Claire’s Stores Inc. F3Q08 (Qtr End 10/31/07) Earnings Call Transcript

Dec.14.07 | About: Claire's Stores (CLE)

Claire’sStores Inc. (CLE) F3Q08Earnings Call December 14, 2007 10:00 AM ET

Executives

EugeneS. Kahn – Chief Executive Officer

IraD. Kaplan – Senior Vice President

Analysts

EmilyShanks – Lehman Brothers

KarruMartinson – Deutsche Bank

CarlaCasella – JPMorgan

JohnLayman -

MaryGilbert – Imperial Capital

GrantJordan – Wachovia

MikeShrekgast – Wong Acker

ErinMarsh – Ducane Capital

DesColblerts – Stone Harbour

AdamPlissner – Credit Suisse

JaneGail Oriner – Halcion

Rick Waddell -

BrianStewart – Levine Leichtman Capital

AnyaWok -

HowardGoldberg – [Braun] Management

BobWettenhall – Royal Bank of Canada

AdamSmallie – Harpor Investments

Operator

Good morning andwelcome to Claire’s Store third quarter conference call. On the call today are Gene Kahn, Chief Executive Officer,Ira Kaplan, Chief Financial Officer, and Marisa Jacobs, Vice President ofCorporate Communications and Investor Relations.

YesterdayClaire’s issued its third quarter earnings press release. A copy can be found on Claire’s corporate website www.clairestores.com. This call is beingtaped and areplay will beavailable to listen to until 5:00 p.m. on Friday, December 21st. The playback number is 203-369-0434 and the password is 25247. This call is alsobeing simultaneously webcast and archived. Itcan beaccessed at www.clairestores.com and replayed ordownloaded as anmp3 file.

I would now liketo introduce you to Marisa Jacobs, Vice President of Corporate Communicationsand Investor Relations.

Marisa F. Jacobs, Esq.

Thank you. Goodmorning and welcome to Claire’s Stores conference call for the unaudited third quarter results forfiscal 2008. Thefollowing discussion may contain forward-looking statements and our actualresults may differ materially from those forward-looking statements. Informationconcerning factors that could cause such differences can be found in theForm 10Q filedinconnection with thefirst quarter of fiscal 2008.

The content of thisconference call contains time sensitive information that is accurate as of the date of this live broadcast,December 14, 2007. We donot assume any obligation to update our forward-looking information. Anyredistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Claire’sStores is prohibited.

I would like topoint out that thepress release we issued yesterday contained EBITDA and adjusted EBITDA numbersto provide you with additional information we believe to be meaningful in evaluating our operating performanceand our ability to service our debt. Because these are not calculated in accordance with generally acceptedaccounting principles, these measures should not be considered in isolation from our financialstatements prepared inaccordance with GAAP. Itshould also benoted that our computation of EBITDA and adjusted EBITDA may differ fromsimilarly titled computation views by other companies.

At this time I’mgoing to turn thecall over to Gene Kahn, CEO of Claire’s Stores. Gene?

Eugene S. Kahn

Thank you,Marisa. Good morning everyone and thank you for joining us today. First I’d liketo provide you with anoverview of our business. Then I’ll turn thecall over to Ira for afinancial review. Then we’ll moveon to your questions.

The third quartermarks thefirst full quarter under new ownership and my leadership as CEO. Our results werebelow planned, but as each of you know thethird quarter was reflective of atightening retail environment. Since joining thecompany inJune I have completed afull review of thebusiness and begun to introduce more process, discipline and structure based onretailing best practices that will help us achieve long-term success. We havecreated agreater commonality of approach and engendered a greater team spirit between NorthAmerica and Europe.

Now with six months under my belt and in spite of the third quarter results my enthusiasmfor and belief inthe companyremains as strong as ever. Claire’s is acompany with asolid track record and as much potential as we have previously commented on.

Earlier thismorning we announced that we have increased our corporate management team byadding Jim Conroy to serve as Executive Vice President. Jim will be theprinciple member of thesenior management team, assisting meindeveloping and implementing strategic initiatives throughout our globalbusiness as we pursue our sales, EBITDA, and cash flow targets. He will have functional responsibilityfor strategic initiatives and implementation, information technology, andinternational franchising and joint ventures.

Let me turn now to some key measurables from the third fiscal quarter. Sales rose by 3%. Third quarter same-storesales decreased by 7/10ths globally. InNorth America, same-store sales fell by 1% primarily as a result of Icing’s negativeperformance, which offset positive same-store sales at our North American Claire’s Stores. In Europe, same-store sales were flat.

In terms of storegrowth, we opened 34 new company-operated stores net during the quarter, with the most significant growth coming fromSpain. If we include joint venture and franchise stores in our calculation, our global storecount grew by 45 to 3,413.

Our revenuesfrom Europe grew to 35% of our total compared to 32% during last year’s thirdfiscal quarter. As apercentage of sales we saw further shifts towards accessories from jewellery in each of our regions. In North America jewellery made up 59%of thesegment sales, down from 63% last year. InEurope jewellery represents asmaller percentage of our total net. Forty-six percent of our sales came fromjewellery compared to 49% inthe thirdquarter of fiscal 2007.

Let me briefly expand on our performance in thethird quarter. Thecostume jewellery business was soft due to several factors. Several of the trends predicted, like the jewelled look, did not meetexpectations. Some apparel was more embellished than in recent years causing the need for cleaner and moreunderstated jewellery looks. Also, thefashion looks currently being worn by thestars aresimpler and more minimalist.

The accessorybusiness was strong, driven by handbags, certain fashion accessory categories,and cosmetics. This growth did not sufficiently offset the decline in jewellery.

There are areas of progress during the quarter, which are equally worth noting. Regardingaveraging atretail, we increased itby 3.3% globally to $4.74, primarily by deemphasizing low price, purchase with purchase, andcash wrap products. This focus caused a2.8% decrease inunits pertransaction, netting a5/10ths percent increase inthe averagedollar sales.

