As filed with the Securities and Exchange Commission on August 22, 2022

Registration No. 333-259887

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 5 TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CLAIRE’S HOLDINGS LLC

to be converted as described herein into a corporation named

CLAIRE’S INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		5600		36-4609619
(State or Other Jurisdiction of Incorporation or Organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)
		2400 West Central Road Hoffman Estates, IL 60192 (847) 765-1100
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

 

Brendan McKeough Executive Vice President, General Counsel & Secretary Claire’s Holdings LLC 2400 West Central Road Hoffman Estates, IL 60192 (847) 765-4319

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

 

Copies to:
John B. Meade, Esq. Pedro J. Bermeo, Esq. Davis Polk & Wardwell LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4000		Craig E. Marcus, Esq. Ropes & Gray LLP Prudential Tower Boston, Massachusetts 02199 (617) 951-7000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐                 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐                 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐                 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐				Accelerated filer		☐
Non-accelerated filer		☒				Smaller reporting company		☐
						Emerging growth company		☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

EXPLANATORY NOTE

Claire’s Holdings LLC, the registrant whose name appears on the cover of this registration statement, is a Delaware limited liability company. Prior to the effectiveness of this registration statement, Claire’s Holdings LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to Claire’s Inc. as described in the section captioned “Corporate Conversion” of the accompanying prospectus. Except as disclosed in the prospectus, the historical consolidated financial statements and selected historical consolidated financial data and other financial information included in this registration statement are those of Claire’s Holdings LLC, and do not give effect to the Corporate Conversion. Shares of the common stock of Claire’s Inc. are being offered by the prospectus included in this registration statement.

 

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED AUGUST 22, 2022

PRELIMINARY PROSPECTUS

                 Shares

 

Claire’s Inc.

Common Stock

 

 

This is the initial public offering of shares of common stock of Claire’s Inc.

We are offering                  shares of common stock in this offering, and if the underwriters exercise their option to purchase additional shares of common stock, we will sell up to                  additional shares of common stock and the selling stockholders identified in this prospectus will sell up to                  additional shares of common stock. We will not receive any proceeds from any sale of shares of common stock by the selling stockholders pursuant to the underwriters’ option to purchase additional shares. Prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price will be between $             and $             per share. We have applied to list our common stock on the New York Stock Exchange under the symbol “CLRS”.

After giving effect to the Corporate Conversion (as defined in this prospectus), and the completion of this offering, affiliates of each of Elliott Investment Management L.P. (together with its affiliates, “Elliott”) and Monarch Alternative Capital LP (“Monarch”) will control approximately     % and     %, respectively, of the outstanding voting power of our company (assuming no exercise of the underwriters’ option to purchase additional shares of common stock from us or the selling stockholders). As such, each of Elliott and Monarch may individually have the ability to exercise significant influence over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, and may have interests that may not align with the interests of each other or of our other stockholders. See “Risk Factors—Risks related to our common stock and this offering—Affiliates of each of Elliott Investment Management L.P. and Monarch Alternative Capital LP may each continue to have significant influence over us after this offering, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.”

The underwriters have a 30-day option to purchase up to                  additional shares of common stock from us and up to                  additional shares of common stock from the selling stockholders at the initial public offering price, less the underwriting discounts and commissions.

 

Price to Public

Underwriting Discounts and Commissions(1)

Proceeds before Expenses, to Us(2)

Proceeds before Expenses, to the Selling Stockholders(3)

Per Share

$

$

$

$

Total

$

$

$

$

 

(1)	See “Underwriting (Conflicts of Interest)” for a description of all compensation payable to the underwriters.

(2)	Assumes no exercise of the underwriters’ option to purchase additional shares of common stock from us.

(3)	Assumes the exercise in full of the underwriters’ option to purchase                  additional shares of common stock from the selling stockholders.

 

 

Investing in our common stock involves risks.

See “Risk Factors” beginning on page 26.

We will be treated as an “emerging growth company,” as defined under the federal securities laws, for certain purposes until we complete this offering, and, as such, may elect, and have elected in this prospectus, to comply with certain reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

The underwriters expect to deliver the shares on or about                , 2022.

Joint Book-Running Managers

 

Goldman Sachs & Co. LLC		Citigroup

 

Cowen		Guggenheim Securities		Piper Sandler		Telsey Advisory Group

Co-Manager

Siebert Williams Shank

 

 

Prospectus dated                    , 2022

claire’s

 

 

TABLE OF CONTENTS

 

 

 

		Page
Prospectus Summary			1
The Offering			18
Summary Historical Consolidated Financial and Other Data			21
Risk Factors			26
Special Note Regarding Forward-Looking Statements			57
Use of Proceeds			59
Dividend Policy			60
Corporate Conversion			61
Capitalization			65
Dilution			67
Management’s Discussion and Analysis of Financial Condition and Results of Operations			70
Business			98
Management			117
Executive Compensation			124
Certain Relationships and Related Party Transactions			142
Principal and Selling Stockholders			144
Description of Capital Stock			148
Material U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock			155
Shares Eligible For Future Sale			158
Underwriting (Conflicts of Interest)			160
Legal Matters			168
Experts			168
Where You Can Find More Information			168
Index To Consolidated Financial Statements			F-1

Unless otherwise indicated, references in this prospectus to “Claire’s,” “our company,” “we,” “our” and “us,” or like terms, refer, prior to the Corporate Conversion discussed elsewhere in this prospectus, to Claire’s Holdings LLC, a Delaware limited liability company and its consolidated subsidiaries, and, after the Corporate Conversion, to Claire’s Inc., a Delaware corporation and its subsidiaries. Neither we, the selling stockholders nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders nor the underwriters take any responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the shares of common stock.

No action is being taken in any jurisdiction outside the United States to permit a public offering of common stock. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restriction as to this offering and the distribution of this prospectus applicable to those jurisdictions.

 

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Market Share and Other Information

This prospectus includes certain market, statistical and industry data and forecasts. Although we are responsible for all of the disclosure contained in this prospectus, in some cases we rely on and refer to market, statistical and industry data, estimates and forecasts that were obtained from third-party surveys, market research, consultant surveys, publicly available information and industry publications and surveys that we believe to be reliable. Unless otherwise indicated, all market, statistical and industry data and forecasts contained in this prospectus are based on independent industry publications, government publications, reports by market research firms or other independent sources and other externally obtained data, such as Green Street Advisors, Euromonitor International Limited and The Morning Consult LLC, that we believe to be reliable. Some market and industry data, and statistical information and forecasts, are also based on management’s estimates, which are derived from our review of internal surveys as well as the independent sources referred to above. Any such market data, information or forecast may prove to be inaccurate because of the method by which we obtain it or because it cannot always be verified with complete certainty given the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties, including those discussed under the caption “Risk Factors.” As a result, although we believe that these sources are reliable, we have not independently verified the information.

Trademarks and Trade Names

We own or have rights to trademarks, service marks and trade names that we use in connection with the operation of our business. Other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners. Solely for convenience, some of the trademarks, service marks and trade names referred to in this prospectus are listed without the ^® or ^™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, service marks and trade names.

Presentation of Financial Information

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. References to “fiscal year” mean the year in which that fiscal year began. For example, references to “fiscal year 2021,” “fiscal year 2020” and “fiscal year 2019” relate to our fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020, respectively.

We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that precede them. As used in this prospectus, unless the context otherwise requires, references to “U.S. dollars,” “dollars,” “U.S. $” and “$” are to the lawful currency of the United States of America.    

This prospectus contains “non-GAAP financial measures,” which are financial measures that are not calculated and presented in accordance with U.S. generally accepted accounting principles (“GAAP”). See “Summary Historical Consolidated Financial and Other Data—Non-GAAP Financial Measures.”

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. These risks include, but are not limited to, those described below, each of which may be relevant to an investment decision. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included elsewhere in this prospectus, before deciding whether to invest in shares of our common stock. If any of the following risks or other risks actually occur, our business, financial condition, results of operations and future prospects could be materially harmed. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risks related to our business and industry

The COVID-19 pandemic has had a significant adverse impact on our business and could continue to adversely impact our business, financial condition, results of operations and cash flows.

As a result of reduced consumer traffic at our retail locations in fiscal years 2020 and 2021, due to store or concession closures, government-imposed restrictions to contain the spread of COVID-19 and public health concern generally, the Company’s sales in those periods were significantly adversely impacted. Though we cannot estimate the precise impact of the COVID-19 pandemic on our results of operations, we note that net sales, gross profit and operating income (loss) were $1,394.7 million, $809.1 million, and $170.7 million, respectively, in fiscal year 2021, compared to $910.3 million, $444.2 million and $(9.4) million, respectively, in fiscal year 2020, compared to $1,284.5 million, $690.2 million and $148.4 million, respectively, in fiscal year 2019. In addition, segment net sales for North America and Europe were $1,107.1 million and $377.6 million, respectively, in fiscal year 2021, compared to $621.9 million and $288.4 million, respectively, in fiscal year 2020, compared to $831.5 million and $453.0 million, respectively, in fiscal year 2019. Segment operating income (loss) for North America and Europe were $160.0 million and $10.7 million, respectively, in fiscal year 2021, compared to $20.8 million and $(30.2) million, respectively, in fiscal year 2020, compared to $110.9 million and $37.4 million, respectively, in fiscal year 2019. We believe that these reductions in net sales, gross profit, operating income (loss) and segment operating income (loss) during fiscal year 2020 were largely attributable to the impact of COVID-19, in particular due to the temporary closure of all of our stores during March 2020 to May 2020, which resulted in no revenues generated at our stores during such period. We also believe our net sales, gross profit, operating income (loss) and segment operating income (loss) continued to be adversely affected by COVID-19, particularly in Europe, in fiscal year 2021. For example, as of January 30, 2021, 53 and 568 of our stores were still temporarily closed in North America and Europe, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19.”

