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

Claire’s Stores Inc. (CLE)

F3Q08 Earnings Call

December 14, 2007, 10:00 a.m., ET

Executives

Eugene S. Kahn – Chief Executive Officer

Ira D. Kaplan – Senior Vice President

Analysts

Emily Shanks – Lehman Brothers

Karru Martinson – Deutsche Bank

Carla Casella – JPMorgan

John Layman -

Mary Gilbert – Imperial Capital

Grant Jordan – Wachovia

Mike Shrekgast – Wong Acker

Erin Marsh – Ducane Capital

Des Colblerts – Stone Harbour

Adam Plissner – Credit Suisse

Jane Gail Oriner – Halcion

Rick Waddell -

Brian Stewart – Levine Leichtman Capital

Anya Wok -

Howard Goldberg – [Braun] Management

Bob Wettenhall – Royal Bank of Canada

Adam Smallie – Harpor Investments

Presentation

Operator

Good morning and welcome 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 of Corporate Communications and Investor Relations.

Yesterday Claire’s issued its third quarter earnings press release. A copy can be found on Claire’s corporate website www.clairestores.com. This call is being taped and a replay will be available to listen to until 5:00 p.m. on Friday, December 21^st. The playback number is 203-369-0434 and the password is 25247. This call is also being simultaneously webcast and archived. It can be accessed at www.clairestores.com and replayed or downloaded as an mp3 file.

I would now like to introduce you to Marisa Jacobs, Vice President of Corporate Communications and Investor Relations.

Marisa F. Jacobs, Esq.

Thank you. Good morning and welcome to Claire’s Stores conference call for the unaudited third quarter results for fiscal 2008. The following discussion may contain forward-looking statements and our actual results may differ materially from those forward-looking statements. Information concerning factors that could cause such differences can be found in theForm 10Q filed in connection with the first quarter of fiscal 2008.

The content of this conference call contains time sensitive information that is accurate as of the date of this live broadcast, December 14, 2007. 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 principles, 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 computation views by other companies.

At this time I’m going to turn the call 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 like to provide you with an overview of our business. Then I’ll turn the call over to Ira for a financial review. Then we’ll move on to your questions.

The third quarter marks the first full quarter under new ownership and my leadership as CEO. Our results were below planned, but as each of you know the third quarter was reflective of a tightening retail environment. Since joining the company in June I have completed a full review of the business and begun to introduce more process, discipline and structure based on retailing best practices that will help us achieve long-term success. We have created a greater commonality of approach and engendered a greater team spirit between North America and Europe.

Now with six months under my belt and in spite of the third quarter results my enthusiasm for and belief inthe company remains as strong as ever. Claire’s is a company with a solid track record and as much potential as we have previously commented on.

Earlier this morning we announced that we have increased our corporate management team by adding Jim Conroy to serve as Executive Vice President. Jim will be the principle member of the senior management team, assisting mein developing and implementing strategic initiatives throughout our global business as we pursue our sales, EBITDA, and cash flow targets. He will have functional responsibility for strategic initiatives and implementation, information technology, and international franchising and joint ventures.

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

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

Our revenues from Europe grew to 35% of our total compared to 32% during last year’s third fiscal quarter. As a percentage of sales we saw further shifts towards accessories from jewellery in each of our regions. In North America jewellery made up 59% of the segment sales, down from 63% last year. In Europe jewellery represents a smaller percentage of our total net. Forty-six percent of our sales came from jewellery compared to 49% inthe third quarter of fiscal 2007.

Let me briefly expand on our performance in the third quarter. The costume jewellery business was soft due to several factors. Several of the trends predicted, like the jewelled look, did not meet expectations. Some apparel was more embellished than in recent years causing the need for cleaner and more understated jewellery looks. Also, the fashion looks currently being worn by the stars are simpler and more minimalist.

The accessory business 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. Regarding averaging at retail, we increased it by 3.3% globally to $4.74, primarily by deemphasizing low price, purchase with purchase, and cash wrap products. This focus caused a 2.8% decrease in units per transaction, netting a 5/10ths percent increase inthe average dollar sales.