We made headway in our merchandise margins, whichimproved by 60 basis points, by proactively managing our inventories. The Netherlands-based distributioncenter that we transitioned to inJune, which serves Spain, Portugal, Austria, and Germany, is functioning well.We arerealizing improved delivery times and better in-stock positions.

The roll out of the new point-of-sale system will resumeand becompleted next year. One of our goals was to introduce gift cards in theU.K. inadvance of this year’s holiday season and that objective was met when the new P.O.S. system was successfullyinstalled.

We told you onour last call that we donot intend to provide any forward-looking information or earnings guidance, norwill we today. I do, however, want to make one comment regarding the current retail environment. We havecontinued to observe asoftening of business since thethird quarter ended, primarily caused by adownward jewellery cycle. This is particularly true in North America and is more pronounced at our Icing stores than at Claire’s.

Withoutrepeating myself, I simply want to note that we remain firmly committed to the strategic initiatives we have put in place. I believe we have a well-defined and realistic path toproduce significant growth over thecoming years.

At this time I’m goingto turn thecall over to Ira Kaplan, our chief financial officer, to update you on ourstore count and to review our third quarter financial performance. Ira?

Ira D. Kaplan

Thank you, Gene.Good morning, everyone. We ended fiscal 2007 with 2,992 company-operated storesin NorthAmerica and Europe. As of theend of fiscal 2008 third quarter thetotal had increased to 3,051, anet increase of 59 stores. Inour Japanese joint venture thenumber of total stores operated increase from 193 to 202 at theend of thethird fiscal quarter. Total franchise stores operated increased to 159 from 125at the end of fiscal 2007 due primarily to the growth associated with our entryinto Russia and Poland.

I would now liketo address some of theline items inthe financials,starting with theincome statement. Sales for the13-week period ended November 3rd, 2007, increased 2.8% to $357.4million compared with sales of $347.6 million for the 13-week period ended October 28th,2006. This increase was primarily attributable to an increase in new stores and FX, foreign exchange benefits. Offsetting theseincreases were thedecline attributable to the0.7% decrease insame-store sales.

I want to notethat we measure our same-store sales on aconstant local currency basis. Or inother words, we adjust last year’s same-store sales to this year’s exchange rate before computing same-store sales.

Gross marginsfor thethird quarter of fiscal 2008 was 50.7% versus 52.4% for the prior year’s fiscal quarter, a decrease of 170 basis points. Wereport gross margin after buying and occupancy.

Merchandisemargin actually increased by 60 basis points. The improvement resulted from our takinglower markdowns than last year, although this was partially offset by a reduction in IMU associated with shifts in our merchandise mix. This increasedmerchandise margin was more than offset by a230 basis point reduction ingross margin attributable to negative operating leverage on fixed rent,(inaudible) expenses.

I would like topoint out that rent expense, including abook-to-cash adjustment of approximately $2 million related to purchaseaccounting adjustments required upon thecompletion of thesale of thecompany. Consequently, about 60 basis points of the decline in gross margin is attributable to itemsthat we add back inthecomputation of adjusted EBITDA.

SG&Aexpenses increased $8.9 million was 7.5% compared to last year’s third fiscalquarter. Adjusting this balance for theoffset of foreign exchangeof $3.8 million, these costs only increased 4.3% compared to last year. The primary cost is payroll and benefit increasesassociated with a2.3% increase inour company-operated store count and normal inflation.

Adjusted EBITDAfor thethird quarter, which as referenced inour press release excludes theimpact of transaction expenses for theMay 2007 acquisition of thecompany, rent related adjustments, and other non-recurring or non-cashexpenses, was $60.5 million compared with adjusted EBITDA of $68.5 million in thethird quarter of fiscal 2007. The$8 million decline was primarily theresult of theimpact of higher occupancy and buying costs of $8.7 million and increasedSG&A costs of $8.9 million. Partially offset by the receipt of an additional $9.2 million in merchandise margin dollars. The balance is attributable tofluctuations inthe variousincome and expense items enumerated inthe adjustedEBITDA table inour press release.

Now let me turn to a discussion of selected balance sheetitems. We ended thethird quarter of fiscal 2008 with $78 million in cash. Our $2 million revolver wasundrawn, aside from a$4.3 million letter of credit.

During the third fiscal quarter $19 million of the $23.8 million spent on capitalexpenditures related mainly to store openings and remodelling projects, with the balance primarily attributable totechnology upgrades. Thesplit of capital expenditures between North America and Europe was $16.3million and $7.5 million respectively.

During the third quarter of fiscal 2008 netcash provided by operating activities totalled approximately $23 million,including thepayment of minimal transaction related expenses. In addition, cash taxes paid during the quarter were $1.8 million and cashinterest of $29.6 million was paid.

Inventory onhand at the end of the third fiscal quarter wasapproximately $157 million versus $159 million at thesame time last year. North American inventories on a per-square-foot basis were 4% lowerthan last year. In-transit inventory approximated last year’s balance. Agingstatistics arestrong with 79% of North American merchandise less than 90 days old.

In Europe,inventories aredown 10% on aper-square-foot basis compared to theend of last year’s third fiscal quarter. Atthe end oflast year’s third fiscal quarter our European inventories were inflated due to the U.K. being over inventoried. Thatsituation does not exist this year and our current European inventory levels are inline with historical levels.

At the end of this year’s third fiscalquarter approximately 74% of our international inventory was current.

At this point let me turn the call back to Gene.

Eugene S. Kahn

Thank you, Ira.We’ll now open thecall to questions. Operator?

Question-and-Answer Session

Operator

Thank you.(Operator Instructions). Our first question today is from Emily Shanks andplease state your company name.

