Facility could proceed against the collateral granted to them to secure that indebtedness. As of May 3, 2014, we were in compliance with the covenants.



As of May 3, 2014, we had $34.6 million of borrowings and $3.3 million of letters of credit outstanding, which reduces the borrowing availability under the Credit Facility to $77.1 million as of that date.

Note Covenants

Our Senior Subordinated Notes, Senior Secured Second Lien Notes, 9.0% Senior Secured First Lien Notes, 6.125% Senior Secured First Lien Notes, and 7.75% Senior Notes (collectively, the "Notes") also contain various covenants that limit our ability to engage in specified types of transactions. These covenants, subject to certain exceptions and other basket amounts, limit our and our subsidiaries' ability to, among other things: • incur additional indebtedness;



• pay dividends or distributions on our capital stock, repurchase or

retire our capital stock and redeem, repurchase or defease any subordinated indebtedness; • make certain investments; • create or incur certain liens;



• create restrictions on the payment of dividends or other distributions

to us from our subsidiaries; • transfer or sell assets; • engage in certain transactions with our affiliates; and • merge or consolidate with other companies or transfer all or substantially all of our assets. Certain of these covenants, such as limitations on our ability to make certain payments such as dividends, or incur debt, will no longer apply if the Notes have investment grade ratings from both of the rating agencies of Moody's Investor Services, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P") and no event of default has occurred. Since the date of issuance of the Notes, the Notes have not received investment grade ratings from Moody's or S&P. Accordingly, all of the covenants under the Notes currently apply to us. None of these Note covenants, however, require us to maintain any particular financial ratio or other measure of financial performance. As of May 3, 2014, we were in compliance with the covenants under the Notes. 26



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Europe Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $2.6 million. These 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. As of February 1, 2014, we had a reduction of $2.4 million for outstanding bank guarantees, which reduces the borrowing availability to $0.2 million as of that date.



Parent Company Registration Statement Filing

On May 3, 2013, Claire's Inc., our Parent, filed a registration statement with the Securities and Exchange Commission for an initial public offering of Claire's Inc.'s common stock.

Critical Accounting Policies and Estimates

Our Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Fiscal 2013 Annual Report on Form 10-K, filed on April 2, 2014, in the Notes to Consolidated Financial Statements, Note 2 - Summary of Significant Accounting Policies, and the Critical Accounting Policies and Estimates section contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations therein.



Recent Accounting Pronouncements

See Note 2 - Recent Accounting Pronouncements, in the Notes to the Unaudited Condensed Consolidated Financial Statements.

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

We and our representatives may from time to time make written or oral forward-looking statements, including statements contained in this and other filings with the Securities and Exchange Commission and in our press releases and reports we issue publicly. 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, business strategy, planned capital expenditures, ability to service our debt, and new store openings for future periods, are forward-looking statements. 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. The forward-looking statements may use the words "expect," "anticipate," "plan," "intend," "project," "may," "believe," "forecasts" and similar expressions. Some of these risks, uncertainties and other factors are as follows: our level of indebtedness; general economic conditions; changes in consumer preferences and consumer spending; unwillingness of vendors and service providers to supply goods or services pursuant to historical customary credit arrangements; competition; general political and social conditions such as war, political unrest and terrorism; natural disasters or severe weather events; currency fluctuations and exchange rate adjustments; failure to maintain our favorable brand recognition; failure to successfully market our products through other channels, such as e-commerce; uncertainties generally associated with the specialty retailing business, such as decreases in mall traffic; disruptions in our supply of inventory; inability to increase same store sales; inability to renew, replace or enter into new store 27



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leases on favorable terms; increase in our cost of merchandise; significant increases in our merchandise markdowns; inability to grow our Company operated store base in North America and Europe, or expand our international store base through franchise or similar licensing arrangements; inability to design and implement new information systems; data security breaches of confidential information or other cyber attacks; delays in anticipated store openings or renovations; results from any future asset impairment analysis; changes in applicable laws, rules and regulations, including changes in North America and Europe, or other international laws and regulations governing the sale of our products, particularly regulations relating to heavy metal and chemical content in our products; changes in anti-bribery laws; changes in employment laws including law relating to overtime pay, tax laws and import laws; product recalls; loss of key members of management; increase in the costs of healthcare for our employees; increases in the cost of labor; labor disputes; increases in the cost of borrowings; unavailability of additional debt or equity capital; and the impact of our substantial indebtedness on our operating income and our ability to grow. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. In addition, we typically earn a disproportionate share of our operating income in the fourth quarter due to seasonal buying patterns, which are difficult to forecast with certainty. Additional discussion of these and other risks and uncertainties is contained elsewhere in this Item 2, in Item 3, "Quantitative and Qualitative Disclosures About Market Risk" and in our Form 10-K for Fiscal 2013 under "Statement Regarding Forward-Looking Disclosures" and "Risk Factors."


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