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

The roll out of the new point-of-sale system will resume and be completed next year. One of our goals was to introduce gift cards in the U.K. in advance of this year’s holiday season and that objective was met when the new P.O.S. system was successfully installed.

We told you on our last call that we do not intend to provide any forward-looking information or earnings guidance, nor will we today. I do, however, want to make one comment regarding the current retail environment. We have continued to observe a softening of business since the third quarter ended, primarily caused by a downward jewellery cycle. This is particularly true in North America and is more pronounced at our Icing stores than at Claire’s.

Without repeating 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 to produce significant growth over the coming years.

At this time I’m going to turn the call over to Ira Kaplan, our chief financial officer, to update you on our store 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 stores in North America and Europe. As of the end of fiscal 2008 third quarter the total had increased to 3,051, a net increase of 59 stores. In our Japanese joint venture the number of total stores operated increase from 193 to 202 at the end of the third fiscal quarter. Total franchise stores operated increased to 159 from 125 at the end of fiscal 2007 due primarily to the growth associated with our entry into Russia and Poland.

I would now like to address some of the line items inthe financials, starting with the income statement. Sales for the 13-week period ended November 3^rd, 2007, increased 2.8% to $357.4 million compared with sales of $347.6 million for the 13-week period ended October 28^th, 2006. This increase was primarily attributable to an increase in new stores and FX, foreign exchange benefits. Offsetting these increases were the decline attributable to the 0.7% decrease in same-store sales.

I want to note that we measure our same-store sales on a constant local currency basis. Or in other words, we adjust last year’s same-store sales to this year’s exchange rate before computing same-store sales.

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

Merchandise margin actually increased by 60 basis points. The improvement resulted from our taking lower markdowns than last year, although this was partially offset by a reduction in IMU associated with shifts in our merchandise mix. This increased merchandise margin was more than offset by a 230 basis point reduction in gross margin attributable to negative operating leverage on fixed rent, (inaudible) expenses.

I would like to point out that rent expense, including a book-to-cash adjustment of approximately $2 million related to purchase accounting adjustments required upon the completion of the sale of the company. Consequently, about 60 basis points of the decline in gross margin is attributable to items that we add back inthe computation of adjusted EBITDA.

SG&A expenses increased $8.9 million was 7.5% compared to last year’s third fiscal quarter. Adjusting this balance for the offset of foreign exchange of $3.8 million, these costs only increased 4.3% compared to last year. The primary cost is payroll and benefit increases associated with a 2.3% increase in our company-operated store count and normal inflation.

Adjusted EBITDA for the third quarter, which as referenced in our press release excludes the impact of transaction expenses for the May 2007 acquisition of the company, rent related adjustments, and other non-recurring or non-cash expenses, was $60.5 million compared with adjusted EBITDA of $68.5 million in the third quarter of fiscal 2007. The $8 million decline was primarily the result of the impact of higher occupancy and buying costs of $8.7 million and increased SG&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 to fluctuations inthe various income and expense items enumerated inthe adjusted EBITDA table in our press release.

Now let me turn to a discussion of selected balance sheet items. We ended the third quarter of fiscal 2008 with $78 million in cash. Our $2 million revolver was undrawn, aside from a $4.3 million letter of credit.

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

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

Inventory on hand at the end of the third fiscal quarter was approximately $157 million versus $159 million at the same time last year. North American inventories on a per-square-foot basis were 4% lower than last year. In-transit inventory approximated last year’s balance. Aging statistics are strong with 79% of North American merchandise less than 90 days old.

In Europe, inventories are down 10% on a per-square-foot basis compared to the end of last year’s third fiscal quarter. Atthe end of last year’s third fiscal quarter our European inventories were inflated due to the U.K. being over inventoried. That situation does not exist this year and our current European inventory levels are in line with historical levels.

At the end of this year’s third fiscal quarter 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 the call to questions. Operator?

Question-and-Answer Session

Operator

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

Emily Shanks – Lehman Brothers

Sure. Emily Shanks from Lehman Brothers. Excuse me. I just have a couple of questions. Thank you for all the detail. About the rent expense and the occupancy costs, can you talk a little bit about what is driving that? And is that across all your store faces or is it due to new store growth? And what new, 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 square footage. All right, square footage increased about 3.5% over the previous third quarter. The remainder of the increase is really related to normal inflation that we see year over year inthe rents that we pay to landlords.