Although we have re-opened all of our stores (including store-in-store locations), consistent with government guidelines, and have resumed sales at all of our concessions locations, there remains uncertainty around expected consumer traffic generally, as a result of new information that may emerge concerning the severity of COVID-19, the impact of new variants and sub-variants of COVID-19, the adoption of vaccines, the effectiveness of vaccines against new variants and sub-variants of COVID-19, the potential for renewed government restrictions (for example, relating to social distancing, which could affect consumer traffic and our ability to provide piercing services) and general consumer behavior. Further, while we have implemented strict safety protocols in stores, there is no assurance that such protocols will be effective or be perceived as effective, and any virus-related illnesses linked or alleged to be linked to our stores, whether accurate or not, may negatively affect the willingness of consumers to visit our stores. If consumer traffic fails to return to pre-pandemic levels or there are fluctuations in consumer traffic, our sales may be negatively affected. Such negative impacts may be exacerbated during traditionally peak consumer traffic periods such as the holiday shopping season.

 

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In addition, if there are further outbreaks of COVID-19 variants or spikes in the number of COVID-19 cases in areas where we operate stores, our employees could become sick or need to be quarantined, or may otherwise be limited in their ability or willingness to work at our locations or travel. Should our stores not have an adequate number of employees, we may be forced to close temporarily, operate on a limited opening schedule, or provide increased wages or incentives in order to attract and retain employees.

The COVID-19 pandemic has also impacted the Company’s global supply chain, primarily through increases in the cost of shipping and distribution (especially for products shipped from Asia to North America and Europe) as a result of impacts on global shipping. These higher costs could continue or increase further. In addition, we have experienced increases in transportation and distribution lead times as a result of shipping fleet congestion at ports of entry, resulting in our having to increase our use of more expensive air freight options from time to time. We discuss the impact of higher cost of shipping and distribution on the Company further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Macroeconomic conditions.” We may need to continue utilizing higher levels of air freight. Also, in the event of future restrictions on the operation of any of the facilities that produce our merchandise, most of which are located in China, we may not be able to source additional facilities to meet our demand. Moreover, should our distribution centers not have adequate numbers of employees due to ill health or have their operations restricted, our stores may face shortages of merchandise.

As the COVID-19 pandemic subsides, the pace of the economic recovery and shifts in consumer discretionary spending to other categories such as travel and restaurants may negatively impact the Company’s results of operations or cash flows. We are also subject to the risk of being unable to negotiate rent suspensions with landlords in the event of future store closures. As such, the full extent of the impact of COVID-19 on the Company’s business and financial performance remains uncertain.

To the extent that COVID-19 has affected and continues to adversely affect the global economy, our business, financial condition, results of operations or cash flows, it has heightened, and may continue to heighten, other risks described within this “Risk Factors” section.

Our success depends on our ability to maintain, enhance and protect the value and goodwill of our brands.

The Claire’s^® and Icing^® brands and associated goodwill are integral to our business, as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brands depends largely on our ability to provide a consistent, enjoyable and quality customer experience and the success of our design, merchandising and marketing efforts. Our brands could be adversely affected if we fail to achieve any of these objectives for our brands, which in turn could negatively impact sales and have a material adverse effect on our business, financial condition and results of operations. Our brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result in litigation. Some of these incidents may relate to actions taken (or not taken) with respect to societal and environmental matters, the personal conduct of individuals associated or perceived to be associated with our brands, the way we manage our relationship with our suppliers, customers, distributors, employees and business partners, our development efforts in existing and new markets or the actions of our franchisees, vendors, licensees or licensors.

Although we maintain policies with our employees, vendors and licensees that promote ethical business practices, and our employees, agents and third-party compliance auditors periodically visit and monitor the operations of the facilities that manufacture our products, we do not control our vendors, independent manufacturers or licensees or their practices. A violation of our vendor policies, license agreements, health and safety standards, product quality standards, labor laws, anti-bribery laws, or other policies or laws by employees, vendors, independent manufacturers, franchisees or licensees could

 

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damage the image and reputation of our brands. Our brands may also be damaged as a result of events that are, or may be, beyond our control, such as actions taken (or not taken) by one or more of our franchisees, licensees or business partners or their employees or subcontractors relating to any of the following: customer service, health, safety, welfare, social justice, political activism or otherwise; litigation and legal claims; security breaches or other fraudulent activities that could affect our and our franchisees’ information and electronic payment systems; illegal activity targeted at us or others; and conduct by individuals associated with us that could violate ethical standards or dilute, tarnish or otherwise adversely affect the reputation of our brands. Customer demand for our products and services and our brands’ value could diminish significantly if any such incidents or other matters erode customer confidence in or goodwill for us or our products and services, which would likely materially and adversely affect our business, financial condition and results of operations.

In addition, if any third party copies our brand designs, products or our stores in a manner than projects lesser quality or carries a negative connotation, uses trademarks that are identical or similar to our trademarks, or otherwise misappropriates, dilutes, infringes or violates our intellectual property rights, it could lead to market confusion, loss of competitive advantage and lost sales, and have a material adverse effect on our brand image and results of operations. Any negative publicity or market confusion regarding us or our brands, services or products could adversely affect our reputation and sales. There can be no assurance that our brand image will not be negatively affected through its association with products, services or actions of our licensees, vendors or other third parties.

We may suffer material adverse business consequences if we are unable to anticipate, identify and respond to merchandise, marketing and promotional trends or consumer shopping patterns and successfully maintain proper merchandise assortment. Profitability and our reputation could be materially negatively impacted if we do not adequately forecast the demand for our products and, as a result, create significant levels of excess inventory or insufficient levels of inventory.

The retail fashion jewelry and accessories business is subject to rapidly changing fashion trends and shifting consumer preferences. Our success depends, in large part, on our ability to anticipate and respond to such changes in a timely manner, keeping our customers engaged and interested in our merchandise. We also aim to maintain a diverse merchandise assortment with a relatively tight inventory of each product, especially with respect to on-trend products. Among other things, we believe that this strategy creates a constant sense of newness, which drives repeat store, e-commerce or concession visits and increased sales and also helps us to reduce markdowns. We make decisions for the purchase and manufacture of merchandise with our suppliers up to 12 months in advance, and sometimes before trends are identified or evidenced by consumer purchases. In addition, the periodic nature of the retail business requires us to carry a significant amount of inventory, especially prior to peak selling periods (such as the year-end holiday season, back-to-school periods, Easter, spring break, Halloween, St. Patrick’s Day and the Fourth of July), when we generally build up inventory levels of specialized merchandise. As a result, it can be difficult for us to respond to new or changing consumer needs and there can be no assurance that we will be able to continue to stock our stores (including store-in-store locations) and concession locations adequately and with sufficient merchandise assortment levels. It is also difficult for us to accurately forecast proper merchandise levels at our new concessions locations, where we may not have historical purchase information to leverage in forecasting demand for each location. Further, we are in the process of implementing new merchandising technology systems that will change the way we allocate products to our stores (including store-in-store locations) and concession locations. Any failure to successfully implement these systems could limit, disrupt or weaken our ability to forecast merchandise levels appropriately. In addition, some of our products involve intellectual property we license from third parties; any failure to license or renew our licenses for on-trend products could negatively affect our sales.

 

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If we are unable to anticipate, identify or react to changing styles or trends or consumer purchasing habits, or if we are unable to successfully offer proper merchandise assortment levels due to inaccurate forecasts or otherwise, consumers may choose to visit our stores (including store-in-store locations), concessions locations or e-commerce websites less frequently, our brands could be impaired, our relationships with our store-in-store and concessions partners could be harmed, our market share may decline and our results of operations could deteriorate. Further, any failure to maintain proper merchandise assortment levels could lead to excess inventories, which could lead to markdowns and increased marked out-of-stock charges and promotions, resulting in a decrease in our merchandise margins. On the other hand, if we forecast demand for our products that is lower than actual demand, we may experience insufficient levels of inventory and increased costs to fulfill demand, and our brand image may also suffer.

Our ability to recruit, train, motivate and retain suitably qualified store associates, distribution center workers and other employees could adversely impact sales and earnings.

The customer experience and timely distribution of our products are essential elements in the success of our business. From time to time, including recently, we have incurred higher wage rates for our employees due to a number of factors, any of which could require us to incur higher wage rates in the future, including: competition for suitable store associates, distribution center workers or other employees; wage pressures; high turnover; or changes in unemployment, immigration, labor or healthcare laws (in particular, in California, where approximately 8% of our North America associates are based; in Europe, where employment relationships are subject to more regulation compared to other jurisdictions in which we operate; and in the United Kingdom, which has a reduced labor pool as a result of Brexit). In particular, as a result of recent employment market trends, it has been more difficult for us to attract and retain employees globally, including because of factors such as increased market competition, enhanced government benefits and stimulus payments as well as concerns around the safety of returning to work, which in turn increases wage and incentives pressures. A shortage of qualified individuals or higher wage rates has resulted and could in the future result in disruptions to the performance of store or other associates or the timely delivery of our products, which in turn could adversely impact our business, financial condition and results of operations. We discuss the impact of higher wage rates on the Company further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Macroeconomic conditions.”

The failure to grow our store (including store-in-store) and concessions businesses or grow our digital business may adversely affect our business.

Our growth strategies include expanding our store (including store-in-store) and concessions businesses in both North America and Europe. In particular, our target is to open between 180 and 220 net-new store locations (the number of expected new store locations, less the number of expected closures of store locations) globally in fiscal year 2022; and with respect to concessions, we plan to continue to grow our concessions partnerships. Our ability to accomplish our growth targets in North America and Europe depends in part on our ability to identify appropriate store locations and negotiate acceptable terms in our store leases and store-in-store and concessions agreements that meet our operating budgets and accomplish appropriate returns on investment.