Emily Shanks – Lehman Brothers

Sure. EmilyShanks from Lehman Brothers. Excuse me. I just have a couple of questions. Thank you for all thedetail. About therent expense and theoccupancy costs, can you talk alittle bit about what is driving that? And is that across all your store faces or is it due to new store growth? And whatnew, how would you think about that going forward?

Ira D. Kaplan

Thank you. The increases in occupancy and those type of costs are mainly due to the increase in our number of stores and our squarefootage. Allright, square footage increased about 3.5% over the previous third quarter. The remainder of the increase is really related to normalinflation that we seeyear over year inthe rentsthat we payto landlords.

Also, as Istated in mycomments, we had abook-to-cash rent adjustment from purchase accounting of about $2 million thatwas higher than last year and that added about 60 basis points to the deleveraging on those costs.

Emily Shanks – Lehman Brothers

Right. Great.Thanks. And then, itsort of leads to your commentary inthe releasearound buying costincreases, can you speak alittle bit about that? Is that across allcategories and what is driving that? Doyou think that this is permanent going forward?

Eugene S. Kahn

The buying coststhat we experienced during thethird quarter were theplanned buying costs as we filled allopen jobs onathis-year/last-year basis and have put greater heft behind the U.K. based team as we are pursuing a new store growth and further Europeanexpansion.

Emily Shanks – Lehman Brothers

Okay. And thenif I could just one more. As we think about what cash balance you need to runthis business base line, what’s your needed cash balance?

Ira D. Kaplan

It’s about $25million to $30 million that we need that, you know, for, like, what I call in thesystem to pay current bills.

Eugene S. Kahn

Right. Okay.Thank you and sorry about thevoice.

Eugene S. Kahn

Thank you.

Operator

Thank you. Ournext question is from Karru Martinson. And please state your company name.

Karru Martinson – Deutsche Bank

Deutsche Bank.Good morning. Interms of theIcing repositioning, I mean, theprior management team had attempted that, I think you guys had mentioned that,product differentiation is around 50% there already. I’m curious, what needs tobe done andwhat’s kind of thetime table for this turnaround.

Eugene S. Kahn

Okay. Thank you,Karru. Basically what we’ve done is begun to study the strategy that was in place when we purchased the company. We had done some work in anindustry (inaudible) to under theplaying field, thecompetitors, and how we can best connect with the targeted customer. At thesame time we’re continuing to differentiate theassortment and as we moveforward to spring theassortment will be75% or 80% differentiated from Claire’s and really focus on the 17- to 27-year-old higher highschool, college, and young working woman customer. I think that Icing’sbusiness is very jewellery base, sowe are changing the complexion of that business to a greater degree than the total Claire’s Stores business.

Karru Martinson – Deutsche Bank

And youmentioned you’re going to geta betterhandle on thecompetitors and I guess for both Icing’s and Claire’s are you seeing more of a competitive response from some of the other, say, teen retailers cominginto your space as theretail market hastightened?

Eugene S. Kahn

I think thateverybody sees thevalue of themargins and thepick-up nature of theaccessory business, soI think that there’s alevel of competition among allof the teenspecialty retailers. But I think that we have attempted to focus probably more so than has been done before on the competitive landscape. Understand the content that the people have, the price points, the looks. And so I think we’ll be strengthening our position goingforward from what we’re learning.

Karru Martinson – Deutsche Bank

And if we justkind of look at, I know we’re not giving guidance, but I’m just trying to thinkof how we should look atthe company in theabsence of communication from you guys. Should we be looking at some of the teen retailers, mall traffic trendsas kind of proxies for you? How should we bejudging performance going forward?

Eugene S. Kahn

I thinkobviously we target acustomer seven to 17 primarily within theClaire’s Stores and we have athree- to five-year-old segment of that as well. And obviously, you know, I’vespoken to theIcing’s. SoI think that there’s abroad landscape of specialty retailers with which we compete because we have a much more classification orientationand most of thecompetitors have alifestyle orientation. SoI think you have to look broadly across thelandscape.

Karru Martinson – Deutsche Bank

Okay. Thank youvery much, guys.

Eugene S. Kahn

Thank you.

Operator

Thank you. Ournext question is from Carla Casella. And please state your company name.

Carla Casella – JPMorgan

Hi. It’s CarlaCasella from JP Morgan. I’m wondering if you can talk a bit about your sourcing costs. Are you seeing any increase in costs coming out of China?

Eugene S. Kahn

Okay, Carla. Wehave a verystrong operation that we refer to as RSI. It’s based in Hong Kong. We were one of the first people to develop a buying office in Asiaand making us astrong vertically integrated retailer. As such we have very good contacts andrelationships with our resources and although we do business with many resources we havesignificant relationships with thetop resources. As such, we’ve worked on acooperative basis to attempt to hold down theinitial costs of theproduct. At the same time, however, given all thefactors that areputting pressure on theproduct we dosee slightincreases incosts. We believe that they’ll bemanageable from aretail basis. And by bringing thecommonality of approach that I spoke to inmy remarks together and buying more product globally we will be able to offset a certain portion of those priceincreases.

Carla Casella – JPMorgan

Okay. Great. Andthen you mentioned your gross margin discussion about the IMU change in merchandise. Can you just explainwhat that is? I’m maybe not thinking quick enough what IMU is.

Ira D. Kaplan

Sure. IMU isinitial mark-up.

Carla Casella – JPMorgan

Okay.

Eugene S. Kahn

And it’s a factor in themerchandise margin as themerchandise margin then gets translated to gross margin.

Carla Casella – JPMorgan

Right. So thelower IMU, thelower initial mark-up we weren’t able to offset the lower –

Eugene S. Kahn

In this quarterour merchandise margin was 60 basis points higher primarily due to the reduction in markdowns on a year-over-year basis. The merchandise margin, the gross margin was lower based on the leveraging of costs against salesless than planned.