Also, as I stated in my comments, we had a book-to-cash rent adjustment from purchase accounting of about $2 million that was 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, it sort of leads to your commentary inthe release around buying cost increases, can you speak a little bit about that? Is that across all categories and what is driving that? Do you think that this is permanent going forward?

Eugene S. Kahn

The buying costs that we experienced during the third quarter were the planned buying costs as we filled all open jobs on a this-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 European expansion.

Emily Shanks – Lehman Brothers

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

Ira D. Kaplan

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

Eugene S. Kahn

Right. Okay. Thank you and sorry about the voice.

Eugene S. Kahn

Thank you.

Operator

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

Karru Martinson – Deutsche Bank

Deutsche Bank. Good morning. In terms of the Icing repositioning, I mean, the prior management team had attempted that, I think you guys had mentioned that, product differentiation is around 50% there already. I’m curious, what needs to be done and what’s kind of the time 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 an industry (inaudible) to under the playing field, the competitors, and how we can best connect with the targeted customer. At the same time we’re continuing to differentiate the assortment and as we move forward to spring the assortment will be 75% or 80% differentiated from Claire’s and really focus on the 17- to 27-year-old higher high school, college, and young working woman customer. I think that Icing’s business is very jewellery base, so we are changing the complexion of that business to a greater degree than the total Claire’s Stores business.

Karru Martinson – Deutsche Bank

And you mentioned you’re going to geta better handle on the competitors 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 coming into your space as the retail market has tightened?

Eugene S. Kahn

I think that everybody sees the value of the margins and the pick-up nature of the accessory business, so I think that there’s a level of competition among all of the teen specialty 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 going forward from what we’re learning.

Karru Martinson – Deutsche Bank

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

Eugene S. Kahn

I think obviously we target a customer seven to 17 primarily within the Claire’s Stores and we have a three- to five-year-old segment of that as well. And obviously, you know, I’ve spoken to the Icing’s. So I think that there’s a broad landscape of specialty retailers with which we compete because we have a much more classification orientation and most of the competitors have a lifestyle orientation. So I think you have to look broadly across the landscape.

Karru Martinson – Deutsche Bank

Okay. Thank you very much, guys.

Eugene S. Kahn

Thank you.

Operator

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

Carla Casella – JPMorgan

Hi. It’s Carla Casella 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. We have a very strong 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 Asia and making us a strong vertically integrated retailer. As such we have very good contacts and relationships with our resources and although we do business with many resources we have significant relationships with the top resources. As such, we’ve worked on a cooperative basis to attempt to hold down the initial costs of the product. At the same time, however, given all the factors that are putting pressure on the product we dosee slight increases in costs. We believe that they’ll be manageable from a retail basis. And by bringing the commonality of approach that I spoke to in my remarks together and buying more product globally we will be able to offset a certain portion of those price increases.

Carla Casella – JPMorgan

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

Ira D. Kaplan

Sure. IMU is initial mark-up.

Carla Casella – JPMorgan

Okay.

Eugene S. Kahn

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

Carla Casella – JPMorgan

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

Eugene S. Kahn

In this quarter our 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 sales less than planned.

Carla Casella – JPMorgan

Okay. Great. And then in Europe the flat same-store sales, that’s on a constant 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. And do you see, with that flatness there, any change in your outlook? It sounds like you still feel like you’ve got ample opportunities overseas to continue to grow that business.

Eugene S. Kahn

I think that our opportunities inthe European continent, and of course the world, are quite significant. I think that there’s, you know, accessories and jewellery, fashion trends are definitely part of the lifestyle – certainly within Europe and around the world – and we have a great deal of opportunity to grow the business beyond North America.

Carla Casella – JPMorgan

Okay. And then you have some initiatives in place to cut thecost basis in Europe by consolidating distribution. Can you just give us an idea on how that’s going?