Further expanding our digital presence, including to additional countries where we currently have a retail store presence but where our e-commerce presence is not customized to the local market, is part of our growth strategy. However, we are vulnerable to certain risks and uncertainties specific to our digital and e-commerce strategy. These include changes in third party marketplace business models, rapid changes in technology, diversion of sales from our store and concessions businesses, customers’ acceptance of the shipping times from our two distribution centers, website downtime and other technical failures, changes in state tax regimes and government regulation of internet activities.

Our failure to successfully respond to these risks and uncertainties could reduce our e-commerce sales, increase our costs, diminish our growth prospects, and damage our brand, which in turn could negatively impact our business, financial condition and results of operations.

 

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A decline in the number of people who go to shopping malls, especially those where we experience high sales volumes, could reduce the number of our consumers and reduce our net sales.

A majority of our stores are currently located in traditional shopping malls. Our sales are derived, in part, from the volume of traffic at those malls. We benefit from the ability of the shopping malls’ “anchor” tenants (generally large department stores) and other area attractions, as well as tourism in certain locations, to generate consumer traffic around our stores. We also benefit from the popularity of shopping malls as shopping destinations. Sales volume and consumer traffic is likely to be adversely affected by economic downturns in a particular area, competition from non-shopping mall retailers (including e-commerce businesses) and other shopping malls where we do not have stores and the closing of anchor tenants in a particular shopping mall. In addition, a decline in the popularity of shopping malls (especially popular shopping malls that typically benefit from high traffic volume) among our core consumers may curtail consumer visits, which in turn could result in decreased sales in our stores and result in a material adverse effect on our business, financial condition and results of operations.

We source a substantial majority of our products through production arrangements in Asia.

We source a substantial majority of our products through a network of vendors that is principally coordinated by our Hong Kong sourcing office. These vendors in turn rely on a number of production facilities, primarily in China. Our global supply chain could be negatively affected due to a number of factors, including:

 

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global or regional public health crises, such as the COVID-19 pandemic, including governmental measures taken in response, which continues to have an adverse effect on our sourcing operations, particularly in China and the rest of Asia and has slowed our ability to source new suppliers and import products into North America and Europe, and may continue to do so in the future;

 

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political instability, war or other global events, including actions taken by governments or others in response to such events, resulting in the disruption of operations or trade in or with countries from which we source our products;

 

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increased costs of raw materials, labor, fuel and transportation;

 

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interruptions in the supply of raw materials, including precious and non-precious metals, plastics, cotton, nylon, polyester and trim items;

 

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financial instability, including bankruptcy or insolvency, of one or more of our major vendors or their manufacturers;

 

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increases in the cost of labor in our sourcing locations;

 

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changes in the customs procedures concerning the importation of the products we sell;

 

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changes in laws concerning supply sources, supply chain transparency, labor and human rights;

 

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unforeseen delays in customs clearance of any goods and merchandise;

 

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the inability to protect our intellectual property;

 

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the ability of our vendors to secure sufficient credit to finance the manufacturing process, including the acquisition of raw materials;

 

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our ability to successfully pursue indemnification claims in the event we seek indemnification from our vendors;

 

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potential consumer concerns about our use of international vendors and independent manufacturers over whom we have limited to no control, including concerns about supply chain transparency and responsible sourcing;

 

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•

manufacturing delays or unexpected demand for products that may increase the need to use faster, but more expensive, transportation methods, such as air-freight services, including because of the COVID-19 pandemic or our failure to accurately forecast demand for certain products; and

 

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other events beyond our control that could interrupt our supply chain and delay receipt of our products into North America and Europe.

The occurrence of one or more of these events could result in disruptions to our sourcing operations, which in turn could negatively impact our sales or result in higher cost of goods sold, thereby negatively impacting our results of operations.

Our ability to source our merchandise efficiently and cost effectively could be negatively impacted if new trade restrictions are imposed, existing trade restrictions become more burdensome or relationships with manufacturers are impaired or terminated.

We do not own or operate the manufacturing facilities that produce our products. We source a substantial majority of our products through vendors that in turn rely on a number of production facilities, primarily in China. Most of our merchandise (including the raw materials used in our merchandise) is subject to trade restrictions, including tariffs, safeguards or quotas, changes to which could increase the cost or reduce the supply of merchandise available to us. These and other trade restrictions have had in the past, and could have again, an impact on our and our vendors’ sourcing patterns. The extent of this impact, if any, and the possible effect on our purchasing patterns and costs, cannot be determined at this time. We cannot predict whether any of the countries in which our or our vendors’ merchandise is currently manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by governmental authorities, nor can we predict the likelihood, type or effect of any restrictions. Trade restrictions, including increased tariffs or quotas, embargoes, safeguards and customs restrictions against items we offer, as well as labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of merchandise to our vendors, and we would expect the costs to be passed along in increased prices to us, which could negatively impact our sales or profitability. Further, we do not own all of the intellectual property in the products produced by all of our manufacturers. If our relationship with a manufacturer is impaired or terminated for any reason, we may not have the ability to source identical products from another manufacturer, which may result in loss of sales or competitive advantage or increased costs to develop new products.

Negative publicity that is accelerated by social media or emergent forms of communication and our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could materially adversely impact our brand and business.

There has been a marked increase in the use of social media platforms, including social media platforms (such as TikTok, Facebook, Snapchat, Twitter and Instagram) and other forms of internet-based communications that allow individuals access to a broad audience of consumers and other interested persons. We use such third party social media platforms as, among other things, marketing tools, and we also maintain relationships with many social media influencers. The rising popularity of social media and other consumer-oriented technologies has increased the speed and accessibility of information dissemination and given users the ability to more effectively organize collective actions, such as boycotts and other brand-damaging events. Many, if not all, social media platforms immediately publish their participants’ posts, often without filters or checks on the accuracy of the content posted. Any negative or potentially damaging social media content (especially if it goes “viral”), regardless of the content’s accuracy or our efforts to respond, could damage our reputation, which in turn could harm our business, prospects, financial condition and results of operations. The harm may be immediate without affording us an opportunity for redress or correction.

 

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Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about our business, exposure of personally identifiable information, out-of-date information, fraud, hoaxes, or malicious dissemination of false information and negative comments relating to actions taken (or not taken) with respect to societal or environmental issues. Furthermore, the use of social media by social media influencers, our customers, employees, vendors, franchisees or other individuals and entities associated with our brand in a negative or damaging way could increase our costs, lead to litigation or result in negative publicity that could damage our reputation and brand and adversely and negatively impact our financial condition and results of operations. This adverse impact may occur whether or not we are directly related to, or otherwise control, the subject matter of the social media attention. Even the mere perception of our involvement could dilute or tarnish or otherwise adversely affect our reputation and brand and could contribute to diminished financial performance.

In addition, we use social media to communicate with consumers and the public in general. Failure to use social media effectively could lead to a decline in our brand value and revenue. Laws, regulations and enforcement actions, including by the U.S. Federal Trade Commission (“FTC”), rapidly evolve to govern social media platforms and communications. For example, the FTC has sought enforcement action where an endorsement has failed to clearly and conspicuously disclose a financial relationship or material connection between influencer and an advertiser. Although we do not prescribe what our influencers post, we may be held responsible for the content of their posts or their actions. The failure by us, our employees, our franchisees, our brand ambassadors or third parties acting at our direction, to abide by applicable laws and regulations in the use of social media could adversely impact our brand, reputation, financial condition and results of operations or subject us to fines or other penalties.

Our industry is highly competitive and failure to effectively compete could have a negative impact on our business.

The jewelry and accessories retail business is highly competitive. We compete with international, national and local department stores, specialty and discount store chains, mass merchants, independent retail stores, e-commerce services, direct marketing to consumers and catalog businesses that market similar lines of merchandise. Many of our competitors are companies with substantially greater financial, marketing and other resources. As a result, these competitors may be able to adapt to changes in consumer trends more quickly, take advantage of acquisitions and other opportunities more readily, devote greater resources to their e-commerce activities and the marketing and sale of their products, and adopt more aggressive pricing strategies than we can.

Some competitors offer or may in the future decide to offer piercing services, which are an important differentiator in our stores and our customers’ shopping experience. If any of our piercing competitors take market share from us or disrupt our efforts to grow our piercing business, this could result in a reduction of any competitive advantage or special appeal that we possess as a leading retail piercing destination and negatively impact our sales.

Although we operate an e-commerce business, the majority of our sales are made in stores or concessions locations. As such, significant shifts in consumer buying patterns to purchasing fashionable jewelry and accessories at affordable prices through online or e-commerce channels could have a material adverse effect on our financial results. Many of our competitors have e-commerce businesses that are substantially larger and more developed than ours, which may place us at a competitive disadvantage. If we are unable to further expand our e-commerce business in response to competitive needs, our sales could decline, or we may need to increase our investments in our e-commerce business, which in turn could cause our profitability to decrease.

 

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If we encounter problems with distribution, our ability to deliver our products to market could be adversely affected.

We rely on distribution centers to warehouse and ship products to our company-operated stores, franchised stores and concessions locations and e-commerce consumers throughout the world. We handle merchandise distribution for all of our retail locations in North America from a distribution center in a suburb of Chicago, Illinois that we lease and operate. We handle merchandise distribution for all of our Europe operations from a distribution center in Birmingham, United Kingdom that we lease and a third party operates on our behalf. We handle merchandise distribution for all of our international franchised operations from a distribution center in Hong Kong that we also lease and operate.

