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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) ( X )Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended May 3, 1997 OR ( )Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 1-8899 CLAIRE'S STORES, INC. (Exact name of registrant as specified in its charter) Delaware 59-0940416 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 S.W. 129th Avenue Pembroke Pines, Florida 33027 (Address of principal executive offices) (Zip Code) (954) 433-3900 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) 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 . The number of shares of the registrant's Common Stock and Class A Common Stock outstanding as of May 31, 1997 was 45,247,322 and 2,916,495 respectively, excluding treasury shares. CLAIRE'S STORES, INC. AND SUBSIDIARIES INDEX PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at May 3, 1997 and February 1, 1996. 3 Consolidated Statements of Income for the Three Months Ended May 3, 1997 and May 4, 1996. 4 Consolidated Statements of Cash Flows for the Three Months Ended May 3, 1997 and May 4, 1996. 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations 7-8 PART I. FINANCIAL INFORMATION CLAIRE'S STORES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) May 3, February 1, ASSETS 1997 1997 Current assets Cash and cash equivalents $ 97,845,000 $ 93,400,000 Inventories 40,211,000 43,149,000 Prepaid expenses and other current assets 13,592,000 14,434,000 Total current assets 151,648,000 150,983,000 Property and equipment: Land and building 8,718,000 8,714,000 Furniture, fixtures and equipment 79,073,000 76,634,000 Leasehold improvements 71,940,000 71,993,000 159,731,000 157,341,000 Less accumulated depreciation and amortization ( 86,260,000) ( 84,660,000) 73,471,000 72,681,000 Other assets 19,439,000 19,187,000 $244,558,000 $242,851,000 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 15,534,000 $ 16,892,000 Income taxes payable 6,138,000 9,831,000 Accrued expenses 14,053,000 14,693,000 Dividends payable 1,453,000 1,450,000 Total current liabilities 37,178,000 42,866,000 Deferred credits 6,093,000 5,473,000 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 2,917,925 and 2,936,840 shares 146,000 146,000 Common stock par value $.05 per share; authorized 50,000,000 shares, issued 45,245,897 and 44,833,047 shares 2,262,000 2,261,000 Additional paid-in capital 16,957,000 16,786,000 Foreign currency translation adjustments ( 87,000) 61,000 Retained earnings 182,461,000 175,710,000 201,739,000 194,964,000 Treasury stock, at cost, 109,882 shares ( 452,000) ( 452,000) 201,287,000 194,512,000 Commitments and contingencies $244,558,000 $242,851,000 CLAIRE'S STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MAY 3, 1997 AND MAY 4, 1996 (Unaudited) THREE MONTHS ENDED May 3, May 4, 1997 1996 Net sales $108,029,000 $92,382,000 Cost of sales, occupancy and buying expenses 53,606,000 44,605,000 Gross profit 54,423,000 47,777,000 Other expenses: Selling, general and administrative 38,480,000 34,056,000 Depreciation and amortization 4,031,000 3,828,000 Interest (income), net ( 1,133,000) ( 833,000) 41,378,000 37,051,000 Income before income taxes 13,045,000 10,726,000 Income taxes 4,892,000 4,076,000 Net income $ 8,153,000 $ 6,650,000 Net income per share $ .17 $ .14 Dividends per common share $ .03 $ .02 Dividends per class A common share $ .015 $ .01 Average number of shares of common stock and equivalents 48,042,000 47,483,000 CLAIRE'S STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MAY 3, 1997 AND MAY 4, 1996 (Unaudited) THREE MONTHS ENDED May 3, May 4, 1997 1996 Cash flows from operating activities: Net income $ 8,153,000 $ 6,650,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,031,000 3,828,000 Loss on retirement of property and equipment 423,000 447,000 Changes in assets and liabilities: (Increase) decrease in - Inventories 2,939,000 ( 937,000) Prepaid expenses and other assets 590,000 ( 1,710,000) Increase (decrease) in - Trade accounts payable ( 1,358,000) 4,086,000 Income taxes payable ( 3,693,000) ( 3,024,000) Accrued expenses ( 639,000) 108,000 Deferred credits 620,000 281,000 Net cash provided by operating activities 11,066,000 9,729,000 Cash flows from investing activities: Acquisition of property and equipment which represents net cash used in investing activities ( 5,246,000) ( 4,336,000) Cash flows from financing activities: Proceeds from stock options exercised 171,000 1,035,000 Dividends paid ( 1,399,000) ( 926,000) Net cash (used in) provided by financing activities ( 1,228,000) 109,000 Effect of foreign currency exchange rate changes on cash and cash equivalents ( 147,000) 42,000 Net increase in cash and cash equivalents 4,445,000 5,544,000 Cash and cash equivalents at beginning of period 93,400,000 59,323,000 Cash and cash equivalents at end of period $97,845,000 $64,867,000 CLAIRE'S STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods. These financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all of the information or footnotes necessary for a complete presentation. They should be read in conjunction with the Company's audited financial statements included as part of the Annual Report on Form 10-K for the year ended February 1, 1997 filed with the Securities and Exchange Commission. 2. Due to the seasonal nature of the Company's business, the results of operations for the first three months of the year are not indicative of the results of operations on an annualized basis. 3. Income per share is based on the weighted average number of shares of common stock and equivalents outstanding during the three months ended May 3, 1997 and May 4, 1996. 4. In February of 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS 128"), which became effective for periods ending after December 15, 1997, including interim periods. This standard requires public companies to present basic earnings per share ("EPS") and, if applicable, diluted earnings per share, instead of primary and fully diluted EPS. For the three months ended May 3, 1997 and May 4, 1996, the effect of adopting SFAS 128 has not been determined. The Company expects the presentation of basic EPS to mirror primary EPS as currently disclosed. The computation of diluted EPS will include dilutive potential common shares. Potential common shares are securities such as stock options outstanding under the Company's 1982 Plan, 1985 Plan, 1991 Plan and 1996 Plan. The number of potential common shares included in the computation of diluted EPS will be calculated using the treasury stock method as required by SFAS 128. The Company will begin disclosing EPS in accordance with Statement 128 beginning with the quarter ended January 31, 1998. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Net sales for the three months ended May 3, 1997 increased approximately 17% over the comparable period ended May 4, 1996. The increase for the period resulted primarily from the addition of a net 152 stores and same-store sales increases of 8%. The same-store sales increases were primarily due to the Company continuing to focus its merchandising strategy to its core customer - female teenagers. In addition, inventories were increased to offer a larger assortment of merchandise for sale and to meet the anticipated increase in customer demand. Cost of sales, occupancy and buying expenses increased 20% for the three months ended May 3, 1997 over the comparable period ended May 4, 1996. The principal reason for this increase was the rise in the number of stores and the volume of merchandise sold. As a percentage of net sales, these expenses increased to 49.6% for the three months ended May 3, 1997 compared to 48.3% for the three months ended May 4, 1996. The increase as a percentage of sales was due to a shift in merchandise sold and acquisitions made during the twelve months ended February 1, 1997 ("Fiscal 1997"). During Fiscal 1997, the Company reacted to changes in customer demand for its product. These changes included a shift in merchandise focus to accessories, which carries a lower gross margin from jewelry. In the three months ended May 3, 1997, accessories were approximately 41% of total sales compared to 35% in the three months ended May 4, 1996. The remaining gross margin decline is attributable to store acquisitions made during Fiscal 1997. These acquisitions included 95 stores in the United States which operate under the trade names "The Icing", "Claire's Etc." and "Accessory Place" and 55 stores in the United Kingdom which operate under the trade name "Bow Bangles". The merchandise offered for sale by some of the stores operating in the United States includes approximately 25% apparel compared to the typical merchandise mix of an historical company-owned store that does not offer apparel for sale. Apparel is maintained in inventory at a lower initial markup and therefore typically realizes a lower gross margin. Also, the costs of rent and common area maintenance are higher in these stores. In addition, rent paid for our stores acquired in the United Kingdom is typically higher than rent paid per square foot in the United States. The increase in cost of sales would have been more acute except for the same-store sales increase during the period which partially offset the effect of the lower margins realized in the acquired stores. Selling, general and administrative expense ("S,G&A"), as a percentage of sales for the three months ended May 3, 1997 was 35.6% compared to 36.9% for the comparable period ended May 4, 1996. The decrease in S,G&A as a percentage of net sales was primarily attributable to the increase in same-store sales as previously discussed and the leveraging of fixed expenses with the addition of 152 net stores. Depreciation and amortization as a percentage of sales was 3.7% for the three months ended May 3, 1997 compared to 4.1% for the three months ended May 4, 1996. The decrease noted as a percentage of sales was due to the recent store acquisitions by the Company. The favorable purchase prices paid have enabled the Company to increase revenues significantly without incurring the level of depreciation and amortization expense normally associated with opening new stores. Interest income, net of interest expense, totaled $1,133,000 for the three month period ended May 3, 1997 compared to $833,000 for the comparable period ended May 4, 1996. This increase was primarily due to the increase in the average cash balance to $95,079,000 during the three months ended May 3, 1997 compared to $62,913,000 during the same period ended May 4, 1996. Also increasing interest income was the Federal Reserve increasing the key Federal Funds rate .25% in March 1997. Inflation has not affected the Company as it has generally been able to pass along inflationary increases in its costs through increased sales prices. Liquidity and Capital Resources Net cash increased $4,445,000 for the three months ended May 3, 1997 due to cash provided by operations of $11,066,000 and the proceeds from stock options exercised of $171,000, partially offset by the acquisition of property and equipment totaling $5,246,000 and the payment of dividends of $1,399,000. Inventory at May 3, 1997 was lower than the inventory level at the end of the Company's February 1, 1997 fiscal year. The Company believes these inventory levels are appropriate given the current economic environment and the level of sales currently being achieved. The Company opened 42 stores in the three months ended May 3, 1997. In addition, the Company remodeled 20 stores. At May 3, 1997, the Company had available a $10 million credit line with a bank to finance the Company's letters of credit and working capital requirements. This credit facility matures July 31, 1999. No borrowings were outstanding under this line of credit at any time during the three month period ended May 3, 1997. The Company believes that its cash on hand, internally generated funds and borrowings available under its credit agreement will be sufficient to meet its current operating needs and its minimum required capital expenditures. SIGNATURE Pursuant to the requirements 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. (Registrant) Date: June 4, 1997 /s/ Ira D. Kaplan Ira D. Kaplan Senior Vice President, Chief Financial Officer and Treasurer (Mr. Kaplan is the Senior Vice President, Chief Financial Officer and Treasurer and has been duly authorized to sign on behalf of the registrant) SIGNATURE Pursuant to the requirements 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. (Registrant) Date: June 4, 1997 Ira D. Kaplan Senior Vice President, Chief Financial Officer and Treasurer (Mr. Kaplan is the Senior Vice President, Chief Financial Officer and Treasurer and has been duly authorized to sign on behalf of the registrant)