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Executives

J. Per Brodin – Senior Vice President and Chief Financial Officer

Eugene S. Kahn – Chief Executive Officer

Analysts

Analyst for Emily Shanks – Barclays Capital

Grant Jordan - Wachovia

Karen Altrace – Goldman Sachs

Carla Casella – JP Morgan

Mary Gilbert – Imperial Capital

Karru Martinson – Deutsche Bank

Colleen Burns – Oppenheimer

Jeff Kobylarz – Stone Harbor Investments

Chris [Face] – JP Morgan

Analyst for Adam Plissner – Credit Suisse

Thomas Howard – UBS

Ben Wagner – [Talent] Investments

Ryan Watson – Fortress

Claire’s Stores, Inc. (CLE) F3Q08 Earnings Call December 4, 2008 10:00 AM ET

Operator

Good morning and welcome to Claire’s Stores, Inc. third quarter earnings conference call. On the call today are Gene Cahn, Chief Executive Officer and Per Brodin, Senior Vice President and Chief Financial Officer. Yesterday Claire’s issued its third quarter earnings press release. A copy can be found on Claire’s corporate website www.clairesstores.com. This call is being taped and a replay will be available until December 12, 2008. The playback number is 4025307636 and the password is 25247. This call is also being simultaneously webcast and archived. It can be accessed at www.clairesstores.com and replayed or downloaded as an mp3 file.

I would now like to turn the call over to Per Brodin, Senior Vice President and Chief Financial Officer.

J. Per Brodin

Thank you, Elan. Good morning everyone and welcome to the Claire’s stores conference call reviewing the company’s unaudited third quarter results for 2008. The following discussion may contain forward-looking statements and our actual results may differ materially from those expectations. Information concerning factors that could cause such differences can be found in the Form 10-K as filed with the SEC on April 25, 2008.

The contents of this conference call contains time sensitive information that is only accurate as of the day of this live broadcast, December 4, 2008. We do not assume any obligation to update our forward-looking information. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Claire’s Stores is prohibited.

I would like to point out that the press release we issued yesterday contained EBITDA and adjusted EBITDA numbers to provide you with additional information we believe to be meaningful in evaluating our operating performance and our ability to service our debt. Because these are not calculated in accordance with generally accepted accounting principals, these measures should not be considered in isolation from our financial statements prepared in accordance with GAAP. It should also be noted that our computation of EBITDA and adjusted EBITDA may differ from similarly titled computations used by other companies.

At this time I’m going to turn the call over to gene Kahn, CEO of Claire’s Stores.

Eugene S. Kahn

Thank you, Per. Good morning, everyone, and thank you for joining us today. I am a little under the weather this morning and hope you’ll all be able to hear me clearly. First I’d like to provide you with an overview of our business during the third quarter followed by an update on our five priorities for fiscal 2008 and a brief overview of our preparations for the holiday season. Then I’ll turn the call back over to Per for a financial review. We will close with your questions.

In the third quarter our business was negatively affected by the extremely challenging global retail environment. In terms of top line performance, our consolidated sales for the quarter were $333 million, a decrease of 6.8%. On a constant currency basis, same-store sales decreased 6.3%. The decline in same-store sales reflects an 11.2% decrease in average transactions per store, partially offset by an increase of 6.2% in average sales per transaction.

This increase in sales per transaction reflects our continued strategy to increase average ticket through good, better, and best priced tiering. The decline in the number of transactions reflects weaker mall traffic as well as reduced reliance on low margin, low dollar value promotional transactions.

As I shared on our last call, we have executed a strong in-store holiday gift offering focused on our three target age groups, young, younger, and youngest. Our holiday assortments are impacted by fashion right merchandise and a key category and item orientation focused primarily on accessories and cosmetics. New holiday décor and separate marketing angles pile on the presence for Claire’s globally and surprise me for the young women targeted for our Icing brand support our gift giving offensive.

In North America, same-store sales decreased 8.7% with sales at our Icing stores continuing to lag Claire’s on a same-store sales basis. Our European business performed relatively well in a difficult retail environment with same-store sales decreasing 1.8% consistent with what other retailers have reported concerning the current challenging environment we have experienced a decline in same-store sales performance from third quarter levels thus far in the fourth quarter. This effect has been most pronounced in Europe, due primarily to a decline in sales performance in Zone 1, which includes the United Kingdom and Ireland which we believe is being driven by a dramatic weakening of economic conditions in that market.

Our merchandise margin increased 30 basis points compared to last year’s second quarter. In a difficult business environment and with first cost price increase pressure, we had a small but significant improvement in our merchandise margins due to improved initial mark up favorably impacted by freight expense savings globally and tenacious pursuit of reduced inventory levels with commensurate markdown improvement. This has reduced SKU reduction, greater clarity in our merchandise offering, and a more compelling assortment for each targeted customer group.

At the beginning of fiscal 2008 we defined and shared with you five priorities that we would remain steadfastly committed to. They support our business strategies both short and long term, help us focus on the most important contributors to our success, and we believe will help drive top line and EBITDA growth in the future. I will recap them in the order we originally presented them although expense discipline clearly is number one today.

First, strengthen our merchandise offense. We have continued to develop our target customer and product strategies throughout the third quarter. We remain confident in our approach to segments, our customer base into young, ages 13 to 18, younger, ages 7 to 12, and youngest, ages 3 to 6 target customer groups and are developing and executing our assortment in line with this strategy.

From a merchandise process perspective, our efforts to enhance our trend function have begun to yield benefits in our ability to both forecast upcoming fashion trends and ideas as well as to translate those fashion concepts into our merchandise classifications. We are placing a greater emphasis on the creation of exclusive and more trend right product design and expect that to continue as we move forward.

We are working tenaciously to expand the proportion of our assortment that is common across the globe with a goal of 50% of the styles being the same. We expect that this combined purchasing power coupled with a continued reduction in both markdowns and freight expense will support our merchandise margins.