Reliance on a single distribution center for each of our major markets means that our supply of stores in that market is dependent upon the continued and optimal operation of that distribution center. Any failure to operate the respective distribution centers at required levels or any failure to source our merchandise efficiently and cost effectively from such distribution centers (for example, due to new or more burdensome trade restrictions, the ongoing COVID-19 pandemic or our ability to negotiate leases on favorable terms or at all) could negatively impact our ability to supply their respective markets. For example, as our concessions business continues to expand, our distribution center in the United Kingdom may not have the capacity to operate at the levels required to handle increased product volumes. Although we expect to open an additional distribution center in Europe, a failure by us to secure any additional distribution center capacity that may be required could limit our ability to expand our business in Europe or elsewhere. Further, in connection with opening a new distribution center and migrating some operations to a new distribution center, we may suffer disruptions in our distribution center operations. In addition, distribution capacity is dependent on the timely performance of services by third parties, including the transportation of products to and from their distribution centers, which also may be adversely affected by work stoppages (including due to labor disputes) or disruption (including due to fires, floods or other calamities). If we encounter problems with our distribution centers, our ability to meet customer and consumer expectations, manage inventory, complete sales and achieve operating efficiencies could be adversely affected.

Moreover, the uncertainty with respect to the movement of goods between the United Kingdom and the European Union following the United Kingdom’s leaving the European Union on January 31, 2020 (“Brexit”) has negatively impacted, and may continue to negatively impact, our ability to distribute products from the United Kingdom to member states of the European Union. Our merchandise that is distributed from our distribution center in the United Kingdom to member states is subject to both UK and EU laws and regulations which may have differing and potentially conflicting requirements. For example, we have experienced temporary delays in distributing certain product categories from the United Kingdom to certain European Union countries due to new documentation requirements and have incurred additional tariff costs of approximately $0.5 million in the first six months following Brexit. While we have established specialized distribution arrangements to mitigate the impacts of Brexit, incurring costs of approximately $1 million, there can be no assurance that we will not experience further distribution delays or costs, which may have a material adverse effect on our business, financial condition and results of operations.

Our concessions and store-in-store locations are operated under agreements that are subject to revocation or modification, and the loss of concessions or store-in-store arrangements could negatively affect our business, financial condition and results of operations.

We conduct business through concessions and/or store-in-store arrangements with mass, grocery, drug, toy, apparel, department store and specialty retailers and we expect to pursue growth through an increased focus on these channels. The retailers with whom we enter into these arrangements are generally able to revoke these contracts at will (subject to reimbursing us, in certain cases with respect to certain store-in-store locations, for amortized capital expenditures) by terminating the applicable

 

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agreement upon notice. Certain of our concessions and store-in-store arrangements may also be terminated early by our retailers in certain default scenarios, including, among others, failure to pay rent when due and payable (if we are otherwise unable to negotiate work-outs with our landlords) and failure to open our locations according to the retailers’ hours of operations (in each case, to certain exceptions). The loss or modification of our concessions and store-in-store arrangements could have a material adverse impact on our business, financial condition and results of operations.

We have changed our executive team significantly since 2019, and if we lose key members of our executive team or are unable to integrate, attract and retain the executives and key personnel we need to support our operations and growth, our business and future growth prospects may be harmed.

Since 2019, we have made a number of key additions to our executive leadership team, including Ryan Vero, our Chief Executive Officer who joined us in July 2019 and Michael Schwindle, our Executive Vice President, Chief Financial Officer who joined us in March 2020. The continued integration of these executives and other new members of our executive team will be critical to our success.

In addition, any potential inability to attract and retain key personnel, or delays in hiring, including due to the COVID-19 pandemic or labor shortages, may seriously harm our business, financial condition and results of operations. We cannot be sure that we will be able to attract and retain a sufficient number of executives and key personnel in future periods. Competition is intense for qualified personnel in the retail industry and the loss of any executives or other key personnel or an inability to attract, hire, retain and motivate additional key personnel required for the operation and expansion of our business could hinder our ability to develop and sell our products.

The loss of any member of our executive team could significantly delay or prevent us from achieving our business and/or growth objectives, and could materially harm our business.

If we are unable to renew or replace our distribution center and store leases, or enter into leases for new distribution centers or stores on favorable terms, or if our current leases are terminated prior to the expiration of their stated term and we cannot find suitable alternate locations, our growth and profitability could be adversely affected.

Our three distribution centers and all of our stores are leased. Our ability to renew expired leases or, if such leases cannot be renewed, to lease suitable alternate locations, and to enter into leases for new distribution centers or stores on favorable terms or at all depends on many factors, many of which are not within our control, including conditions in the local real estate market, competition for desirable properties, our relationships with current and prospective landlords, and the ability to negotiate acceptable lease terms that meet our financial targets and other business needs. If we are unable to renew existing leases (for example, due to a shopping mall closure or due to a landlord choosing to lease its property to other tenants that want to enter into longer leases or rent larger spaces) or lease suitable alternate locations or enter into leases for new distribution centers or stores on favorable terms or at all, our growth and profitability could be materially adversely affected. In addition, from time to time, particularly in response to the ongoing COVID-19 pandemic, we may seek to renegotiate existing lease terms or relocate our stores, or close some of our stores, which in most cases requires a modification of an existing lease. Failure to secure favorable, modified lease terms in such situations could have a material adverse effect on our results of operations.

Additionally, the broader economic environment may at times make it difficult to ascertain the fair market value of retail real estate. For example, the COVID-19 pandemic has created uncertainty in the market value of some retail real estate. This type of uncertainty may result in us exercising lease

 

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options at previously negotiated rents, renewing expiring leases or entering into new leases, in each case at above-market rental rates, which could have an adverse effect on our results of operations.

Fluctuations in foreign currency exchange rates could negatively impact our results of operations.

Although substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars, our sourcing operations may be adversely affected by significant fluctuation in the value of the U.S. dollar against foreign currencies. We are also exposed to the gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our consolidated financial statements due to the translation of results of operations and financial position of our foreign subsidiaries. We purchased approximately 60% of our merchandise from China in fiscal 2021. During fiscal 2021, the Chinese yuan strengthened against the United States dollar. An increase in the Chinese yuan against the dollar means that we will have to pay more in United States dollars for our purchases from China. If we are unable to negotiate commensurate price decreases from our Chinese suppliers, these higher prices would eventually translate into higher costs of sales, which could have a material adverse effect on our results of operations.

In addition, our European businesses operate utilizing several different European currencies, the most common of which is the euro. All sales and operating costs within our Europe segment are denominated in the local currency. During fiscal 2021, over a quarter of our consolidated revenues were derived from our Europe segment. As a result, changes in exchange rates between the U.S. dollar and other European currencies (and in particular, the euro) may negatively affect our revenues and other operating results as expressed in U.S. dollars in the future.

Macroeconomic conditions may adversely impact levels of consumer spending, which could adversely impact our business, financial condition, results of operations and cash flows.

Consumer purchases of discretionary items, including our merchandise and services, generally decline during recessionary periods and other periods where disposable income is negatively affected. Some of the factors impacting discretionary consumer spending include general economic conditions, wages and employment, inflation, consumer debt, the availability of consumer credit, currency exchange rates, taxation, fuel and energy prices, interest rates, consumer confidence and other macroeconomic factors. Any future economic downturn could adversely impact our results of operations and continued growth. Economic conditions have in the past created pressure on us and similar retailers to increase promotions and discounts, which can have a negative impact on our business, financial condition, results of operations and cash flows.

As a result of impacts of the COVID-19 pandemic on global shipping and recent employment market trends, we have experienced increases in the cost of shipping and distribution (especially for products shipped from Asia to North America and Europe) and higher wage rates for our employees, respectively. We discuss these impacts on the Company further under “—Risks related to our business and industry—The COVID-19 pandemic has had a significant adverse impact on our business and could continue to adversely impact our business, financial condition, results of operations and cash flows,” “—Risks related to our business and industry—Our ability to recruit, train, motivate and retain suitably qualified store associates, distribution center workers and other employees could adversely impact sales and earnings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Macroeconomic conditions.”

Litigation matters and regulatory enforcement actions relating to our business could be adversely determined against us or otherwise distract management from our business activities and result in significant liability or damage to our brands.

We are involved from time to time in litigation and regulatory enforcement actions relating to our business, which may include class actions involving consumers or employees, claims relating to

 

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employees, commercial disputes, advertising practices, landlord-tenant disputes, intellectual property, claims arising from our piercing services, allegations arising from product safety, product liability and personal injury claims and regulatory enforcement actions (such as inspections of our stores for compliance with health, safety and consumer protection laws). Actions and claims can raise complex factual and legal issues that are subject to risks and uncertainties, could require significant management time or harm our reputation, and could cause the Company to incur significant legal fees.

Depending on the actual outcome of pending litigation or regulatory enforcement actions, fees, settlements, damage awards and other charges could be recorded in the future, and/or we may be enjoined from carrying out our business in certain ways. Any of the foregoing could have a material adverse effect on our results of operations and our reputation.

Natural disasters or unusually adverse weather conditions, public health crises, political crises and other catastrophic events or other events outside of our control could adversely affect our net sales or supply of inventory.