Eugene S. Kahn

As I said earlier, we really have, we can’t really share with you any forward-looking numbers, but we certainly, but I would say that’s certainly always in our mindset.

Carla Casella – JPMorgan

Okay. So, but have 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 evaluating our opportunities.

Carla Casella – JPMorgan

Oh, okay. Great. Thanks a lot.

Eugene S. Kahn

Thank you.

Operator

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

John Layman -

Good morning, gentlemen. (Inaudible). Had a couple of quick questions for you. Going back to sales, could you just give me a little bit of colour of the 2.8% 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 would be about 2.3%?

Ira D. Kaplan

Yeah, I don’t have that calculation in front of me.

John Layman -

Okay. We’ve certainly all appreciate the challenging retail environment inthe U.S. and seeing some stories, you know, as it’s translating over to the Euro zone in the U.K. Would you define that environment as challenging as well? Have you seen the same kind of trends that you’re starting to seein the U.S.?

Eugene S. Kahn

No. I wouldn’t define it that way. I think that if we backtrack a little bit, Mark Smith joins us as the managing director of Europe atthe Apollo Transaction and he is in charge of all of Europe now. So we are now for the first time operating as one entity in Europe. So I think that we believe that there is significant upside potential in the European business, particularly in light of the fact that the European business is less jewellery reliant in total. So obviously with the momentum switching to the accessory portion of the business that puts more windin their sales on an easier translatable basis than the North American business.

John Layman -

Okay. And one last question, if I may. Claire’s is certainly known as the leader in jewellery for the demographic that you serve. I can attest to that with my nieces. But switching over to accessories kind of circles back to a previous question. Do you see that actually increasing your competition base? And secondly, related to both, is there higher merchandise margins and accessories over jewellery or vice-versa? Thank you for your call, gentlemen.

Eugene S. Kahn

Okay. John, I would say that Claire’s is a jewellery and fashion accessory business. It always has been. The momentum in most recent years inthe jewellery business sort of made the accessory penetration diminish. Beginning last spring, really beginning in the fall of ’06, but certainly inthe spring of ’07 we saw the escalation of that trend and, as such, we’ve responded accordingly. We believe that we can be competitive for on a price basis and pursue the customers as I’ve outlined we’re targeting and be very successful in attracting them.

John Layman -

And could you speak on margins, please?

Eugene S. Kahn

Yes. I was just going to do that. As far as the margins are concerned, traditionally the margin in accessories has been lower than jewellery, but I believe that some of the disciplines and practices of buying them not with the same weeks of supply that we doin jewellery will allow us to bring the margins virtually to the same level and as such the margin, and to demonstrate that the margins of accessories versus jewellery in Europe are much closer than they arein North America even currently.

John Layman -

Great. And I wish you good holiday success, gentlemen. Thank you.

Eugene S. Kahn

Thank you, John.

Operator

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

Mary Gilbert – Imperial Capital

Imperial Capital. I wondered if you could give us what the Claire’s comp increases were. Because you said that Claire’s inthe quarter actually increased on a comp basis. And then how much was the decline at Icing?

Eugene S. Kahn

We basically will file our S-4 later today or at latest Monday morning. And in looking at how we wanted to look atthe business going forward we will be having two reportable segments, North America and Europe, and as such we’ll be reporting North America going forward as one combined entity.

Mary Gilbert – Imperial Capital

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

Eugene S. Kahn

Right. We’ll continue to share with you some directional comments, but we’re going forward and looking at North America as one operating entity.

Mary Gilbert – Imperial Capital

Okay. Fair enough. The other thing that I wanted to geta sense for is when we’re looking out to 2008 should we be using about $100 million for capex? Is that kind of the range that you’re thinking of? And how should we look at working capital?

Ira D. Kaplan

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

Mary Gilbert – Imperial Capital

Okay. Not even qualitatively in terms of how it compares to this year?

Ira D. Kaplan

I’m sorry, could you repeat your question?

Mary Gilbert – Imperial Capital

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

Ira D. Kaplan

Well, if you look at our capex for the past quarter, we spent about $19 million on stores. If you analyze that and multiply it by four that’s a relatively good estimate.