Two, complement our existing team by recruiting talent with strong industry and management experience. Since joining the business 18 months ago, we have devoted considerable time and made significant progress in upgrading our management team and refining our organization structure. We are confident that this organization will provide a strong foundation to sustain us through the current retail environment. Importantly, with the exception of one open DMM position, the buying organizations in both North America and Europe are now in place, gaining traction and positioning us well for the future.

With most of this improved team having joined during the first two quarters of 2008, they have already had some impact on the business in the third quarter, having enhanced our strategies and refined our assortments for the important fourth quarter [inaudible] merchandise offerings and are in the process of planning our back to school business, all positioning us to maximize emerging categories and identified opportunities.

As we announced in mid-November, Mark Smith, the current President of our European business, will assume an advisory role to the company and will be succeeded by Kenny Wilson. Kenny will lead the growth and continued expansion of the European business. He will have direct responsibility for merchandising and operations for the more than 930 stores across 10 countries and will participate as a key leader within the [Crawford] Senior Management team helping to establish short-, mid-, and long-term global direction.

Kenny comes to us with a wealth of experience, having spent the last 18 years with the Levi Strauss Corporation, most recently as Senior Vice President, Commercial Operations Europe, and prior to that as President, Levi Brands, Europe. Kenny brings to this position an extensive background in fashion retailing, a track record of building a compelling consumer brand, and a history of successful results across all of Europe.

I would also like to again acknowledge the efforts of Mark Smith, who served Claire’s Europe and its predecessor company in the UK for almost 18 years. Mark was the driving force in building the business to its current market position and we benefited tremendously from his enthusiasm and passion.

Third, realize results of our newly created European division. One of the critical outcomes of the first phase of the pet project was the creation of essentialized buying and merchandising organization. In order to maximize the effectiveness of this team, we are in the process of conducting important consumer, market, and competitive research across four of the major countries in Europe. The goal of this research is to enable us to understand the similarities and differences across geographies and to identify critical opportunities to grow sales. We are confident that we will be able to exploit this opportunity particularly with the addition of Kenny Wilson as he has significant management experience across all of the countries in which we operate and will lead the existing talented and experienced senior management team.

As it relates to pet, while some of the final components of the pet project were planned to be completed by the end of this fiscal year, we have decided to focus on more immediate business needs in light of the current European retail environment and plan to conclude the remaining work on pet in Spring 2009.

Fourth, devote appropriate attention to Icing. As we reported on our last call, one of the ancillary benefits of the pet project is the creation of dedicated Icing organization with sole focus on that brand. While the Icing concept certainly has room for improvement, the Icing team has been able to impact the business in a positive way by shifting the assortment more towards accessories from jewelry as well as developing a broader and more defined casual business focused on a singular young female attending college or just entering the work force.

We have advanced the Icing research project mentioned on our September call; however, we have decided to defer some remaining work here as well until Spring 2009 to remain focused on our fourth quarter business activities.

Fifth, sustain and bolster financial discipline. In addition to our merchandise offense, we acknowledge and need to maintain financial discipline and explore all potential avenues for maximizing cash flow in this difficult retail environment. As I highlighted in June, earlier this year we launched a cost savings initiative which we refer to as CSI. In the third quarter we achieved approximately $5.8 million of the $15 million stated objective for savings from our cost savings initiative in fiscal 2008 in addition to the $1.4 million achieved in Quarter 2.

We believe we are on track to achieve the remaining portion of the $15 million during the fourth quarter. We also believe our current initiatives will translate to an annual savings rate in excess of $40 million for 2009 and we continue to seek out additional cost savings beyond those already identified. As a point of reference, the currently identified savings are concentrated in freight, shrink, store labor optimization, procurement of non-merchandise goods and services, and other payroll.

Furthermore, we are being very judicious with our capital spending and have further reduced our fiscal 2008 CapEx budget to approximately $60 million from an original plan of $85 million. We believe there are additional opportunities to further reduce CapEx in fiscal 2009. We have also begun a comprehensive review of our store portfolio with a particular emphasis on reducing occupancy costs and evaluating underperforming stores.

I would like to spend a couple of minutes sharing some highlights of the third quarter merchandise performance and our customers’ response to our improving assortment. In the third quarter the accessory business, our growth vehicle, grew to 48.8% of the business, up 1.7 percentage points year-over-year. On a global basis with the exception of the hair goods business, comparable accessory sales increased 6.7%.

There were several key drivers of the accessories business. Halloween themed merchandise and related categories were the strongest performers of a growing holiday theme business year-to-date. The cosmetics business continues to demonstrate strong growth across most of the product offering led by nails and eyes. Across the fashion accessories business, significant growth occurred in fashion scarves, hats, boots, and the multiple categories of cold weather products. Hand bag growth was led by segmenting the business into casual and dressy bags. Double handle and shoulder styles performed best.

The jewelry business continued to down trend across both the young and younger portions of the business; however, we had growth in ear piercing globally. In addition, peace symbol motif merchandise and other casual hippie inspired products continued to perform exceptionally well with strength in totes, hats, handbags, belts, and key jewelry categories.

We are well positioned for the holiday season. We have created and implemented a strong authoritative gift headquarters and holiday themed environment that emphasizes our value proposition and will substantially benefit our results. We are in stock on the most desirable products and will sell new spring transitional merchandise for a mid December floor set.

Although we are facing unprecedented economic upheaval, uncertainty, and weakness in consumer confidence, as a strong value provider, we anticipate maximizing the available business opportunity. This approach benefits from improved planning and strong disciplined execution and simultaneously builds on the learnings from last year from the consumer research that helped develop and refine our holiday giftables approach.

At the same time, we appreciate that the harshness of the current environment may offset the benefit of all of our hard work to reposition and maximize the business and therefore as I previously said, we are extremely sensitive to the need to continue to reduce costs in excess of our cost savings initiative and minimize capital expenditures going forward.