Natural disasters, such as hurricanes, earthquakes, tsunamis, power shortages or outages, or floods; public health crises, such as pandemics and epidemics (including the ongoing COVID-19 pandemic); social unrest; political crises, such as terrorism, war, political instability or other conflict; industrial accidents, such as structural integrity failure or fire; or other events outside of our control, could damage or destroy our stores or our products at our concessions locations, make it difficult for our employees or customers to travel to these sites, result in delays or disruptions in the production and/or delivery of merchandise to our distribution centers or our sales locations or in the fulfillment of e-commerce orders to our consumers, or require us to incur substantial additional costs, including in air freight, to ensure timely delivery. Disasters occurring at our stores, concessions locations, distribution centers or our manufacturers’ facilities also could impact our reputation and our consumers’ perception of our brands. Moreover, these types of events could negatively impact consumer spending in the impacted regions or, depending upon the severity, globally, which could adversely impact our operating results. In addition, our operations depend on our ability to maintain and protect the computer systems we use to manage our business, including systems related to purchase orders, demand planning, web applications, accounting functions, and other critical aspects of our business. Our systems are vulnerable to damage from natural disasters, power loss, telecommunications failures, terrorist and cyber-attacks and similar events. Our disaster recovery planning may not be sufficient to respond adequately to any such events. Moreover, for locations where we believe the impact of a loss event in any given location would not be significant, we have chosen to self-insure. As a result, our stores in North America are generally self-insured, whereas corporate and distribution locations are insured, as are most of our stores in Europe. There can be no assurance that we have adequate insurance to cover losses at any of our stores or our distribution centers.

Our business depends on the willingness of vendors and service providers to supply us with goods and services pursuant to customary credit arrangements that may not be available to us in the future.

We purchase goods and services from vendors pursuant to credit arrangements customary for the industry. If we are unable to maintain or obtain trade credit from vendors and service providers on terms favorable to us, or at all, or if vendors and service providers are unable to obtain trade credit or factor their receivables, then we may not be able to rely upon our vendors for expedient services, which may negatively impact our ability to execute our business plan, develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could result in a material adverse effect on our business, financial position and results of operations.

 

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Some of our European workforce is covered by collective bargaining agreements, national collective agreements and/or works councils, and our business could be harmed in the event of a prolonged work stoppage.

Approximately 45% of our employees in Europe are covered by collective bargaining agreements, national collective agreements and/or works councils. If we encounter difficulties with renegotiations or renewals of collective bargaining arrangements and/or national collective agreements or are unsuccessful in those efforts, we could incur additional costs and experience work stoppages. We cannot predict how stable our union relationships will be or whether we will be able to successfully negotiate successor collective bargaining agreements without impacting our financial condition. In addition, the presence of unions may limit our flexibility in dealing with our workforce. Work stoppages could negatively impact our ability to distribute and sell our products on a timely basis, which could have a material adverse effect on our business, financial condition and results of operations.

We have a history of net losses, and we may continue to experience net losses in the future.

We experienced net losses of $67.0 million in fiscal year 2020, primarily due to the impact of COVID-19 and the loss on derivative liability related to the Series A Preferred Units, and $198.2 million in fiscal year 2019, primarily due to a loss on early debt extinguishment attributed to the payment of a make whole premium feature in connection with the repayment of our Refinanced Term Loan (as defined below), the write-off of unamortized debt financing costs and transaction expenses in connection with the Debt Exchange and the loss on derivative liability related to the Series A Preferred Units. At April 30, 2022, January 29, 2022, January 30, 2021 and February 1, 2020, our accumulated deficit was $604.2 million, $700.5 million, $509.6 million and $273.4 million, respectively. While we generated net income of $117.1 million in the first quarter of fiscal year 2022 and $8.2 million in fiscal year 2021, there is a risk that we will experience net losses in the future and not generate net income. In addition, our ability to achieve and maintain profitability is subject to a number of the risks and uncertainties discussed in “—Risks related to our business and industry,” many of which are beyond our control.

Goodwill impairments could have a material adverse impact on our results of operations.

Goodwill and indefinite-lived intangible assets are subject to impairment assessments at least annually (or more frequently when events or circumstances indicate that an impairment may have occurred) by applying a fair-value test. Our principal intangible assets, other than goodwill, are trademarks, franchise and concession agreements, and leases that existed at date of acquisition with terms that were favorable to market at that date. Significant negative industry or general economic trends, changes in customer demand for our product, disruptions to our business, and unexpected significant changes or planned changes in our operating results or use of long-lived assets may result in impairments to goodwill, intangible assets, and other long-lived assets. We may be required to recognize additional impairment charges in the future, which could result in material non-cash write downs of goodwill or indefinite-lived intangible assets. Additional impairment losses could have a material adverse impact on our results of operations and stockholder’s deficit.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-ownership change net operating losses (“NOLs”) and other tax attributes, including interest expense carryforwards, to offset future taxable income. For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of

 

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stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Similar rules may apply under state tax laws. Our existing NOLs and other tax attributes may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection with this offering, or there is a future change in our stock ownership (which may be outside of our control) that results in an ownership change, our ability to utilize NOLs and other tax attributes could be further limited by Section 382 of the Code. U.S. federal NOLs generated in taxable years beginning on or before December 31, 2017, or pre-2017 NOLs, are subject to expiration while U.S. federal and certain state NOLs generated in taxable years beginning after December 31, 2017, or post- 2017 NOLs, are not subject to expiration. Additionally, for taxable years beginning after December 31, 2020, the deductibility of federal post-2017 NOLs is limited to 80% of our taxable income in such year, where taxable income is determined without regard to the NOL for such post-2017 NOLs. For these and other reasons, we may not be able to realize a tax benefit from the use of our NOLs and other tax attributes.

We may be subject to additional tax liabilities in connection with our operations or due to future legislation, each of which could materially impact our financial position and results of operations.

We are subject to federal and state income, sales, use, value added and other taxes in the United States and other countries in which we conduct business, and such laws and rates vary by jurisdiction. We do not collect sales and use, value added and similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable. Certain jurisdictions in which we do not collect sales, use, value added or other taxes on our sales may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. There is also uncertainty over sales tax liability as a result of the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., which held that states could impose sales tax collection obligations on out-of-state sellers even if those sellers lack any physical presence within the states imposing the sales taxes. Under Wayfair, a person requires only a “substantial nexus” with the taxing state before the state may subject the person to sales tax collection obligations therein. An increasing number of states (both before and after Wayfair was decided) have considered or adopted laws that attempt to impose sales tax collection obligations on out-of-state sellers. The Supreme Court’s Wayfair decision has removed a significant impediment to the enactment and enforcement of these laws, and it is possible that states may seek to tax out-of-state sellers on sales that occurred in prior tax years. Similarly, non-U.S. jurisdictions have imposed or proposed digital services taxes, including in connection with the Organisation for Economic Co-Operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Project. These taxes, whether imposed unilaterally by non-U.S. jurisdictions or in response to multilateral measures (e.g., the BEPS Project), could result in taxation of companies that have customers in a particular jurisdiction but do not operate there through a permanent establishment. Changes to tax law or administration such as these, whether at the state level or the international level, could increase our tax administrative costs and tax risk, and negatively affect our overall business, results of operations, financial condition and cash flows.

Although we believe our tax practices and provisions are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical tax practices, provisions and accruals. If we receive an adverse ruling as a result of an audit, or we unilaterally determine that we have misinterpreted provisions of the tax regulations to which we are subject, there could be a material effect on our tax provision, net income or cash flows in the period or periods for which that determination is made, which could materially impact our financial results. In addition, liabilities associated with taxes are often subject to an extended or indefinite statute of limitations period. Therefore, we may be subject to additional tax liability (including penalties and interest) for a

 

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particular year for extended periods of time. Further, any changes in the taxation of our activities, may increase our effective tax rate and adversely affect our financial position and results of operations. For example, on April 7, 2021, the Biden administration proposed changes to the U.S. tax system. Since that date, both houses of Congress have released their own proposals for changes to the U.S. tax system, which differ in a number of respects from the President’s proposal. The proposals under discussion have included changes to the U.S. corporate tax system that would increase U.S. corporate tax rates and changes that would raise the tax rate on and make other tax changes to certain income earned by foreign subsidiaries. We are unable to predict which, if any, U.S. tax reform proposals will be enacted into law, and what effects any enacted legislation might have on our liability for U.S. corporate tax. However, it is possible that the enactment of changes in the U.S. corporate tax system could have a material adverse effect on our liability for U.S. corporate tax and our consolidated effective tax rate.

Failure to maintain our franchising relationships may adversely affect our business, financial condition and results of operations.

Outside of North America and Europe, we currently have franchising and licensing agreements with unaffiliated third parties who are familiar with the local retail environment and have sufficient retail experience to operate stores in accordance with our business model. Our largest franchisee, Alshaya Trading Co. W.L.L., operates our Claire’s^® stores in Bahrain, Egypt, Jordan, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Our franchise arrangements involve certain risks, including the following: franchisees may have economic, business or legal interests or goals that are inconsistent with ours, or they may be unable to meet their economic or other obligations and we may be required to fulfill those obligations alone. We do not control the actions of our franchisees, including any noncompliance with regulations, nonperformance, default or bankruptcy. We may be subject to increased costs and use of resources to manage any issues that arise out of our franchise relationships or arrangements. In addition, the termination of an arrangement with a franchisee or a lack of expansion by certain franchisees could result in the delay or discontinuation of the development of franchised stores, or an interruption in the operation of our brand in a particular market or markets. We may not be able to find another operator to resume development activities in such market or markets. For example, our former franchisee in Japan chose not to extend its agreement with us upon its expiration in October 2020, and we have not yet replaced the franchisee there. Failure to maintain our franchising relationships may adversely affect our business, financial condition and results of operations.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our Term Loan Credit Agreement dated as of December 18, 2019 (the “Term Loan Credit Agreement”), which governs our $502.4 million aggregate principal amount of Term Loan maturing on December 18, 2026, and our $75.0 million asset-based revolving credit facility dated as of January 24, 2019 (the “ABL Credit Agreement,” together with the Term Loan Credit Agreement, the “Credit Facilities”) contain various covenants that limit our subsidiaries’ ability to engage in specified types of transactions. The covenants under the Credit Facilities limit our subsidiaries’ ability to, among other things:

 

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incur additional indebtedness;

 

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create or incur certain liens;

 

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make certain investments;

 

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subject to certain exceptions, declare or pay any dividend or make any payment or distribution on account of our subsidiaries’ equity interests, including any dividend or distribution to Claire’s Holdings LLC to permit it to pay dividends or make other payments;

 

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create restrictions on the payment of dividends or other distributions to us from our subsidiaries; and

 

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transfer or sell assets.