Carla Casella – JPMorgan

Okay. Great. Andthen inEurope theflat same-store sales, that’s on aconstant currency basis I assume?

Ira D. Kaplan

Yes. Yes. It is. We state the prior year numbers at current year rates.

Carla Casella – JPMorgan

Okay. Great. Anddo you see,with that flatness there, any changein youroutlook? Itsounds like you still feel like you’ve got ample opportunities overseas tocontinue to growthat business.

Eugene S. Kahn

I think that ouropportunities inthe Europeancontinent, and of course theworld, arequite significant. I think that there’s, you know, accessories and jewellery,fashion trends aredefinitely part of thelifestyle – certainly within Europe and around the world – and we have a great deal of opportunity to grow thebusiness beyond North America.

Carla Casella – JPMorgan

Okay. And thenyou have some initiatives inplace to cut thecost basis in Europe by consolidating distribution.Can you just give us anidea on how that’s going?

Eugene S. Kahn

As I saidearlier, we really have, we can’t really share with you any forward-lookingnumbers, but we certainly, but I would saythat’s certainly always inour mindset.

Carla Casella – JPMorgan

Okay. So, buthave you closed any facilities to date historically?

Ira D. Kaplan

Yes. We had a distribution center in Austria that we closed.

Carla Casella – JPMorgan

Okay. And there are others that are slated to be closed. Okay.

Ira D. Kaplan

We’re evaluatingour opportunities.

Carla Casella – JPMorgan

Oh, okay. Great.Thanks alot.

Eugene S. Kahn

Thank you.

Operator

Thank you. Ournext question is from John Layman. And please state your company name.

John Layman -

Good morning,gentlemen. (Inaudible). Had acouple of quick questions for you. Going back to sales, could you just give me alittle bit of colour of the2.8% increase? How much of that was related to currency translation?

Ira D. Kaplan

The 2.8 – give me one second. The 2.8% increase ... We actually saw a,in the average retail it was about 0.5% on the average unit retail. I mean, on the average transaction.

John Layman -

Okay. So can I assume that organic sales wouldbe about2.3%?

Ira D. Kaplan

Yeah, I don’thave that calculation infront of me.

John Layman -

Okay. We’vecertainly allappreciate thechallenging retail environment inthe U.S. andseeing some stories, you know, as it’s translating over to the Euro zone in theU.K. Would you define that environment as challenging as well? Have you seen the same kind of trends that you’restarting to seein the U.S.?

Eugene S. Kahn

No. I wouldn’tdefine itthat way. I think that if we backtrack alittle bit, Mark Smith joins us as themanaging director of Europe atthe ApolloTransaction and heis in chargeof all ofEurope now. Sowe are nowfor thefirst time operating as one entity inEurope. So Ithink that we believe that there is significant upside potential in theEuropean business, particularly inlight of thefact that theEuropean business is less jewellery reliant intotal. Soobviously with themomentum switching to theaccessory portion of thebusiness that puts more windin theirsales on aneasier translatable basis than theNorth American business.

John Layman -

Okay. And onelast question, if I may. Claire’s is certainly known as the leader in jewellery for the demographic that you serve. I canattest to that with my nieces. But switching over to accessories kind ofcircles back to aprevious question. Doyou see thatactually increasing your competition base? And secondly, related to both, isthere higher merchandise margins and accessories over jewellery or vice-versa?Thank you for your call, gentlemen.

Eugene S. Kahn

Okay. John, Iwould saythat Claire’s is ajewellery and fashion accessory business. Italways hasbeen. Themomentum inmost recent years inthejewellery business sort of made theaccessory penetration diminish. Beginning last spring, really beginning in thefall of ’06, but certainly inthe springof ’07 we saw theescalation of that trend and, as such, we’ve responded accordingly. We believethat we can becompetitive for on aprice basis and pursue thecustomers as I’ve outlined we’re targeting and be very successful in attracting them.

John Layman -

And could youspeak on margins, please?

Eugene S. Kahn

Yes. I was justgoing to dothat. As far as themargins areconcerned, traditionally themargin inaccessories hasbeen lower than jewellery, but I believe that some of the disciplines and practices of buyingthem not with thesame weeks of supply that we doin jewellerywill allow us to bring themargins virtually to thesame level and as such themargin, and to demonstrate that themargins of accessories versus jewellery inEurope aremuch closer than they arein NorthAmerica even currently.

John Layman -

Great. And Iwish you good holiday success, gentlemen. Thank you.

Eugene S. Kahn

Thank you, John.

Operator

Thank you. Ournext question is from Mary Gilbert. And please state your company name.

Mary Gilbert – Imperial Capital

ImperialCapital. I wondered if you could give us what the Claire’s comp increases were.Because you said that Claire’s inthe quarteractually increased on acomp basis. And then how much was thedecline atIcing?

Eugene S. Kahn

We basicallywill file our S-4 later today or atlatest Monday morning. And inlooking athow we wanted to look atthe businessgoing forward we will behaving two reportable segments, North America and Europe, and as such we’ll be reporting North America going forwardas one combined entity.

Mary Gilbert – Imperial Capital

Oh. Okay. So you’re saying that you’re not goingto distinguish between how much Claire’s increased in comps and how much Icing decreased in cost.

Eugene S. Kahn

Right. We’llcontinue to share with you some directional comments, but we’re going forwardand looking atNorth America as one operating entity.

Mary Gilbert – Imperial Capital

Okay. Fairenough. Theother thing that I wanted to geta sense foris when we’re looking out to 2008 should we beusing about $100 million for capex? Is that kind of the range that you’re thinking of? Andhow should we look atworking capital?

Ira D. Kaplan

It is our policyto not discuss anything forward-looking. We really can’t comment at this time on capex for next year.

Mary Gilbert – Imperial Capital

Okay. Not evenqualitatively interms of how itcompares to this year?

Ira D. Kaplan

I’m sorry, couldyou repeat your question?