Mary Gilbert – Imperial Capital

Okay. Okay. That’s very helpful.

Ira D. Kaplan

And working capital 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’s forward looking and we’re not going to comment to that right now.

Mary Gilbert – Imperial Capital

Okay. And then what about cash taxes? How should we think about cash taxes in terms of a rate that we should apply?

Ira D. Kaplan

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

Mary Gilbert – Imperial Capital

Okay. Okay. All right. So the trends that you’re seeing inthe last quarter are continuing inthe current quarter, is that sort of what you indicated on the call?

Eugene S. Kahn

As I said, you know, I think that we can’t comment any further than I already have. We see a softening going forward. We’re experiencing the softening right now. But I think that the basic fundamentals of the business are sound and we continue onward.

Mary Gilbert – Imperial Capital

Okay. And then one 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 seeing in terms of the trends simplicity and have you been able to assort accordingly?

Ira D. Kaplan

Excuse me. We’re presently evolving our assortment as we begin receiving in the middle of December the first spring receipts to encompass that look, obviously.

Mary Gilbert – Imperial Capital

Okay. All right. So that’s something that’s sort of ongoing now in response to that shift in design for jewellery.

Eugene S. Kahn

Okay. Thank you.

Mary Gilbert – Imperial Capital

Thank you.

Operator

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

Grant Jordan – Wachovia

Wachovia. Thanks for taking the questions. 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 commented that you’re definitely being impacted by themove in jewellery to accessories, but that the, you know, is it more that or is it more the soft retail environment?

Eugene S. Kahn

I think that it’s a combination of both really.

Grant Jordan – Wachovia

Okay. So. Okay. That’s helpful. And then last question. Have you made any indication as to whether you’ll take cash interest on the 9 and 5/8ths?

Eugene S. Kahn

Yes.

Grant Jordan – Wachovia

Okay. All right. Thanks for taking the questions.

Operator

Thank you. Our next 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-, the jewellery business or jewellery sales as a percentage of sales will bottom out at?

Do you guys have an estimate where you’d like to take the business? I know you don’t comment on forward looking, but I guess if you’re thinking of how you’re going to manage the product 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 the first thing, Mike, that we have to understand that there’s always a cyclical nature within retail business and particularly or certainly within accessories and jewellery. I’d say that what we’re doing is pursuing the accessory business aggressively while still responding to the underpinnings of what the customer is asking for in jewellery.

I’d also say, as I explained in my remarks, the penetration of these two parts of our business – we look at them just as two parts – very, very much by geography. So there’s really a different strategy going on on a regional basis.

Mike Shrekgast – Wong Acker

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

Eugene S. Kahn

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

Mike Shrekgast – Wong Acker

Okay.

Eugene S. Kahn

-- by classification and it will turn out how we report inthe fourth quarter, first quarter, second quarter and so forth.

Mike Shrekgast – Wong Acker

Okay. Good enough. And then with regards to Icing, I think last quarter you said it was down 5.7%. I know you’re not giving a specific number, but can you tell us whether it was better or worse than the last quarter?

Eugene S. Kahn

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

Mike Shrekgast – Wong Acker

Okay. And then is there an opportunity in Europe to increase your inventory turns or is the new facility more about having in-stock, better in-stock positions?

Eugene S. Kahn

It’s really more the latter than the former. Obviously one of the initiatives that we brought to the business is to operate with better flow through and overall look to operate with less weeks of supply on an ongoing basis. But that would apply uniformly to our business.

Mike Shrekgast – Wong Acker

And less weeks of supply, does that also mean that accessories will grow as a percentage of the business? Again, because I think you said, accessories have a shorter inventory turn.

Eugene S. Kahn

There’s really no correlation between that, Mike.

Mike Shrekgast – Wong Acker

Okay.

Eugene S. Kahn

Okay?

Mike Shrekgast – Wong Acker

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

Ira D. Kaplan

We don’t break that out separately.

Mike Shrekgast – Wong Acker

Okay. Thanks for your time.

Ira D. Kaplan

Okay. Thank you.

Eugene S. Kahn

Thank you.