These covenants restrict and limit our ability to operate our business. A breach of any of these covenants could result in a default under our Credit Facilities. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. Such actions could, in turn, cause cross defaults under our other indebtedness. In addition, our assets and cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments, or we may not be able to refinance or restructure the payments we are required to make under our debt arrangements. Even if we were able to secure additional financing, it may not be available on favorable terms. Any of the foregoing events would have a material adverse effect on our financial condition.

The phase-out, replacement or unavailability of LIBOR and/or other interest rate benchmarks could adversely affect our ability to service our indebtedness.

The interest rates applicable to the Credit Facilities are based on, and the interest rates applicable to certain debt obligations we may incur in the future may be based on, a fluctuating rate of interest determined by reference to the London Interbank Offered Rate (“LIBOR”). On November 30, 2020, the ICE Benchmark Administration (“IBA”), the administrator of LIBOR announced plans to consult on ceasing publication of USD LIBOR on December 31, 2021 for only the one week and two month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors. In light of this announcement, the future of LIBOR at this time is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR’s phase-out could cause LIBOR to perform differently than in the past or cease to exist.

In response to concerns regarding the future of LIBOR, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (the “ARRC”) to identify alternatives to LIBOR. The ARRC has recommended a benchmark replacement waterfall to assist issuers in continued capital market entry while safeguarding against LIBOR’s discontinuation. The initial steps in the ARRC’s recommended provision reference variations of the Secured Overnight Financing Rate (“SOFR”), calculated using short-term repurchase agreements backed by Treasury securities. At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement. In anticipation of LIBOR’s phase-out, the Credit Facilities provide for alternative base rates, as well as a transition mechanism for selecting a benchmark replacement rate for LIBOR, with such benchmark replacement rate to be mutually agreed with the administrative agent.

Changes in the method of calculating LIBOR, or the replacement of LIBOR with an alternative rate or benchmark, may adversely affect interest rates and result in higher borrowing costs. This could adversely affect our results of operations, cash flow and liquidity. There can be no assurance that we will be able to reach any agreement on a replacement benchmark, and there can be no assurance that any agreement we reach will result in effective interest rates at least as favorable to us as our current effective interest rates. The failure to reach an agreement on a replacement benchmark, or the failure to reach an agreement that results in an effective interest rate at least as favorable to us as our current effective interest rates, could result in a significant increase in our debt service obligations, which could adversely affect our financial condition and results of operations. In addition, the overall financing market may be disrupted as a result of the phase-out or replacement of LIBOR, which could have an adverse impact on our ability to refinance, reprice or amend the Credit Facilities, or incur additional indebtedness, on favorable terms, or at all.

 

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Risks related to information technology, data security and intellectual property

If our or our third-party providers’ information technology systems are interrupted for a significant period of time or fail to perform as designed, our business could be adversely affected.

The efficiency of our operations is dependent on information technology systems. Information technology systems manage our financial and operational data, maintain our in-stock positions and transact the sale of our products in our stores and online. The failure of our or our third-party providers’ information technology systems to perform as designed, loss of data, or any interruption or breach of our or our third-party providers’ systems could disrupt our business. Our third-party information technology systems may not remain available on terms acceptable to us and may require replacement, which could result in substantial operational expense, diversion of our resources and reduced efficiency, any of which could result in a material adverse effect on our business, financial condition or results of operations. Further, our or our third-party providers’ information technology systems are potentially vulnerable to breakdown or other interruption or damage from system malfunctions, natural disasters, terrorism, war and telecommunication and electrical failures. Such failures could have a material adverse effect on our business, financial condition and results of operations.

In particular, we may be vulnerable to targeted or random security breaches, ransomware, phishing attacks, denial of service attacks, acts of vandalism, computer viruses, other malware, misplaced or lost data, programming and/or human errors or similar events. Our systems and facilities are also subject to compromise from internal threats, such as theft, misuse, unauthorized access or other improper actions by employees, third-party service providers and other third parties with otherwise legitimate access to our systems, website or facilities that result in the unauthorized release of personal or confidential information. The methods of cyber-attack and deception change frequently, are increasingly complex and sophisticated, have increased in number, may be difficult to detect for long periods of time and can originate from a wide variety of sources, including criminals, nation-state actors, hacktivists, industrial espionage and insider threats. Actual or anticipated attacks may expose us to risks, including risks to our ability to provide our products and services and management distraction, and cause us to incur increasing costs, including costs to hire additional personnel, purchase additional insurance and protection technologies, train employees and engage third-party experts and consultants. Our efforts to ensure the integrity of our systems and website may not be sufficient to anticipate, detect, appropriately react and respond to, or implement effective preventative measures against, all cybersecurity incidents, particularly against unknown or unanticipated methods of intrusion. Additionally, as a result of our associates and third-party service providers trending towards working remotely, potentially on connections that may be less secure, there is an increased risk that we may experience cybersecurity-related incidents. As cybersecurity incidents continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. In addition, our remediation efforts may not be successful or may not be completed in a timely manner. Any of the foregoing events could have a material adverse effect on our business, financial condition and results of operations.

Also, we are in the process of implementing modifications and upgrades to our information technology systems, and we continue to evaluate additional modifications and upgrades that may be needed. For example, certain of our information technology systems, particularly in Europe, limit our ability to track store and concessions openings and SKUs and require key skills that only a limited number of our information technology professionals possess, and therefore our information technology systems may not be sufficient for our business needs and we may need to upgrade the capacity of such systems and/or hire additional information technology professionals. Modifications and upgrades involve replacing legacy systems with successor systems or making changes to the legacy systems. There are inherent risks associated with replacing and changing these core information technology

 

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systems, including failure to accurately capture data and loss resulting from disruptions of normal operating processes and procedures that may occur during the implementation of new information technology systems. In addition, from time to time, we may supplement (and have supplemented in the past) our existing information technology systems with certain manual processes, in particular in anticipation of future system capabilities. Over time, these manual processes may be less scalable and cost-effective and we generally anticipate to replace them with future system capabilities. There can be no assurances that we will successfully launch new systems as planned or on the desired timelines, that launches will occur without disruptions to our operations, that the costs of investments in our information technology systems will not exceed estimates, that we will successfully train personnel to manage our systems or perform necessary interim processes, that our information technology systems will be as beneficial as predicted, or that we will always be able to replace interim manual processes with future system capabilities. Information technology system disruptions, if not anticipated and appropriately mitigated, or our inability to perform necessary interim manual processes or replace them with future system capabilities, could have a material adverse effect on our business, financial condition and results of operations. Such negative impacts may be exacerbated if any information technology disruptions are to our legacy systems, which may take longer to recover compared to our new information technology systems.

If we or our third-party providers experience any compromise or breach of our or our third-party service providers’ data security or information technology systems, including the security of customer, associate, third-party or company information, as we have in the past, we may be subject to penalties and liability and experience negative publicity, which could affect our customer relationships and have a material adverse effect on our business.

We collect, use, transmit, analyze, manage and otherwise process a large volume of personal data and other confidential, personal, proprietary and sensitive information. We and our customers could suffer harm if customer information or any other personal data we process or that is processed on our behalf by our third-party providers were accessed by unauthorized parties due to a security breach or failure in our or our third-party providers’ systems. For example, in a cybersecurity incident we experienced in June 2020, hackers skimmed consumer payment card information that was entered during online purchases on our website, resulting in a fine issued by a payment card brand, regulatory investigations, and individual and class action lawsuits. Third parties may attempt to circumvent our and our third party providers’ security measures in order to misappropriate personal and other information. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems, such as implanted malware, that could compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees and vendors such as through phishing attacks. In addition to our own systems, networks and databases, we use third-party service providers to store, transmit and otherwise process personal data and other sensitive and confidential information on our behalf. Due to applicable laws and regulations or contractual obligations, we may be held responsible for data security breaches attributed to our service providers that relate to the information we share with such providers or to which they are granted access.

The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, and as a result we may be unable to anticipate these techniques or implement adequate preventive measures. Any significant compromise or breach of our or our third party service providers’ information technology systems and data security, media reports about such an incident, whether accurate or not, or our failure to make adequate or timely disclosures to the public or law enforcement agencies following any such event, whether due to delayed discovery or a failure to follow existing protocols, could cause any of the following: interruptions to our operations, fines or penalties, enforcement actions or investigations (for example, by agencies such as the UK Information Commissioner’s Office (the “ICO”), which enforces

 

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data privacy rights under the General Data Protection Regulation (“GDPR”) and continues to investigate the above-noted cybersecurity incident we experienced in June 2020), distraction to our management, disclosure of personal, confidential, proprietary or sensitive customer, associate, third-party or Company information in violation of applicable privacy and other laws, a loss of confidence in our security measures, loss of customers, significant damage to our reputation with our customers, associates, investors and other third parties, and result in significant legal, regulatory and financial liabilities and lost revenues. Current and future investigations, lawsuits or adverse publicity relating to our methods of processing personal data could result in fines, penalties or other payment obligations imposed on us by regulatory agencies, including the ICO, which could materially and adversely affect our business, financial condition and results of operations.