I will now turn the call back to Per for the third quarter financial review.

J. Per Brodin

Thank you, Gene. I would like to begin by first recapping changes in our store base during the third quarter of fiscal 2008 and then outline our plans with respect to the store base for the remainder of the year. In the third quarter we opened 30 new stores and closed 9 stores. This reflects 21 new and 2 closed stores in Europe and 9 new stores and 7closed stores in North America. We ended the third quarter with 3,074 company-operated stores in North America and Europe which compares to 3,053 stores at the end of Q2 2008.

In our Japanese joint venture, the number of total stores operated increased from 205 to 209 and the total number of franchise stores increased from 175 to 188 at the end of the quarter. Collectively our global store count increased 38 stores in the third quarter. In terms of remaining planned store openings in the fourth quarter, we anticipate 12 additions.

In light of the weakened global retail environment, we are focused on maximizing cash flow and are being very prudent in our approach to capital spending and new store openings, ensuring they meet our financial objectives. In order to reduce occupancy costs and improve profitability, we have begun a comprehensive review of the North American store portfolio including both leases that are up for renewal and leases that have remaining terms. Specifically, we are looking to renew leases on more favorable terms, renegotiate lease rates on malls with sub-optimal traffic, and close selected underperforming stores.

In terms of capital expenditures, we have reduced our fiscal 2008 capital expenditures to approximately $60 million from our original plan of $85 million as we seek to maximize cash flow. Of the total CapEx budget, approximately 25% is for new stores including lease rights or key money and a remainder of that amount relates to remodels and maintenance and approximately $11 million for POS upgrades. We believe we will be able to significantly reduce CapEx in fiscal 2009.

Now let me turn to our financials and review some of the specific line items starting with the statement of operations. Sales for the three month period ended November 1, 2008 decreased 6.8% to $333 million compared to sales of $357.4 million for the three month period ended November 3, 2007. This net decrease was attributable to same-store sales declining $21.4 million and a decrease of $7.7 million from foreign currency translation of our foreign operations, partially offset by new store revenue of $4.6 million.

Our same-store sales decreased 6.3% for the quarter which was comprised of negative 8.7% and negative 1.8% in North America and Europe, respectively. Similar to what we experienced during the past few quarters, the decline of Icing was more than at Claire’s, although we observed a sequential improvement in Icing sales performance compared to Q2. As a reminder, we conservatively compute same-store sales on a constant currency basis so the FX impact on our total sales does not affect our same store sales.

Overall, since the acquisition of the company, Claire’s has experienced a net benefit from our growing European business and the devaluation of the US dollar. However, during the third quarter, we experienced a reversal of prior foreign exchange trends with the Euro and pound weakening relative to the dollar, particularly in October. These foreign exchange changes negatively affected adjusted EBITDA by $2.3 million as compared to the rates in effect during the third quarter of 2007.

Gross profit percentage decreased by 200 basis points during the three months ended November 1, 2008 compared to the three months ended November 3, 2007. A 30 basis point increase in merchandise margin was offset by a 230 basis point increase in occupancy cost excluding $500,000 of non-recurring expenses related to [inaudible] and European transformation project, the decline in gross profit percentage would have been 190 basis points. The majority of the decline in gross profit percentage is attributable to the de-leveraging effect of lower sales.

Sales, general, and administrative expenses increased $1.3 million or a 1.1% increase in the third quarter over the comparable prior year period. However, excluding $2.2 million of non-recurring Pan-European transformation costs and $2.8 million of expense relating to the cost savings initiative offset by a $2.5 million benefit resulting from foreign currency changes, selling, general, and administrative expenses would have decreased $1.2 million or 0.9%.

Adjusted EBITDA for the third quarter which is referenced in our press release excludes certain items was $44.6 million compared with adjusted EBITDA of $60.5 million in the third quarter of fiscal 2007. The $15.9 million decline in adjusted EBITDA is primarily the result of a decrease in merchandise margin dollars associated with the decline in same-store sales in the face of higher occupancy, buying costs, and SG&A as well as the negative impacted of foreign exchange fluctuation offset partially by the contribution of new stores and a 30 basis point increase in merchandise margin.

Now let me turn to a discussion of select balance sheet items. Although we did not need to do so, during the third quarter the company drew down the full availability of $194 million under its revolving credit facility. As you know, companies are not able to selectively draw portion of its revolver from specific lenders. Accordingly, we drew the revolver in order to preserve the full amount available immediately after Lehman Brothers filed for bankruptcy in order to preserve the full availability of their commitment. Upon the replacement of Lehman Brothers or the assumption of its commitment by a credit worthy entity, the company will assess whether to pay down all or a portion of this outstanding balance based on various factors, including the credit worthiness of other syndicate members and general economic conditions.

During the third fiscal quarter, approximately half of the $15 million of capital expenditures related mainly to store openings and remodeling projects with the balance primarily attributable to technology upgrades. During the third quarter of fiscal 2008 our cash balance increased by $159 million. Reduced for the draw of our revolver, our cash balance decreased by $35 million in the quarter. As adjusted EBITDA of $45 million was reduced by $23 million of cash interest, $27 million that represents a seasonal increase in working capital and the cash impact of certain EBITDA adjustments, $15 million of capital expenditures and key money, $4 million of mandatory amortization of our term loan, and $11 million of FX translation adjustments.

It is important to bear in mind that Q3 traditionally has a seasonal working capital build in preparation for the holiday season. Consistent with our disciplined approach to managing inventory, we believe our inventory is well positioned as we head into the critical holiday season. Overall, our inventory decreased from $157 million to $149 million while operating 23 more stores than the comparable prior year period.

With that, Gene and I are happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Emily Shanks – Barclays Capital.

Analyst for Emily Shanks – Barclays Capital

My first question relates to gross margin. Was the 230 basis point increase in occupancy and buying costs all due to de-leveraging or was there an increase in absolute dollars as well?