Operator

Thank you. Our next question is form Erin 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. I couldn’t tell if the, you mentioned that units were up or down, up on a per basket basis by 50 bips (sic), but basket, total transactions were down 3.5%. Was that on a sales or a unit basis?

Eugene S. Kahn

That’s on a sales basis.

Erin Marsh – Ducane Capital

Okay. Sorry. And how does that, was that constant across, is that for both North America and Europe or is there significant differentials there?

Ira D. Kaplan

The average unit retail in North America was basically flat and in Europe it was up 10% but included in that is some foreign exchange.

Erin Marsh – Ducane Capital

Okay. Thank you.

Eugene S. Kahn

Thank you.

Operator

Thank you. Our next question is from Des Colblerts (sic).

Des Colblerts – Stone Harbour

I’m with Stone Harbour. Can you say how many of your stores now have the new point-of-sale terminals installed?

Ira D. Kaplan

We have 200, the new point-of-sale equipment installed in 294 stores in North America and 421 stores inthe U.K.

Des Colblerts – Stone Harbour

Okay. Can you say, for the stores that have new point-of-sale terminals, has there been any change in sales once these new terminals have been put in place?

Ira D. Kaplan

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

Des Colblerts – Stone Harbour

All right. The transactions per store were down 3.5% in the third quarter. Can you say what the reasons were behind that?

Eugene S. Kahn

As I said, we chose to diminish the purchases purchased and cash wrap programs that provided additional transactions last year, but really reduced our overall average dollar sales. So in specifically looking to decrease that business to a much, much lower level we produced these results because of that strategy.

Des Colblerts – Stone Harbour

Okay. All right. You mention how your new Netherlands distribution center, that it’s up and running. You said it’s running well. Can you say how 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 would indicate that there’s a benefit that we’re receiving from the Netherlands D.C.

Des Colblerts – Stone Harbour

Okay. And the press release said that you’re in the early stages of refining the Icing concept and content. Can you say just how much of the store you’ve changed and how much you’re content with that that’s achange that you will continue going forward? Or do you have to refine what you’re testing right now?

Eugene S. Kahn

I think that it’s more the latter of what you just said. When I came to the business the positioning for Icing had been strategized and we continued to study the customer more and the competitive landscape and adjust on that basis. You know, we are testing several different ideas of within the assortment in order to develop a more 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 the top items that make you optimistic about the company?

Eugene S. Kahn

I think that in some of the research we’ve done I think that when we said that we were the go-to resource for young ladies we have enthusiastic endorsement of that fact. So I think that now it’s really being responsive to our needs and looking for additional categories to make us even more connected with the customer that we’re pursuing.

Des Colblerts – Stone Harbour

All right. Thank you.

Eugene S. Kahn

Thank you.

Operator

Thank you. Our next 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 what conditions would you look to North America deteriorating that you might reconsider and go into cash conference conservation mode and start to cut back on the expansionary spend?

Eugene S. Kahn

Adam, at this point I don’t think that would be a consideration at all. I mean, we have an unbelievable retail repertoire here of stores. Whether they’re mall based or lifestyle and some strip-centre based. We have outlet stores. So we’re really operating on a very diverse playing field. Although we have the strongest amount of stores inthe mall, we certainly have always been a traffic generator to the mall and I think that as we refine the concept as I’ve outlined and, you know, remove some of the historical influence on our offence going forward, you know, we have a bright future.

Adam Plissner – Credit Suisse

Great. And maybe just in terms of sourcing, are there differences in your off-shore sourcing of accessories versus jewellery? I know overall you’ve given statistics of how much is off-shore in Asia, but in terms of accessories does it add complexity either in timing and/or costings, particularly versus jewellery.

Eugene S. Kahn

It’s a very similar basis because the business isn’t as developed. I would say that it’s not at the same stage of, it’s not in the same stage of development, but it’s well developed. We have unbelievable sourcing capabilities. One of the things that I amthe most pleased with is the RSI organization, its capabilities, its management, its ability to respond to what we need, to find additional resources to do business with on a timely basis. We’ve calendarized all of the sourcing capabilities and lead time required and I think that we’ll be much more agile going forward than we have previously been.