Mary Gilbert – Imperial Capital

Well, you know,I think we just want to understand what you’re capex plans are interms of new store openings, remodels and that sort of thing.

Ira D. Kaplan

Well, if youlook at ourcapex for thepast quarter, we spent about $19 million on stores. If you analyze that andmultiply itby four that’s arelatively good estimate.

Mary Gilbert – Imperial Capital

Okay. Okay.That’s very helpful.

Ira D. Kaplan

And workingcapital requirements area minimum.

Mary Gilbert – Imperial Capital

Okay. Yeah.Because I wondered if you saw any opportunities in generating cash from working capital.

Ira D. Kaplan

Again, that’sforward looking and we’re not going to comment to that right now.

Mary Gilbert – Imperial Capital

Okay. And thenwhat about cash taxes? How should we think about cash taxes in terms of a ratethat we should apply?

Ira D. Kaplan

Again, that’sforward looking and we’re not going to comment to that at this point.

Mary Gilbert – Imperial Capital

Okay. Okay. All right. So thetrends that you’re seeing inthe lastquarter arecontinuing inthe currentquarter, is that sort of what you indicated on the call?

Eugene S. Kahn

As I said, youknow, I think that we can’t comment any further than I already have. We see asoftening going forward. We’re experiencing thesoftening right now. But I think that thebasic fundamentals of thebusiness aresound and we continue onward.

Mary Gilbert – Imperial Capital

Okay. And thenone last thing. I wanted to understand on jewellery, did you say that the jewellery assortment had sort of a lot more going on and now we’re seeingin terms of the trends simplicity and have you beenable to assort accordingly?

Ira D. Kaplan

Excuse me. We’represently evolving our assortment as we begin receiving in themiddle of December thefirst spring receipts to encompass that look, obviously.

Mary Gilbert – Imperial Capital

Okay. All right. So that’s something that’s sort ofongoing now inresponse to that shift indesign for jewellery.

Eugene S. Kahn

Okay. Thank you.

Mary Gilbert – Imperial Capital

Thank you.

Operator

Thank you. Ournext question is from Grant Jordan. And please state your company name.

Grant Jordan – Wachovia

Wachovia. Thanksfor taking thequestions. Most of mine have been answered. I just want to drill down a little bit on your comments about the retail environment. It seems like, you know, you commentedthat you’re definitely being impacted by themove in jewellery to accessories, but thatthe, you know, is itmore that or is itmore thesoft retail environment?

Eugene S. Kahn

I think thatit’s acombination of both really.

Grant Jordan – Wachovia

Okay. So. Okay.That’s helpful. And then last question. Have you made any indication as towhether you’ll take cash interest on the9 and 5/8ths?

Eugene S. Kahn

Yes.

Grant Jordan – Wachovia

Okay. All right. Thanks for taking the questions.

Operator

Thank you. Ournext question is from Mike Shrekgast. And please state your company name.

Mike Shrekgast – Wong Acker

Wong Acker (sic).Quick question. I was just wondering, where do you guys think the access-, thejewellery business or jewellery sales as a percentage of sales will bottom outat?

Do you guys have an estimate where you’d like to take the business? I know you don’t commenton forward looking, but I guess if you’re thinking of how you’re going tomanage theproduct mix going forward. Is it, you know, mid-50%? Is it maybe 50%? Do you see accessories climbing above 50%maybe?

Eugene S. Kahn

Okay. So I’d say thefirst thing, Mike, that we have to understand that there’s always a cyclical nature within retail businessand particularly or certainly within accessories and jewellery. I’d say that what we’re doing is pursuing the accessory business aggressivelywhile still responding to theunderpinnings of what thecustomer is asking for injewellery.

I’d also say, asI explained inmy remarks, thepenetration of these two parts of our business – we look at them just as two parts – very, verymuch by geography. Sothere’s really adifferent strategy going on on aregional basis.

Mike Shrekgast – Wong Acker

Would then onthat point with regards to North America, is there a desire or how are you managing the business to roughly what kind ofmix?

Eugene S. Kahn

I would say since we don’t give anyforward-looking information, I would saythat we continue to pursue accessories aggressively, but –

Mike Shrekgast – Wong Acker

Okay.

Eugene S. Kahn

-- byclassification and itwill turn out how we report inthe fourthquarter, first quarter, second quarter and soforth.

Mike Shrekgast – Wong Acker

Okay. Goodenough. And then with regards to Icing, I think last quarter you said it was down 5.7%. I know you’re notgiving aspecific number, but can you tell us whether itwas better or worse than thelast quarter?

Eugene S. Kahn

All I can say is that Icing underperformed the total North American business.

Mike Shrekgast – Wong Acker

Okay. And thenis there anopportunity inEurope to increase your inventory turns or is the new facility more about havingin-stock, better in-stock positions?

Eugene S. Kahn

It’s really morethe latterthan theformer. Obviously one of theinitiatives that we brought to thebusiness is to operate with better flowthrough and overall look to operate with less weeks of supply on an ongoing basis. But that would applyuniformly to our business.

Mike Shrekgast – Wong Acker

And less weeksof supply, does that also mean that accessories will grow as a percentage of the business? Again, because I think yousaid, accessories have ashorter inventory turn.

Eugene S. Kahn

There’s reallyno correlation between that, Mike.

Mike Shrekgast – Wong Acker

Okay.

Eugene S. Kahn

Okay?

Mike Shrekgast – Wong Acker

Okay. Just onelast quick question was, what was rent atthe end of the quarter? Or what was rent in thequarter?

Ira D. Kaplan

We don’t breakthat out separately.

Mike Shrekgast – Wong Acker

Okay. Thanks foryour time.

Ira D. Kaplan

Okay. Thank you.

Eugene S. Kahn

Thank you.

Operator

Thank you. Ournext question is formErin Marsh. And please state your company name.