There have recently been a number of high profile security incidents, including ransomware attacks and related theft of personal information of individuals, among other incidents, that have caused significant impacts on the operations of other businesses. These breaches have in some cases also resulted in lawsuits and governmental enforcement actions that have sought or obtained significant fines, penalties, and damages, and have also resulted in companies entering into agreements with government regulators that impose ongoing obligations and requirements, including internal and external (third party) monitorships for many years. Also, although we currently maintain cybersecurity insurance, such insurance may not be sufficient in type or amount to cover us against claims related to breaches, failures or other data security-related incidents, and we cannot be certain that such insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operations.

We may be unable to obtain, maintain, protect or enforce our trademarks and other intellectual property rights.

Our trademarks and other intellectual property rights are important to our success and our competitive position due to their name recognition and goodwill with our customers. While we have registrations of our Claire’s^® and Icing^® trademarks in the United States, the European Union, the United Kingdom and other countries, we have not registered these trademarks in all categories, nor in all countries in which we currently, or may in the future, source or offer our products, and we may be unable to register or otherwise protect new intellectual property rights we develop in the future. There can be no assurance that the actions we have taken to establish and protect our trademarks and other intellectual property will be adequate to prevent the imitation of our products or brands by others or other third party infringement, misappropriation or other violation of our intellectual property rights, or to prevent others from seeking to block the sale of our products or the operation of our stores as a violation of the trademarks and other intellectual property rights of others. Also, if we expand into new international markets, there is a risk that our trademarks and other intellectual property rights may conflict with the registered trademarks or other intellectual property rights of other companies, which may require us to rebrand our product and service offerings, obtain costly licenses, defend against third-party claims, substantially change our product or service offerings or curtail our plans for international expansion. Some of our or our vendors’ product designs and marketing materials may be deemed unprotectable under applicable copyright and similar laws, allowing third parties to freely copy them and thus negatively impact our results of operations. Any of our intellectual property rights, including our trademark registrations, may lapse or be abandoned, challenged, circumvented, declared generic or otherwise invalidated or canceled through governmental or administrative process or litigation. We may also allow certain of our registered intellectual property rights, or our pending applications for intellectual property rights, to lapse or become abandoned, or we may not seek to enforce our intellectual property rights, including if we determine that obtaining, maintaining, protecting or enforcing the applicable registered intellectual property rights is not cost effective.

 

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In addition, unilateral actions in countries in which we operate, including changes to or the repeal of laws recognizing trademarks or other intellectual property rights, could have an impact on our ability to obtain, maintain and enforce our trademarks and other intellectual property rights. Furthermore, the laws of some countries may not protect trademark and other intellectual property rights to the same extent as the laws of the United States, and it may be more difficult for us to successfully obtain, maintain, protect and enforce our trademarks and other intellectual property rights in these countries.

Our ability to protect our trademarks and other intellectual property may be adversely affected by the COVID-19 pandemic. As a result of the pandemic, certain intellectual property offices have amended their filing requirements and other procedures, including, but not limited to, extending deadlines and waiving fees. These accommodations have not been applied uniformly across all intellectual property offices globally, and the effectiveness and duration of existing action is unclear. Further, the ongoing COVID-19 pandemic has created uncertainty with respect to the uninterrupted operation of intellectual property offices, which, among other things, may cause delayed processing of renewal and application filings. Our inability to establish, maintain and/or enforce current and future trademarks or other intellectual property rights may have an adverse effect on the growth and reputation of our business. Further, the constantly evolving nature of the COVID-19 pandemic may affect our brand and intellectual property rights over time in ways that cannot be reasonably anticipated or mitigated. This could have an adverse effect on our business, financial conditions and results of operations.

We may be required to spend significant resources to monitor and protect our trademarks and other intellectual property rights. In some cases, litigation may be necessary to protect or enforce our trademarks and other intellectual property rights. Such litigation could be costly, unpredictable, time-consuming and distracting to management, regardless of whether we are successful. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits challenging our intellectual property rights and if such defenses, counterclaims or countersuits are successful, we may lose valuable intellectual property rights. In some cases, we may choose not to protect or enforce our rights when we compare the uncertainty, risks and costs of litigation with the costs and risks associated with the infringement. In addition, third parties may bring opposition, cancellation or similar adversarial proceedings against our trademarks and if such third parties are successful, we may lose our trademark rights.

In addition, the value of our intellectual property could diminish if others assert rights in, or ownership of, our trademarks and other intellectual property rights, or trademarks that are similar to our trademarks. We may be unable to successfully resolve these types of conflicts to our satisfaction. In some cases, there may be third party trademark owners who have prior rights to our trademarks or third parties who have prior rights to similar trademarks, and we may not be able to prevent such third parties from using and marketing any such trademarks. Such third party use of similar trademarks or other intellectual property can dilute or harm our brand, and could thus negatively impact our business and results of operations.

We are, and may in the future be, subject to legal claims alleging that we, our vendors, our franchisees or licensees or the manufacturers of our merchandise infringe, misappropriate or otherwise violate the intellectual property rights of third parties.

Our commercial success depends on our ability to commercialize our merchandise and conduct our business without infringing, misappropriating or otherwise violating any intellectual property owned by third parties. We may be subject to liability if we, or our merchandise, our vendors, our franchisees or licensees, or the manufacturers of our merchandise infringe, misappropriate or otherwise violate the trademarks or other intellectual property rights of third parties. We generally rely on vendor or licensor representations of intellectual property ownership without independently verifying that the vendor, or

 

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the manufacturers with whom the vendor does business or licensors legally hold intellectual property rights to the merchandise we purchase or intellectual property we license. Third parties may bring legal claims, or threaten to bring legal claims, that their intellectual property rights are being infringed, misappropriated or violated by us or our vendors or licensors.

We have encountered, and may in the future encounter, claims from third parties that the sale of certain of our products or the conduct of our business infringes, misappropriates or violates certain intellectual property rights held by such third party. Such actual or threatened claims (whether or not valid) could adversely impact our brand reputation and result in direct and indirect costs, all of which may have an adverse impact on our operations and financial performance. Even if we believe such third party claims are without merit, a court may hold that we or our vendors have infringed, misappropriated or violated such intellectual property rights or we may settle claims to avoid the cost and uncertainty of litigation. If we were to be found liable for any such infringement, misappropriation or other violation, we could be required to pay substantial monetary damages or royalties and enter into costly license agreements (if available at all), and we could be subject to injunctions preventing further infringement. We may also be required to remove or rebrand any merchandise from our inventory that is the subject of such infringement, misappropriation or other violation, incur costs associated with this removal or rebranding if the vendor is unwilling or unable to reimburse us and purchase new merchandise or merchandise components to replace any we remove or rebrand. Any payments we are required to make and any injunctions with which we are required to comply as a result of infringement claims could be costly. Any of the foregoing could have a material adverse effect on our business, financial condition and operations.

Even if intellectual property claims brought by or against us are settled or resolved in our favor, litigation or other legal, governmental or administrative proceedings relating to intellectual property claims, or the mere threat thereof, may cause us to incur significant expenses and distract our personnel from their normal responsibilities. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or proprietary information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or other proceedings could substantially increase our operating losses and reduce the resources available for sales, marketing or distribution activities. Any of the foregoing could have a material adverse effect on our business, financial condition and operations.

If our franchisees, vendors and other licensees do not observe our required quality and trademark usage standards, the strength of our brands may be weakened, our trademarks may become invalidated and we may suffer reputational damage.

We license our brands and other intellectual property to our affiliates, franchisees, vendors, advertisers and other third parties and generally require our licensees to adhere to our quality control guidelines and other requirements in order to protect our brands and other intellectual property. However, there can be no assurance that our licensees will use our brands and other intellectual property in accordance with our quality control guidelines and will not take actions that hurt the value or validity of our brands or other intellectual property. Noncompliance by our licensee entities with the terms and conditions of our agreements that pertain to health and safety standards, quality control, product consistency, use of our brands or other intellectual property or proper marketing or other business practices, may adversely impact the goodwill of our brands. For example, our licensees may refer to our brands improperly in communications, resulting in the weakening of the distinctiveness of our brands. Our failure to adequately control the quality of goods and services provided under our

 

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brands could cause our trademarks to cease functioning as an indicator of a single source, resulting in invalidity or abandonment of such trademarks. Licensees or third parties may refer to or make statements about our brands that do not make proper use of our trademarks or required designations, that improperly alter our branding, or that are critical of our brands or place our brands in a context that may tarnish their reputation. This may result in impairment, dilution or tarnishment of our brands. Franchisees and other licensees may produce or receive through the supply chain defective products, which may adversely impact our goodwill and our brands. Franchisees or other licensees may also seek to register or obtain registration for domain names and trademarks involving localizations, variations and versions of certain branding tools, and these activities may limit our ability to obtain or use such rights in such territories.

We may not be able to adequately prevent such practices by our licensees, which could harm the value of our brands, result in the abandonment, tarnishment, dilution or invalidity of our trademarks, and materially adversely affect the results of our operations. There can be no assurance that we will have an adequate remedy available, or that we will be successful, in the event that we take actions to prevent such conduct by licensees. In addition, even if our licensees observe and maintain the quality and integrity of our brands and other intellectual property assets in accordance with the relevant license and other agreements, our suppliers or products manufactured by our suppliers may be subject to regulatory sanctions and other actions by third parties which can, in turn, negatively impact the perceived quality of our products or services and our overall goodwill, regardless of the merits of the sanctions or other actions. Any such sanctions or actions could thereby materially reduce our revenues and the results of our operations.

Risks related to laws, regulations and industry standards

Our business, including our marketing programs, e-commerce initiatives, and use of consumer information, is governed by an evolving set of laws and enforcement trends relating to data privacy or security, and any actual or perceived failure by us to comply with any such existing or future laws or with other obligations relating to data privacy and security could substantially harm our business and results of operations.