Adam Plissner – Credit Suisse

Okay. Thanks.

Eugene S. Kahn

Thank you.

Operator

Thank you. Our next question is from Jane Gail Oriner (sic). And please state your company name.

Jane Gail Oriner – Halcion

Hi, yes, Halcion. I’m just wondering in terms 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 have not. It’s pretty constant what we’ve been seeing.

Jane Gail Oriner – Halcion

All right. Thank you.

Operator

Our next question is from Rick Waddell. And please state your company name.

Rick Waddell -

Hey, guys. (Inaudible). Can you tell me what level of same-store sales you guys would have needed in the current quarter to have sort of a, to not seethe deleveraging inthe SG&A and the gross margin line?

Ira D. Kaplan

It’s about 2.5%.

Rick Waddell -

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

Ira D. Kaplan

Yes.

Rick Waddell -

Okay. Fair enough. When you look at Icing, how much of the Icing comp – and I know you’re not going to get into 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 just sort of, you know, from looking at that do you get a sense that the comp problem that you’re seeing inthe quarter, is it specifically 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 much consumer researcher and competitive landscape scanning as we have and had sort of come together – and I’m not denigrating the effort that was made because it was considerable, but come together ina more cohesive fashion then we would have attempted to add new in-store and marketing and then we’d have a sort of clientele launch or re-launch Icing. What we’re doing now is using what we’ve done as a testing laboratory, if you will, to refine what we’ve learned. We’ll do that through the next calendar year and then look to really move forward 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 that determination, but I’m saying that it will be a certain amount of time until we get to the final stage based upon the fact that we turned this business completely from what it was because it wasn’t Claire’s and it wasn’t Icing. So we, you know, the Claire’s team put together a positioning statement and we’re pursuing that positioning statement now, but doing the appropriate amount of testing and research to ensure its success.

Rick Waddell -

Okay. Fair enough. Thanks, guys.

Eugene S. Kahn

Thank you, Rick.

Operator

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

Brian Stewart – Levine Leichtman Capital

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

Ira D. Kaplan

Sorry, we don’t break those expenses down.

Brian Stewart – Levine Leichtman Capital

Okay. I think you did when you placed the notes, but you’re not going to do that on an ongoing basis.

Ira D. Kaplan

Correct.

Brian Stewart – Levine Leichtman Capital

And then what, can you quantify the, how about the breakout between fixed and variable costs in gross margin?

Ira D. Kaplan

Again, we don’t break 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? I saw you increased your merchandise margin by 60 bips, but I guess that I would expect it to be higher if it had not been for that shift in mix.

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. Our next 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 place this quarter or inthe second quarter?

Eugene S. Kahn

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

Anya Wok -

Do you have those costs handy?

Ira D. Kaplan

No, we wouldn’t break out those costs Anya. Only to say that we obviously as a company are cost minded and want to bring the lowest costs possible.

Eugene S. Kahn

They were insignificant.

Anya Wok -

Okay. And then on the (inaudible) front, that increased about 7.5% and you noted that part of that was 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. There is a piece of it that we can’t control and we match that with how revenues are going to the best of our ability.

Anya Wok -

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

Ira D. Kaplan

They were (inaudible).

Anya Wok -

Pardon me?

Ira D. Kaplan

We paid cash taxes. In my discussion I had said it was $1.8 million.

Anya Wok -

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

Eugene S. Kahn

Thank you, Anya.

Operator

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

Howard Goldberg – [Braun] Management

Thank you. With Braun (sic) (inaudible) Management. Good morning. I was wondering if you could comment whether you felt your inventory reduction in North America on a square footage basis had an effect on your sales growth in the quarter. Did it stifle it in your view or was it a non-event?

Eugene S. Kahn

I think, Howard, it really is a non-event.

Howard Goldberg – [Braun] Management

Can you say were you just pruning non-productive items or de-cluttering the store to some extent or something else?

Eugene S. Kahn

I think that we operate with a considerable amount of skews, so we’re trying to refine those views in order to focus our efforts on key best sellers and being stocked on the most 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 and being more agile to respond to the trends rather than working further out, laying it in, if you will, and then responding.