Erin Marsh – Ducane Capital

Hi, guys. Ducane(sic) Capital. I was wondering if you could just clarify some of the comments around the movein units. Icouldn’t tell if the, you mentioned that units were up or down, up on a perbasket basis by 50 bips (sic), but basket, total transactions were down 3.5%.Was that on asales or aunit basis?

Eugene S. Kahn

That’s on a sales basis.

Erin Marsh – Ducane Capital

Okay. Sorry. Andhow does that, was that constant across, is that for both North America andEurope or is there significant differentials there?

Ira D. Kaplan

The average unitretail inNorth America was basically flat and inEurope itwas up 10% but included inthat is some foreign exchange.

Erin Marsh – Ducane Capital

Okay. Thank you.

Eugene S. Kahn

Thank you.

Operator

Thank you. Ournext question is from Des Colblerts (sic).

Des Colblerts – Stone Harbour

I’m with StoneHarbour. Can you sayhow many of your stores now have thenew point-of-sale terminals installed?

Ira D. Kaplan

We have 200, the new point-of-sale equipmentinstalled in294 stores inNorth America and 421 stores inthe U.K.

Des Colblerts – Stone Harbour

Okay. Can yousay, for thestores that have new point-of-sale terminals, has there been any change in sales once these new terminals havebeen put inplace?

Ira D. Kaplan

We don’t discussspecific groups of stores (inaudible) same-store sales.

Des Colblerts – Stone Harbour

All right. The transactions per store were down 3.5% in thethird quarter. Can you saywhat thereasons were behind that?

Eugene S. Kahn

As I said, wechose to diminish thepurchases purchased and cash wrap programs that provided additionaltransactions last year, but really reduced our overall average dollar sales. So inspecifically looking to decrease that business to a much, much lower level we producedthese results because of that strategy.

Des Colblerts – Stone Harbour

Okay. All right. You mention how your newNetherlands distribution center, that it’s up and running. You said it’srunning well. Can you sayhow much better you’re in-stocks arein Europe?Any kind of ditty you can point out there.

Eugene S. Kahn

I would say that, you know, the business across Europe wouldindicate that there’s abenefit that we’re receiving from theNetherlands D.C.

Des Colblerts – Stone Harbour

Okay. And the press release said that you’re in theearly stages of refining theIcing concept and content. Can you sayjust how much of thestore you’ve changedand how much you’re content with that that’s achangethat you will continue going forward? Or doyou have to refine what you’re testing right now?

Eugene S. Kahn

I think thatit’s more thelatter of what you just said. When I came to thebusiness thepositioning for Icing had been strategized and we continued to study the customer more and the competitive landscape and adjust onthat basis. You know, we aretesting several different ideas of within theassortment inorder to develop amore cohesive strategy going forward.

Des Colblerts – Stone Harbour

Okay. And, Gene,you said that you were enthusiastic about Claire’s. Can you say what are thetop items that make you optimistic about thecompany?

Eugene S. Kahn

I think that in some of the research we’ve done I think that whenwe said that we were thego-to resource for young ladies we have enthusiastic endorsement of that fact. So I think that now it’s really beingresponsive to our needs and looking for additional categories to make us evenmore connected with thecustomer that we’re pursuing.

Des Colblerts – Stone Harbour

All right. Thankyou.

Eugene S. Kahn

Thank you.

Operator

Thank you. Ournext question is from Adam Plissner. And please state your company name.

Adam Plissner – Credit Suisse

Credit Suisse.Good morning. I was wondering, you’re obviously trying to capture the opportunity in international and under whatconditions would you look to North America deteriorating that you mightreconsider and go into cash conference conservation mode and start to cut backon theexpansionary spend?

Eugene S. Kahn

Adam, at this point I don’t think that would be aconsideration atall. I mean, we have anunbelievable retail repertoire here of stores. Whether they’re mall based orlifestyle and some strip-centre based. We have outlet stores. So we’re really operating on a very diverse playing field. Althoughwe have thestrongest amount of stores inthe mall, wecertainly have always been atraffic generator to themall and I think that as we refine theconcept as I’ve outlined and, you know, remove some of the historical influence on our offencegoing forward, you know, we have abright future.

Adam Plissner – Credit Suisse

Great. And maybejust interms of sourcing, arethere differences inyour off-shore sourcing of accessories versus jewellery? I know overall you’vegiven statistics of how much is off-shore inAsia, but interms of accessories does itadd complexity either intiming and/or costings, particularly versus jewellery.

Eugene S. Kahn

It’s a very similar basis because the business isn’t as developed. I wouldsay thatit’s not at the same stage of, it’s not in thesame stage of development, but it’s well developed. We have unbelievablesourcing capabilities. One of thethings that I amthe mostpleased with is theRSI organization, its capabilities, its management, its ability to respond towhat we need, to find additional resources to do business with on a timely basis. We’ve calendarized all of the sourcing capabilities and lead timerequired and I think that we’ll bemuch more agile going forward than we have previously been.

Adam Plissner – Credit Suisse

Okay. Thanks.

Eugene S. Kahn

Thank you.

Operator

Thank you. Ournext question is from Jane Gail Oriner (sic). And please state your companyname.

Jane Gail Oriner – Halcion

Hi, yes,Halcion. I’m just wondering interms of your new store opening if you’re seeing any kind of improvement in rental terms given the softening of the retail environment?

Eugene S. Kahn

To date we havenot. It’s pretty constant what we’ve been seeing.

Jane Gail Oriner – Halcion

All right. Thankyou.

Operator

Our nextquestion is from RickWaddell. And please state your company name.

Rick Waddell -

Hey, guys.(Inaudible). Can you tell mewhat level of same-store sales you guys would have needed in thecurrent quarter to have sort of a, to not seethedeleveraging inthe SG&Aand thegross margin line?

Ira D. Kaplan

It’s about 2.5%.