J. Per Brodin

There were some increase in dollars but the majority of that increase, the vast majority of that increase, was related to the de-leveraging effect.

Analyst for Emily Shanks – Barclays Capital

Then I heard you give cash interest and other cash items. Could you give cash taxes as well? I might have missed that.

J. Per Brodin

We did not but it was an immaterial amount.

Analyst for Emily Shanks – Barclays Capital

Lastly we were sorry to hear that Mark Smith is leaving. Is he departing for a specific opportunity?

J. Per Brodin

No, Mark Smith will continue as a senior advisor to us. He was not interested in continuing in a full time position going forward. When we acquired the company, Mark was involved in the due diligence phase with Apollo and when he was named Managing Director and President of Europe, it was known by senior management that his commitment would not be to the full term of potentially taking, when the company went public, and that he would work for a couple of years in a full time position. So that allowed us to plan an orderly transition and we began a search for a replacement in early Spring and we’re happy to conclude that by naming Kenny in November. We’ve provided for an orderly transition so that we will have been in Birmingham with Kenny in the month of November for two days, December two days. Kenny will start on January 19 and Mark will move into his new position with the company on February 15.

Eugene S. Kahn

And Jason if I could clarify that, when we think of those occupancy and buying dollars, it’s pretty even on a constant currency basis, slightly down due to the effects of FX.

Analyst for Emily Shanks – Barclays Capital

Actually just one last item. Are you seeing any material difference by region in the US in terms of mall traffic and sales trends for the last quarter or going into the next quarter?

Eugene S. Kahn

Basically the business in Canada is our strongest entity right now in North America and the southeast is struggling the most and the west towards the end of the third quarter and into the beginning of the fourth has slowed down immeasurably from its previous performance.

Operator

Your next question comes from Grant Jordan from Wachovia.

Grant Jordan - Wachovia

My first question, if you look at the performance of Europe on a same-store sales basis, it’s still holding in there pretty well relatively speaking. If you can get us some color on kind of why you think that is and how you view that business going forward.

Eugene S. Kahn

As I said in my remarks, we definitely see a slow down in the beginning of the fourth quarter in the region, our Zone 1, which is comprised of the United Kingdom and the Republic of Ireland. Definitely the economy was much stronger in Europe for the third quarter. In addition, I think that the combination of the more centralization of the European buying and the work we did in focusing the assortments with one buying group and one planning group in charge of it really allowed us to continue to propel Zones 2, which is comprised of France, Belgium, Spain, and Portugal, and Zone 3, which is comprised of Switzerland, Austria, Germany, and Holland, and those businesses, their economies, are continuing to lead the European performance.

Grant Jordan - Wachovia

Second, you talked about looking at your portfolio stores of potentially to close underperforming stores. Can you just give us kind of a general thought on what percentage of the portfolio you would classify as underperforming and then along with that, you talked about significantly reducing CapEx next year. Any thought on how many new stores you plan to open?

J. Per Brodin

From an overall underperforming store standpoint, we’ve historically said that from a negative EBITDA percentage of stores, we’re under 10% from that perspective and so you would expect that as we evaluate the stores for which it will make sense to make an economic decision to close stores it would be then south of that number and in terms of the number of stores we may open in 2009, again referencing the comments we made in our scripts, we are looking, given the current environment, at potential significant reductions to our capital expenditure spending in 2009 and as part of that we’ll be making decisions about the number of stores that we think is appropriate to open under the circumstances. I guess as a part of that, maybe a follow on to that, is there are a relatively small number of stores to which we’re already contractually committed so we do have the ability to limit that number to a fairly small number if we so choose.

Grant Jordan - Wachovia

Are there any new stores on the dock for Q4?

J. Per Brodin

As I mentioned in my remarks, there are 12 stores that will be opening or that have opened in Q4. Those are all November openings.

Grant Jordan - Wachovia

Then my last question, obviously on the working capital front you’ve got a fairly low days payable. Do you have any idea as to what percentage of your vendors use factoring firms to sell product to you and have you seen any change in your relationship with your vendors?

J. Per Brodin

Our understanding is that we have approximately 1% of our vendors that use factors and we have not experienced a significant change in our relationship with our vendors. I think on the last call we said that our relationships remain strong and we believe that’s still true. We certainly get questions from them from time to time given the current environment but I’ve seen no change in that relationship.

Grant Jordan - Wachovia

Is it safe to say that for a number of your vendors you’re by far the largest customer?

J. Per Brodin

We have such a broad base of vendors that for some we are a significant portion of their business and for some or not, it’s a vendor by vendor situation.

Eugene S. Kahn

Grant, were you referring to that primarily in domestic North American purchases or globally?

Grant Jordan - Wachovia

I guess globally.

Eugene S. Kahn

Globally of you look at it on a total basis, not those that are factored, we are number one to many of our key resources in Asia but because we use the domestic market to supplement our offering and make it more fashion worthy if you will or operate on a faster turn time, then we’re able to, there we would not be one of the top purchasers form those resources.

Grant Jordan - Wachovia

Just to clarify, you said only 1% of your vendors use factors? Is that a number or is that by purchases?

Eugene S. Kahn

That’s by purchase volume.

Operator

Your next question comes from Karen Altrace from Goldman Sachs.

Karen Altrace – Goldman Sachs

A couple questions. First you mentioned that next year you’ll be lowering CapEx. Have you kind of given us a level to where you think you can cut it to or what you’re targeting?

J. Per Brodin

No, we’re still contemplating that. I think if you look at what we did during the 2008 year starting at the $85 million planned expenditures and taking that down to $60 million, we think there’s room for significant reduction in that amount and as the economic environment continues to unfold, we will continue to formally formulate our plans and adjust to that environment, but I think the best guidance I can give you on that is we think it’s significant room for reduction on the $60 million.