Howard Goldberg – [Braun] Management

Okay. I was hoping you could, looking back, tell us the fourth quarter of last year, which had an extra week in it, what that comparison is going to do to this year’s numbers. Was the extra week a year ago an especially profitable one or not?

Ira D. Kaplan

No, we really don’t break out that number for that one extra week.

Howard Goldberg – [Braun] Management

Okay.

Ira D. Kaplan

The numbers last year, it was gross 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 it against the 14 weeks of last year.

Howard Goldberg – [Braun] Management

Sure. I know the sales number will be adjusted, but I don’t know if that extra week was loaded with greater expenses or fewer expenses and that could have a big swing factor. I thought that kind of commentary would be helpful.

Ira D. Kaplan

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

Howard Goldberg – [Braun] Management

Okay. Can you share with us with respect to your bank credit agreement what the tightest covenants or the most restrictive covenants you face now on a performance basis?

Ira D. Kaplan

We’re above that. That’s all I can say at this point in time.

Eugene S. Kahn

Okay, Howard, that we’re operating well above that. That shouldn’t be an area 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 if you’d like.

Howard Goldberg – [Braun] Management

Okay. That would be great. Thanks.

Eugene S. Kahn

Thank you, Howard.

Operator

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

Bob Wettenhall – Royal Bank of Canada

Hi, it’s Bob Wettenhall from Royal Bank of Canada. Obviously you guys are echoing what other people are seeing in the retail environment domestically. And I think everybody’s rehashed that. I’m just curious, what’s your long-term leverage target in terms of debt to EBITDA for this capital structure?

Ira D. Kaplan

We don’t have one, 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 you guys be comfortable at because obviously EBITDA’s going down year over year, your leverage is going up. How do you intend to de-lever?

Ira D. Kaplan

Well, I think some of that is forward looking. We’re going to continue to increase our EBITDA as we try to increase same-store sales.

Eugene S. Kahn

I would into that, Bob, that if you think about it this way, you know, EBITDA is still the resultant of the sales. And so as we put our new programs and strategies in place and we start getting traction I think that the business’s own top line growth that we will be able to deliver on.

Bob Wettenhall – Royal Bank of Canada

I appreciate that. But putting aside top line growth, and let’s not put a time frame on this, when you’re going to get to it what’s the appropriate leverage on a more conservative basis for this company where you would be comfortable?

Eugene S. Kahn

We’re very comfortable with our current capital structure and our plans are to de-lever it as we move forward in the future.

Bob Wettenhall – Royal Bank of Canada

Okay. That’s great.

Eugene S. Kahn

I would like to clarify 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. So far through the quarter, since quarter end have you seen any change in average number of transactions per store? Which way is that trending in the last couple of weeks?

Eugene S. Kahn

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

Bob Wettenhall – Royal Bank of Canada

Okay. Thanks a lot.

Operator

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

Adam Smallie – Harpor Investments

Harpor (sic) Investments. Thanks. Getting back to the 3.5% traffic decline inthe quarter, how much of that do you think is a result 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 long time 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 the best assortments, responding to what the customer wants, and operating on that level to produce the best possible sales results that we can.

Adam Smallie – Harpor Investments

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

Eugene S. Kahn

I think two, I’d like to clarify two points. The press release and our remarks commented on the transactions, not the traffic. As I explained, the transactions are down because of the program that we discontinued around the cash wrap, which is a four-for-five-dollar concept that really increased our transactions, but didn’t really convert to real business.

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

Adam Smallie – Harpor Investments

No, I understand that your items aren’t seasonal. I guess I assumed, and perhaps you can correct me if this is wrong, that mall traffic generally in part is driven by weather conditions and therefore people walking by your stores and deciding to go in I think would be indirectly impacted by the weather.

Eugene S. Kahn

There’s no doubt that the weather is a factor in the business, but I think the cycles that we experience in the classifications that we do business 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 the time we have for questions today. I will now turn this call over to the speakers for closing remarks.

Eugene S. Kahn

Very good. I thank you for your interest in Claire’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 to speaking with you again in April. Good bye.

Operator

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

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