Rick Waddell -

Oh, 2.5%. And has that been sort of consistent goingbackwards as well?

Ira D. Kaplan

Yes.

Rick Waddell -

Okay. Fairenough. When you look atIcing, how much of theIcing comp – and I know you’re not going to getinto specific numbers, but presumably you can compare how the jewellery business did at Claire’s versus the jewellery business at Icing, correct?

Eugene S. Kahn

Yes, you can do that.

Rick Waddell -

So, can you justsort of, you know, from looking atthat do you get asense that thecomp problem that you’re seeing inthe quarter,is itspecifically jewellery related or is there something going on at Icing that’s causing the worst performance at Icing versus the performance at Claire’s?

Eugene S. Kahn

I would say that if we had started a strategy that had done as muchconsumer researcher and competitive landscape scanning as we have and had sortof come together – and I’m not denigrating theeffort that was made because itwas considerable, but come together ina morecohesive fashion then we would have attempted to add new in-store and marketingand then we’d have asort of clientele launch or re-launch Icing. What we’re doing now is using whatwe’ve done as atesting laboratory, if you will, to refine what we’ve learned. We’ll do that through the next calendar year and then look toreally moveforward and make abig splash,I’d say.

Rick Waddell -

So the plan, if I’m hearing you correctly,is to sort of study Icing through 2008 and then re-launch in 2009?

Eugene S. Kahn

I would say that we haven’t made thatdetermination, but I’m saying that itwill be a certain amount of time until we get to the final stage based upon the fact that we turned this businesscompletely from what itwas because itwasn’t Claire’s and itwasn’t Icing. Sowe, you know, theClaire’s team put together apositioning statement and we’re pursuing that positioning statement now, butdoing theappropriate amount of testing and research to ensure its success.

Rick Waddell -

Okay. Fairenough. Thanks, guys.

Eugene S. Kahn

Thank you, Rick.

Operator

Thank you. Ournext question is from Brian Stewart. And please state your company name.

Brian Stewart – Levine Leichtman Capital

Yeah, it’sLevine Leichtman. I was wondering if you guys can break out your comps for the quarter into the merchandising freight and occupancyand buying categories?

Ira D. Kaplan

Sorry, we don’tbreak those expenses down.

Brian Stewart – Levine Leichtman Capital

Okay. I thinkyou did when you placed thenotes, but you’re not going to dothat on anongoing basis.

Ira D. Kaplan

Correct.

Brian Stewart – Levine Leichtman Capital

And then what,can you quantify the, how about thebreakout between fixed and variable costs ingross margin?

Ira D. Kaplan

Again, we don’tbreak that out separately.

Brian Stewart – Levine Leichtman Capital

Do you guys have an estimate of the gross margin impact of the shift in mix from jewellery to accessories? Isaw you increased your merchandise margin by 60 bips, but I guess that I wouldexpect it tobe higher ifit had notbeen for that shift inmix.

Ira D. Kaplan

You’re correct,but again we don’t specifically break those type of numbers out.

Brian Stewart – Levine Leichtman Capital

Okay. Thanks.

Operator

Thank you. Ournext question is from Anya Wok (sic). And please state your company name.

Anya Wok -

(Inaudible)Advisors. Hi, I was wondering if you could give us some details around the foreclosing, sorry, the distribution center closing in Austria and then opening one in Netherlands and did that take placethis quarter or inthe secondquarter?

Eugene S. Kahn

It took place in June and we had previously developed a strategy to bring a centralized D.C. facility in theNetherlands to continental Europe. We’re currently reviewing that decision and facilityin order todecide to proceed with theroll out.

Anya Wok -

Do you have thosecosts handy?

Ira D. Kaplan

No, we wouldn’tbreak out those costs Anya. Only to saythat we obviously as acompany are cost minded and want to bring the lowest costs possible.

Eugene S. Kahn

They wereinsignificant.

Anya Wok -

Okay. And thenon the(inaudible) front, that increased about 7.5% and you noted that part of thatwas due to FX and then another part was due to, I can’t remember what it was now. But what can you do to actually have a better control on the SG&A front going forward?

Ira D. Kaplan

Well, we look at SG&A pretty much every day. Thereis a pieceof it thatwe can’t control and we match that with how revenues are going to the best of our ability.

Anya Wok -

Okay. And didyou just sayat the beginning (inaudible) taxes for the quarter?

Ira D. Kaplan

They were(inaudible).

Anya Wok -

Pardon me?

Ira D. Kaplan

We paid cashtaxes. In mydiscussion I had said itwas $1.8 million.

Anya Wok -

One-point-eight.Okay. Great. That’s all. Thank you.

Eugene S. Kahn

Thank you, Anya.

Operator

Thank you. Ournext question is from Howard Goldberg. And please state your company name.

Howard Goldberg – [Braun] Management

Thank you. WithBraun (sic) (inaudible) Management. Good morning. I was wondering if you couldcomment whether you felt your inventory reduction in North America on a square footage basis had an effect on your sales growth in thequarter. Did itstifle it in your view or was it anon-event?

Eugene S. Kahn

I think, Howard,it really isa non-event.

Howard Goldberg – [Braun] Management

Can you say were you just pruning non-productiveitems or de-cluttering thestore to some extent or something else?

Eugene S. Kahn

I think that weoperate with aconsiderable amount of skews, sowe’re trying to refine those views inorder to focus our efforts on keybest sellers and being stocked on themost wanted merchandise. I think that our reductions in inventory is a matter of placing the goods on a more timely basis and flowing the goods into our stores and out andbeing more agile to respond to thetrends rather than working further out, laying it in, if you will, and then responding.

Howard Goldberg – [Braun] Management

Okay. I washoping you could, looking back, tell us thefourth quarter of last year, which had anextra week init, what that comparison is going to doto this year’s numbers. Was theextra week ayear ago an especially profitable one or not?