Karen Altrace – Goldman Sachs

Fair enough. On the economy, there’s been some announcements out of your competitors saying that they’re going to stop Libby Lu, Limited Too, converting their stores to Justice, and from my view it seems to me there’s capacity coming out of among your competition. Are you internally formulating any plans to capitalize this? In a related question, obviously again as you said, traffic is slow, are you re-assessing your promotional programs at all, you’re discounting strategies at all, to try to drive more traffic into your stores?

Eugene S. Kahn

First I’d say that we’re always cognizant of our competitors and we follow them avidly. So we’re very cognizant of the locations we do business with Libby Lu which is a smaller specialty retailer and Limited Too on a broader basis. We believe that the consolidation within the accessory and jewelry classifications for this younger portion of the business, tweens as you might refer to them, ages 7 to 12, we already are experiencing growth in that segment of the business and we think that this will allow us to capitalize on it.

To the second portion of your question, we clearly are perceived as a value provider of product in the accessory and jewelry business to our customer and as such we pay very close attention to our good, better, best price tiering and even the understanding that good is the entry price point range of our product offering and even in the opening price points if you will, we remain very focused on being a strong competitor within the value and also a strong competitor offering great value for the price within the best price ranges in the store.

So as such, I believe that we obviously are promoting product both either merchandise that we planned promotionally and/or merchandise that are slower selling but we do not POS our entire store offering at anytime and believe that would be a tremendous detriment to our business. We’ve been able to sustain our merchandise margin during this time because of this strategy. As we’ve taken hold of the business, we’ve made much more of the clearest product when we mark it down and so we’re able to keep our stocks fresh and we take mark downs every month in North America and in Europe as they are legally allowed and we POS it later in the month to really drive through that month’s mark downs and then start again in the ensuing month, so there’s a value offering of clearance that then is POS to a lower price to clear it out each and every month, so I think that our value orientation remains quite strong and we sell a lot of product at the offering price.

Operator

Your next question comes from Carla Casella from JP Morgan.

Carla Casella – JP Morgan

I have a couple questions on your comments about the rent expense and substantially negotiating that down. Have you already started? Do you have any stores that you’ve been able to negotiate down the rent and give us a sense for maybe what percentage decrease you could possibly see in your rent either per store or on a consolidated basis?

J. Per Brodin

I would comment on that and I would say that yes, we have been able to negotiate rent reductions on some of our leases. We have in North America north of 2000 store base and so we have a number of stores that come up for lease every year or renewal every year and accordingly, that’s given us an opportunity to address lease rates already and as we’ve been able to do that, a couple factors come into play. One is performance of the store within that mall as well as the performance of that particular mall relative to other markets, so it’s not an overall percentage I can give you because it’s really on a case by case basis but we have been able to successfully achieve decreases where we believe it’s been appropriate.

Eugene S. Kahn

Carla, I would just add on to that in addition to working to renew the leases on more favorable terms, we are as Per said working in our portfolio review to renegotiate lease rates on malls that have sub-optimal traffic and as was alluded to by a previous question, we will take a more definitive stand on closing underperforming stores particularly in light of this environment but still with an ongoing commitment to maximizing cash flow as we have said from the very beginning.

Carla Casella – JP Morgan

That’s primarily in the US or is it also going on, that evaluation, overseas?

J. Per Brodin

The evaluation is global but the majority of the opportunity that we see is in North America.

Carla Casella – JP Morgan

This is for clarification, of the one time charges or the add backs to EBITDA, the Pan European, you said that’s included in the gross margin?

J. Per Brodin

No. There’s a portion that’s included in gross margin and the rest is in SG&A, approximately $500,000 of that was in the merchandise, affected the margin line.

Operator

Your next question comes from Mary Gilbert from Imperial Capital.

Mary Gilbert – Imperial Capital

I wanted to find out in 2009 how much do you need to spend to support system? So for example if you’re looking at cutting CapEx back closer to a maintenance level, we’d be looking at around $30 million and then of that $30 million, let’s just say how much would be associated with systems?

J. Per Brodin

We don’t provide forward-looking guidance I’d say to that level of specificity but I think that the levels, the amounts that you’re citing, if we decided to go completely into subsistence level, that we could do that at an amount less than the amounts that you had stated.

Mary Gilbert – Imperial Capital

In terms of your systems initiatives, is it fair to say that we would need to spend another $11 million in ’09 or what is sort of the optimal level that you want to be at in terms of getting your systems where you need to be?

J. Per Brodin

The $11 million that I referenced relative to the spending on our new POS system is something that is along the lines of a one-time or periodic long term investment such that we don’t expect that to be a run rate type of expenditure or something like that. We think that from a POS system standpoint, we have approximately $5 million left to complete that implementation that will roll into 2009 and then there will certainly be some other investments that we strategically would like to make in 2009 but again all those would be under review based on the continuing economic environment.

Mary Gilbert – Imperial Capital

Also, with regard to the additional cost savings, can you give us some idea of the magnitude of those potential savings over and above the $40 million that we’ll see flow through in 2009? Would it be another $20 million, another $10 million?

J. Per Brodin

At this point it’s difficult to quantify. We think that we’re on target as we said. If you take the $15 million in the current year which translates to an amount in excess of $40 million. We’re studying ways to increase that looking for additional opportunities but are not prepared to comment on a number at this point.

Eugene S. Kahn

Mary Gilbert – Imperial Capital

Also when we look at you fully drew down the revolver. Had you not, let’s just say we weren’t in this environment, does that say that borrowing at the end of the quarter would have been in the $30 million to $50 million range on a normal basis, is that about right?

J. Per Brodin

I think as we alluded to at the previous quarter’s call, it was likely that we were going to have a working capital draw at the end of the quarter based on the fact that we have $194 million outstanding and we have $194 million draw that’s a zero net theoretical draw if you will; however, if you think about our past comments that we think we need a minimum of $15 million in the system just to maintain our operations, I think you’d conclude we have a theoretical draw of approximately $15 million as of the end of the quarter.