Ira D. Kaplan

No, we really don’tbreak out that number for that one extra week.

Howard Goldberg – [Braun] Management

Okay.

Ira D. Kaplan

The numbers lastyear, it wasgross and we’re not going to break out that one week’s ...

Howard Goldberg – [Braun] Management

Okay. And –

Eugene S. Kahn

We will,obviously, Howard, report itagainst the14 weeks of last year.

Howard Goldberg – [Braun] Management

Sure. I know the sales number will be adjusted, but I don’t know if thatextra week was loaded with greater expenses or fewer expenses and that couldhave a big swing factor. I thought that kind ofcommentary would behelpful.

Ira D. Kaplan

Again, I’msorry, but we don’t break that out.

Howard Goldberg – [Braun] Management

Okay. Can youshare with us with respect to your bank credit agreement what the tightest covenants or the most restrictive covenants you facenow on aperformance basis?

Ira D. Kaplan

We’re abovethat. That’s allI can say at this point in time.

Eugene S. Kahn

Okay, Howard,that we’re operating well above that. That shouldn’t be anarea of concern.

Howard Goldberg – [Braun] Management

Can you say what the benchmarks are? What the hurdles?

Ira D. Kaplan

I don’t have the prospectus in front of me, but I could follow up ifyou’d like.

Howard Goldberg – [Braun] Management

Okay. That wouldbe great.Thanks.

Eugene S. Kahn

Thank you,Howard.

Operator

Thank you. Ournext question is from Bob Wettenhall. And please state your company name.

Bob Wettenhall – Royal Bank of Canada

Hi, it’s BobWettenhall from Royal Bank of Canada. Obviously you guys are echoing what other people are seeing in theretail environment domestically. And I think everybody’s rehashed that. I’mjust curious, what’s your long-term leverage target in terms of debt to EBITDA for thiscapital structure?

Ira D. Kaplan

We don’t haveone, but we’re planning to de-lever.

Bob Wettenhall – Royal Bank of Canada

Can you give us an indication of what pace and where,you know, I’m not asking for forward guidance, I’m just saying where would youguys becomfortable atbecause obviously EBITDA’s going down year over year, your leverage is goingup. How doyou intend to de-lever?

Ira D. Kaplan

Well, I thinksome of that is forward looking. We’re going to continue to increase our EBITDAas we try to increase same-store sales.

Eugene S. Kahn

I would intothat, Bob, that if you think about itthis way, you know, EBITDA is still theresultant of thesales. And soas we put our new programs and strategies inplace and we start getting traction I think that the business’s own top line growth thatwe will beable to deliver on.

Bob Wettenhall – Royal Bank of Canada

I appreciatethat. But putting aside top line growth, and let’s not put a time frame on this, when you’re goingto get to it what’s the appropriate leverage on a more conservative basis for thiscompany where you would becomfortable?

Eugene S. Kahn

We’re verycomfortable with our current capital structure and our plans are to de-lever it as we move forward in thefuture.

Bob Wettenhall – Royal Bank of Canada

Okay. That’sgreat.

Eugene S. Kahn

I would like toclarify one thing. Our debt doesn’t have any maintenance covenants on it.

Bob Wettenhall – Royal Bank of Canada

Got it. Okay.That’s fair. And one other question. Sofar through thequarter, since quarter end have you seen any change in average number of transactions per store? Which way is that trending in thelast couple of weeks?

Eugene S. Kahn

As we said, wereally aren’t giving any forward-looking information.

Bob Wettenhall – Royal Bank of Canada

Okay. Thanks a lot.

Operator

Thank you. Ournext question is from Adam Smalley (sic). And please state your company name.

Adam Smallie – Harpor Investments

Harpor (sic)Investments. Thanks. Getting back to the3.5% traffic decline inthe quarter,how much of that doyou think is aresult of October weather being warmer than typical?

Eugene S. Kahn

Obviously there are mitigating factors for the results of the quarter. I’ve learned a longtime ago in retailing not to blame the weather for the business. So we’ve experienced the same issues that everybody else has.We’re certainly focused on having thebest assortments, responding to what thecustomer wants, and operating on that level to produce the best possible sales results that wecan.

Adam Smallie – Harpor Investments

Okay, so then based on that, experiencing the same trends as the other retailers and not looking forany forward guidance, obviously, just directionally, other retailers have saidthat based on colder than normal November traffic has picked up.

Eugene S. Kahn

I think two, I’dlike to clarify two points. Thepress release and our remarks commented on thetransactions, not thetraffic. As I explained, thetransactions aredown because of theprogram that we discontinued around thecash wrap, which is afour-for-five-dollar concept that really increased our transactions, but didn’treally convert to real business.

Secondly, I’dsay, you know, our business is not that seasonally related that we take an experience of big decline because of warm weather orgoing to geta big spike. If you really think of the classifications that we carry.

Adam Smallie – Harpor Investments

No, I understandthat your items aren’t seasonal. I guess I assumed, and perhaps you can correctme if thisis wrong, that mall traffic generally inpart is driven by weather conditions and therefore people walking by yourstores and deciding to go inI think would beindirectly impacted by theweather.

Eugene S. Kahn

There’s no doubtthat theweather is afactor in the business, but I think the cycles that we experience in theclassifications that we dobusiness in are equally a determiner of the business that we produce.

Adam Smallie – Harpor Investments

Okay. Thanks.

Eugene S. Kahn

Thank you, Adam.

Operator

And this is all thetime we have for questions today. I will now turn this call over to the speakers for closing remarks.

Eugene S. Kahn

Very good. Ithank you for your interest inClaire’s and for joining us this morning on our third quarter conference call.I know it’s early, but I want to wish each of you a happy and healthy holiday season and a fabulous new year. We look forward tospeaking with you again inApril. Good bye.

Operator

Thank you. Thisconcludes today’s conference. You may disconnect at this time.

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