Eugene S. Kahn

Mary Gilbert – Imperial Capital

Okay, so that $15 million is still a good number. That’s very helpful there. Also, can you tell us what you’re thinking, what’s your assessment of Icing at this point?

J. Per Brodin

I think that the Icing business is definitely beginning to turn the corner. We’ve created much more separation from Claire’s, targeting customers that are young women entering college or entering the workforce, 19-25. I think that we’re shifting the percentage of business Icing traditionally had been almost myopically focused on the jewelry portion of the business but the business being almost two-thirds jewelry and we’re really engaged in propelling the accessory businesses and if you were to go into our stores today for the holiday season you’d see the illustrated [surprised me] marketing campaign is a handle for our gift giving strategies and you will begin to see as we move forward to spring it will be more dramatic, shifting from a dressy or dress up oriented business to a much more casual portion of the business so that lifestyle of this customer can be addressed within our offering. We’re upgrading our in-store look as I said and the promotional materials in the store are much more on target to this Icing customer. I would say at this moment in time there’s 3% to 0% overlap with Claire’s and as we move forward, those elements of the business will also be eliminated. We believe strongly in this opportunity and look to complete the research that we began in the spring season and start marketing Icing to this customer hopefully by the Fall ’09 season.

Mary Gilbert – Imperial Capital

Could you characterize the same-store sales decline differentiation? In other words you always say, “Okay, Claire’s performed better than Icing” but has there been a narrowing in that difference? So in other words if we look at this quarter even given this environment, has that differential improved?

Eugene S. Kahn

I would say that there has been sequential improvement in each quarter and I’d say in the fourth quarter as we look at it to date, they have converged. So we look forward to Icing no longer lagging Claire’s but hopefully as we go into the spring season, being able to push ahead of it.

Mary Gilbert – Imperial Capital

Then one final question. How much was Lehman, what percentage of the facility did Lehman represent?

J. Per Brodin

We do not disclose the components of the syndicate within that lender group so we’re not prepared to discuss the amount that they held at this point.

Mary Gilbert – Imperial Capital

Are you in discussions with that getting assumed by another lender? Is that taking place or where does that stand if it stands at all?

J. Per Brodin

We’re working on resolving [inaudible] to that situation and when we have resolved it, to the suitable conclusion as we said in our prepared remarks we will pay down that draw and move forward.

Operator

Your next question comes from Karru Martinson from Deutsche Bank.

Karru Martinson – Deutsche Bank

To your earlier comments at the beginning of the call, you said that competence had declined from third quarter levels primarily due to Europe and weakening in the UK and Ireland. I was wondering what were you seeing here in the US – should I be translating that these third quarter trends be continued?

Eugene S. Kahn

What I said was that as we looked into the beginning of the fourth quarter we saw a change in the United Kingdom and the Republic of Ireland business which comprises Zone 1 in Europe, and obviously in addition, I had said that obviously in the environment that we are operating in experiences the declining same store performance from the third quarter as we moved into the month of November.

Karru Martinson – Deutsche Bank

Okay, so that’s across the board and not just Europe?

Eugene S. Kahn

Well, yes, that is across the board. Just to clarify that one more time, the difference is that in Europe, which had a much stronger performance in the third quarter, the Zone 1 business is measurably different, but I would not necessarily read into that that is across the entire continent of Europe.

Karru Martinson – Deutsche Bank

Okay, thanks for the clarification.

Operator

Your next question comes from Colleen Burns from Oppenheimer

Colleen Burns – Oppenheimer

On the merchandise margin, I know it was up 30 basis points but that was a deceleration from the 290 basis points improvement you saw in the 2nd quarter. Can you talk about what drove the difference there? Were you more promotional; was it mixed?

J. Per Brodin

I think, Colleen, if I can address that, as we discussed in the second quarter call, the majority of the year-over-year increase in the second quarter was due to the margin rate that we experienced in Q2 of 2007 – that rate was depressed by a large amount of mark downs to clear merchandise as we headed into the fall season. We did see that was not repeated in the third quarter of 2007, therefore we did not see a year-over-year improvement in Q3 similar to what we saw in Q2 due to the absence of any significant markdowns in the third quarter. On a sequential basis, our margins are relatively consistent, so we are pleased with that, that we were able to pull to that level, even though you don’t see the year-over-year delta.

Colleen Burns – Oppenheimer

Thanks for the clarification. And this $6 million of cost savings; was that really all in gross margins?

J. Per Brodin

No, that was a combination of some gross margin, particularly in the freight area. We had some labor savings in the store area, and some other G&A items that we were able to achieve.

Eugene S. Kahn

I would comment in relation to your first question so we don’t go too far away from it. I think that as far as the merchandise margin is concerned, I think that I agree with Per’s answer in that it was in the year-over-year basis that was a totally different period. I’d say that staying flat in this environment is a strong merchandise margin showing, and we have not turned to a promotional [inaudible] which others have in line with my previous remarks, but I would say that initial markup particularly in Europe is negatively impacted by the exchange rates on purchases, so when it gets consolidated you don’t see it as dramatically but the FX exchange as the dollar is strengthening has impact on our purchases that need to be made note of at this point so that your expectations going forward are measured in that regard.

Colleen Burns – Oppenheimer

Okay, thanks for the additional color. Just lastly on your spring assortments that you’re flowing into the stores, I think you said in mid-December? Would you say that you plan that inventory down mid to high single digits, kind of consistent with what you’re seeing in comp store sales?

Eugene S. Kahn

Well as Per related, with 23 additional stores, our inventory levels are down. Our operating strategy has been to operate with less weeks of supply on an ongoing basis, both declutter the stores, improve our flexibility, and limit our liability so we intend to operate with that at the end of December, January, February, and on into the spring. The addition of the spring merchandise, Claire’s and I think globally have made a slow turn into the spring season traditionally. Back to school is a very quick turn into the fall season, but we really haven’t been ready and prepared for warm weather hot tropical businesses. This will allow us to have a fashion statement and product offering for the customer on a go-forward basis that has wear-now applicability. For instance we’ll be very strong into the sunglass business and very strong into bright colors that are performing very well across all of these classifications. So we feel very good about keeping this order we flow our products, so that we have less weeks of supply, but have more interesting products so that we benefit from revisit customers to our store, offering for a new look each and every month.

Operator

Your next question comes from Jeff Kobylarz from Stone Harbor Investments

Jeff Kobylarz – Stone Harbor Investments

I was curious just about, you mentioned earlier about trying to have exclusive merchandise in the store. Can you say what percentage of your merchandise is exclusive now and what your goal is?

Eugene S. Kahn

I’d say that the merchandising of store now is about 60% exclusive to us, in totality thinking that the licensed portion of the business is a substantial portion of the other 40, so that I’m giving the accurate number but if you were to take license out it would be a higher number. I think that what we’ve begun, as I explained earlier this year, is to have a design function; we’ve hired several designers to create products for us rather than translate and interpret ideas from the streets, the runways, etc etc. That exclusive offering of design product for us has performed well. For instance, people wear the products that we have in our stores right now is distinctly different from last year, and performing exceedingly well as I related in our comments, and continues to perform exceedingly well even in difficult times we find ourselves in. We’re able to have something that’s unique and differentiates us rather than think so much of it as pounds of products, as a commodity. I think that going forward that differentiation in exclusive design will help propel the business.

Jeff Kobylarz – Stone Harbor Investments

Okay. You also mentioned that you thought your trend forecasting was also operating better. Can you comment on that a little bit further?

Eugene S. Kahn

We enhanced in our merchandise, we created a merchandising calendar, a merchandising cycle, and we were able to regiment our buys and put it on a 12 month calendar. We’re operating a calendar which looks forward 18 months into the future on an ongoing basis, so we know when we have to begin aligning inception to when we need to deliver the product to the DC and then to the selling floor. In doing so, the fashion trend and product innovation function becomes much more important. It’s working further out and it needs to be able to help us prognosticate both the trendy fashion statements as well as the colors that we want to operate with in the fashion sensibilities or basics and core, the middle ground, as well as the fashion product offering. So it allowed us to be successful with product offering like in trend, like geek chic and peace that have performed exceedingly well, and I think that it also allows us to have a very much more balanced approach in our store today of one color palette within the fashion portion of the business throughout the store. It’s really important for fashion trends to be on target to get that young 13 to 18 year old customer to shop at our store, and it is key to being successful in accessories because the fashion influences accessories far more than jewelry alone, so I think that has allowed us to look better and perform better.

Jeff Kobylarz – Stone Harbor Investments

Okay, do you feel like you’re maintaining your share with your customers, or do you think you could be losing share in any way?

Eugene S. Kahn

I think that we are maintaining or growing our share of the market, particularly since we were much more boy in the accessory portion of the business, and as such I think that there is some compression in some stores trading down to our value orientation, but I think that we handle that fairly well. The research that we’ve done would indicate that we are a number one, two or three destination for accessories and jewelry.

Jeff Kobylarz – Stone Harbor Investments

Okay, and lastly, the changes going on at Piercing Pagoda, do you think that will help you in 2009?

Eugene S. Kahn

We believe strongly in the piercing portion of the business and so we think that should allow us to pick up some of that business in mall based operators. I also think that we believe that the piercing purchase is good because there is a bounce back associated with it, so the customer can come back into our store. One of the system support things that will be on our docket – not that expensive but meaningful to our business – will be to be able to capture electronically those customers and be able to start communicating with them so we can develop. Our business, basically if you think about it today, compared to other specialty retail stores has no direct communication and no tie to its most allegiant customers. So one of the things that we’re working on to launch it in 2009 is a loyalty customer relationship program that I think will allow us to gain additional traction.

Jeff Kobylarz – Stone Harbor Investments

Do you have a CRM person working on that now?

Eugene S. Kahn

Right now the initiatives and implementation area would be overseeing that.

Operator

Your next question comes from Chris Face – JP Morgan.

Chris [Face] – JP Morgan

Just a couple of questions. First, is it possible to quantify what the impact to the comp was from the change in your promotional strategy? Specifically, you reference the low dollar value promotional transactions in the press release.

Eugene S. Kahn

Yes. So we had a purchase-to-purchase program that was around the terminal last year. We discontinued it in late 2007 and ran into the beginning of 2008, but specifically we haven’t really calculated the difference other than we see the impact on units per transaction, and part of the increase on the average sales per transaction is because of that.

Chris [Face] – JP Morgan

Okay. Then I guess as we think about Q4 and beyond, you’re actually facing easier comparisons, and so I believe last year at this time, you talked about you didn’t feel the merchandise mix in the stores was appropriate and that’s why you had a negative 8% comp in Q4 last year in North America. I know the retail environment is extremely difficult right now, but what shall we be thinking about for the store performance in North America for Q4?

Eugene S. Kahn

As you well know, we don’t really give forward-looking numbers or guidance, but I would say that we feel very strongly that our merchandise offering as I said in my remarks is very on-target this year, appropriate to the customer that we’ve maximized new businesses like the fashion scarf businesses and the hat business. But there’s always room for improvement, but I think we’re significantly better than last year in both the Claire’s franchise globally and the Icing franchise in North America.

Chris [Face] – JP Morgan

Okay. And then, Per, as it relates to the revolver draw down, I’m just wondering as the expectation that at the end of Q4, if Claire’s wanted to, would they be able to pay down the revolver?

J. Per Brodin

I have to point again, we don’t give forward-looking information on those type of things, particularly in light of the current economic environment. I think the other point to make is relative to, I think it was one of Melissa’s questions, is that we are working through this issue given the fact that part of it is tied up in bank reports, this is not something that we think resolves within a couple of weeks. So it very well may be outstanding at the end of the year.

Operator

Your next question comes from Adam Plissner – Credit Suisse

Analyst for Adam Plissner – Credit Suisse

I just had a question regarding a little more color on the revolver. Other companies didn’t get their Lehman commitments filled, how did you guys get yours filled, and does that imply that you need to pay it back?

J. Per Brodin

We acted as properly as we could on the issue. When we saw that Lehman was teetering if you will, and it looked as though they were about to file bankruptcy, we began to take action and to put in action the necessary procedures to facilitate the draw. I don’t know what situations impacted the other companies, whether it was timing or not, but we acted as quickly as possible so that we wouldn’t be affected by that, and fortunately we were able to achieve the full draw.

Analyst for Adam Plissner – Credit Suisse

Finally, from your bank, that in your bonds or trading, are pretty low levels, almost as if you guys are going bankrupt sometime in the near future. Is there a way that you as a company, or Apollo, can take advantage of this? Is there any restrictions on the company from using the cash that you guys have on balance sheets to pay back to buy back any of the bonds?

J. Per Brodin

Well we don’t think it’s appropriate to comment beyond what we disclosed in our 10-Q relative to what we may or may not do relative to bond repurchases. We look at uses of our cash flow as pretty consistent to messages of our past calls that we look at our cash flow in terms of payback and how we’ll create value for the company. More importantly this quarter versus previous quarters given the more challenging environment, we’re being very judicious with our capital expenditures, maximizing cash flow and making sure we have adequate balances, which to fund operations such that they would maximize those items and take those into account as we make those decisions.

Analyst for Adam Plissner – Credit Suisse

Just to clarify. Are you restricted from buying back bonds, or is that something you don’t want to talk about?

J. Per Brodin

We are not. We disclosed in our 10-Q that we may from time to time consider repurchasing bonds and I think implicit in that statement is that we allowed to.

Analyst for Adam Plissner – Credit Suisse

Okay, thank you.

Operator

Your next question comes from Thomas Howard – UBS

Thomas Howard – UBS

Most of my questions were answered. One quick follow-up. You seem to carry a large cash balance in Europe. I think in the past you’ve said you’ve got no restrictions on repatriating that. Of the cash balance at the end of the third quarter, how much was that the non-guarantor subs?

J. Per Brodin

The amount you’ll see will be in the $36 million range.

Thomas Howard – UBS

And I think in the past you’ve said there’s no restrictions on repatriating that but from a mechanical perspective, is there any reasons why you don’t bring that back, because it seems like it’s more than you would need to operate those stores.

J. Per Brodin

I’d say from a mechanical standpoint, we look at the most efficient way of running our operations and given our cash position at the end of the quarter we won’t move cash just for the sake of moving cash, so it’s not a need just to bring cash or repatriate cash for the sake of repatriating. It’s more about optimizing cash levels in both geographies to meet our working capital needs.

Operator

Your next question comes from Ben Wagner from [Talent] Investments.

Ben Wagner – [Talent] Investments

I’ve just got a follow-up question with regard to Lehman Brothers. So, you all put in the works this drawdown before Lehman actually filed, but were able to receive the cash post-bankruptcy. Is that right?

J. Per Brodin

I’d say technically we did begin the procedures before the bankruptcy was filing. I think there’s also some ancillary issues that maybe we could take offline, that there were affiliates of Lehman that didn’t file soon as the parent company did. So there are some technical steps within their timing, and that may have aided us in achieving our drawdowns. But if you want more detail on that, why don’t you try to contact me offline.

Ben Wagner – [Talent] Investments

Okay. There was one question that was asked earlier, with regard to, do you foresee any reason why you would have to specifically repay the Lehman portion, with regards of their filing?

J. Per Brodin

No, we would have no need to repay that prior to the maturity date 2013.

Operator

Your next question comes from Ryan Watson – Fortress.

Ryan Watson – Fortress

Just a follow-up again on the Lehman question. Why are you confident that you don’t have to pay this back, or that it wouldn’t be a forthcoming request? I mean, how do you frame that out?

J. Per Brodin

We have a revolving credit facility where we have a syndicate of banks that have agreed to fund that. Once they’ve funded, in essence the way I think of it as there’s a funded commitment that they’ve made, so now that entity, they have an asset. So if you’re thinking from their side of it, or the bankruptcy court side of it, there’s an asset that they will be looking to transfer, sell, do something with. Whatever happens on that side of it has nothing to do with the fact that we have a credit facility that we’re allowed to draw. The draw was made, and the obligations to repay that draw until the facility expires.

Ryan Watson – Fortress

You’re well-versed in terms of bankruptcy and fraudulent conveyance and things like that, I mean does transfer value out of the estate, I mean, I’m just saying one could make an argument that the amount you’ve borrowed is not appropriately collateralized by Claire’s assets. I’m just trying to think of – have you had your attorneys look into this matter, so that you’re more comfortable?

J. Per Brodin

Ryan, I think we’re getting into some detail that’s probably not inclusive of this call. We’ve stated what our belief is. If you want us to discuss this in more detail, let’s take this offline.

Ryan Watson – Fortress

Fair enough, thank you. But I just want one more question on a different matter. As far as the cash you have at Foreign Subs, are there any tax implications in bringing that back domestically?

J. Per Brodin

Depending on the level that we bring in relation to their earnings and profits overseas, there may or may not be tax implications, but that’s one of the things that we evaluate when making repatriation decisions.

Ryan Watson – Fortress

Okay, thank you very much.

Eugene S. Kahn

Thank you Ryan, and thank you everyone for your continued interest in Claire’s and for joining us today on our Q3 conference call. We look forward to speaking with you on our fourth quarter in April. Have a good day.

Operator

This concludes today’s conference. You may now disconnect at this time.

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Source: Claire’s Stores, Inc. F3Q08 (Qtr End 11/01/08) Earnings Call Transcript
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