We collect, maintain, use, and share personal data, including consumer data, provided to us in the course of our business, including through online activities and other consumer interactions. These activities are subject to evolving laws and enforcement trends, as well as the terms of our privacy policies and certain contractual restrictions in third-party contracts.

For example, one of the ways we track consumer data and interactions for marketing purposes is through the use of third-party “cookies.” The U.S. and European governmental authorities have enacted, have considered, or are considering legislation or regulations that could significantly restrict the ability of companies and individuals to engage in these activities. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for internet users to prevent the placement of cookies or to block other tracking technologies. The regulation of the use of cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms and, consequently, materially and adversely affect our business, financial condition and results of operations. We also send short message service (“SMS”) text messages to customers for marketing purposes. The actual or perceived improper sending of text messages may subject us to potential risks, including liabilities or claims relating to consumer protection laws such as the U.S. Telephone Consumer Protection Act of 1991. If we do not comply with these laws or regulations or if we become liable under these laws or regulations, we could face direct liability, could be required to change some portions of our business model, could face negative publicity, and our business, financial condition and results of operations could be adversely affected.

 

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Various legislative and regulatory bodies, including governmental agencies such as the FTC, or self-regulatory organizations, may expand or further enforce current laws or regulations, enact new laws or regulations, or issue revised rules or guidance regarding privacy, data protection, consumer protection, and advertising. In fact, the FTC has become increasingly aggressive in prosecuting alleged failure to secure personal data as unfair and deceptive acts or practices under the Federal Trade Commission Act and increasing fines against companies found to be in violation of the Children’s Online Privacy Protection Act. We are also subject to a number of state laws, which may differ from each other, which could complicate compliance efforts. For example, the California Consumer Privacy Act (the “CCPA”) gives California residents data protection and privacy rights to access and delete their personal information, opt out of certain sales of personal information, and receive detailed disclosures about what personal information is collected, how their personal information is used, and how that personal information is shared and imposes obligations on companies that process their personal information. The CCPA provides for civil penalties for violations enforced by the California Attorney General, as well as a private right of action for data breaches that result in the loss of personal information. Furthermore, the California Privacy Rights Act (the “CPRA”), effective beginning January 1, 2023, imposes additional data protection obligations, including expanding California residents’ rights with respect to certain sensitive personal information. Other states (such as Virginia and Colorado) have also passed or plan to pass data privacy laws that are similar to the CCPA, CPRA and GDPR (described below), and such laws may have potentially conflicting requirements that would make compliance challenging. We have incurred and may continue to incur costs to adapt our systems and practices to comply with the current legal requirements relating to data privacy such as the CCPA and these costs may adversely affect our financial condition and results of operations. Operators of commercial websites and applications may be subject to the Children’s Online Privacy Protection Act (“COPPA”) if their activities are directed to children under the age of 13 and they collect such children’s personal information. Our websites and applications are not intended for children under the age of 13, and we do not knowingly collect any personal information from individuals under the age of 13; however, a regulator may deem our site and application to be directed to children and find us subject to COPPA. Any failure or perceived failure to comply with COPPA may result in government enforcement actions, litigations, fines and penalties or adverse publicity.

We are also subject to laws, regulations and standards in many international jurisdictions that apply broadly to the collection, use, retention, security, disclosure, transfer and other processing of personal information. For example, the General Data Protection Regulation (“GDPR”) includes obligations and restrictions concerning the consent and rights of individuals to whom the personal data relates, the transfer of personal data out of the European Economic Area or the United Kingdom, security breach notifications and the security and confidentiality of personal data. The GDPR authorizes fines for certain violations of up to 4% of global annual revenue or €20 million, whichever is greater. Such fines are in addition to any civil litigation claims by customers and data subjects. Despite our efforts to bring practices into compliance with the GDPR, we may not be successful either due to internal or external factors such as resource allocation limitations or a lack of vendor cooperation. Non-compliance could result in proceedings against us by governmental entities, customers or others. In addition, local data protection authorities may have different interpretations of the GDPR, leading to potential inconsistencies amongst various European Union member states. The Data Protection Act 2018 is the United Kingdom’s implementation of the GDPR, which will continue to apply in the United Kingdom following its departure from the European Union. Additionally, a recent decision from the Court of Justice of the European Union (“CJEU”) and related regulatory guidance may impact our ability to transfer personal data from the European Economic Area or United Kingdom to the United States and other jurisdictions.

This area is rapidly evolving and increasingly rigorous, with new and changing requirements applicable to our business. It is possible that such laws and contractual obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another from time to time, may be

 

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interpreted and applied in a manner that may have a material adverse effect on our business, may conflict with other rules, or may conflict with our practices, so that enforcement practices are likely to remain uncertain for the foreseeable future. Evolving privacy, security, compliance and data protection laws and regulations could impose significant limitations, require changes to our business, or restrict our use or storage of personal information, which may increase our compliance expenses, such as costs related to organizational changes, implementing additional protection technologies, training employees and engaging consultants, which are likely to make our business costlier or less efficient to conduct over time. Any failure or perceived failure by us to comply with any applicable laws and regulations or contractual obligations relating to data privacy and security could result in damage to our reputation and our relationships with our customers, as well as proceedings or litigation by governmental agencies or customers, including class action privacy litigation in certain jurisdictions, which could subject us to significant fines, sanctions, awards, penalties or judgments, force us to spend significant amounts to remediate any non-compliance or to defend or update our practices, distract our management and increase our costs of doing business, any of which could compromise our ability to develop an adequate marketing strategy and pursue our growth strategy effectively, which, in turn, could adversely affect our business, financial condition and results of operations.

Our cost of doing business could increase as a result of changes in regulations regarding the content and sale of our merchandise and our piercing services.

We are subject to laws that regulate the content and sale of our merchandise. For example, the U.S. Consumer Product Safety Improvement Act of 2008 (“CPSIA”) imposes restrictions and requirements on the sale of children’s products, including importing, testing and labeling requirements. In addition, various U.S. states, from time to time, propose or enact legislation regarding heavy metals or chemicals in products that differ from U.S. federal laws. For example, California’s Proposition 65 requires businesses to provide warnings to Californians about significant exposures to chemicals that are harmful to human health. In each of the European Union and the United Kingdom, the “REACH” legislation and regulations require identification and disclosure of chemicals in consumer products. We are also subject to various other health and safety rules and regulations, such as the U.S. Federal Food Drug and Cosmetic Act and the U.S. Federal Hazardous Substance Act. Chemicals and other substances regulated in the United States and the European Union may be in merchandise that we sell. Over time, these regulations, among others, may require us to substitute certain chemicals contained in our products with substances the regulators consider safer. Compliance with these laws could require us to alter or remove certain merchandise, impacting our sales or cost of sales. Moreover, if we are alleged to be in violation of existing or newly adopted regulatory requirements, we could incur significant defense costs, fines or penalties.

We currently offer nose piercing services at certain of our stores in the United Kingdom, Ireland, France, Germany and Canada, and we expect to expand our nose piercing services as part of our growth strategy. Compliance with laws or regulations relating to nose piercing will require us to alter our training programs and piercing services, which could increase our costs of doing business. Any failure or perceived failure by us to comply with any applicable laws relating to nose piercing (or any newly adopted laws relating to ear or nose piercing) could cause us to incur significant fines or penalties and experience harm to our reputation.

Failure to comply with standards, rules and laws governing electronic payments could subject us to penalties and other adverse consequences.

In connection with credit or debit card transactions, we collect and transmit confidential information by way of secure private retail networks. Payment networks, such as Visa, MasterCard and American Express, establish their own rules and standards that allocate liabilities and responsibilities among the payment networks and their participants. These rules and standards govern a variety of

 

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areas, including how customers may use their cards, the security features of cards, security standards for processing, data security and allocation of liability for certain acts or omissions, including liability in the event of a data breach. The payment networks may change these rules and standards from time to time as they may determine in their sole discretion and with or without advance notice to their participants. These changes may impose additional costs and expenses on or be disadvantageous to certain participants. Participants are subject to audit by the payment networks to ensure compliance with applicable rules and standards. The networks may fine, penalize or suspend the registration of participants for certain acts or omissions or the failure of the participants to comply with applicable rules and standards. For example, a payment network imposed a fine in connection with a cybersecurity incident we experienced in June 2020 in which hackers skimmed consumer payment card information that was entered during online purchases on our website.

As a merchant that accepts credit and debit cards for payment, we are subject to the Payment Card Industry (“PCI”) Data Security Standard (“PCI DSS”), issued by the PCI Council. The PCI DSS contains compliance guidelines and standards with regard to our security surrounding the physical administrative and technical storage, processing and transmission of individual cardholder data. In addition, because we accept debit cards for payment, we are subject to American National Standards Institute data encryption standards and payment network security operating guidelines. Our systems are subject to annual review under the PCI DSS requirements, and we have historically had, may now have, and may have in the future items that require improvement. Failure to be PCI compliant or to meet other payment card standards may result in the imposition of financial penalties, legal action, compensation costs, damaged reputation, revenue loss, or federal audits. Our removal from networks’ lists of PCI DSS-compliant service providers could mean that existing merchants, retail partners, sales partners or other third parties may cease using or referring our services. Also, prospective merchants, retail partners, sales partners or other third parties may choose to terminate negotiations with us, or delay or choose not to consider us for their processing needs. In addition, the card networks could refuse to allow us to process through their networks. Even if we are found to be in compliance with PCI-DSS, there is no assurance that we will be protected from a security breach. Moreover, industry groups may in the future adopt additional self-regulatory standards by which we are legally or contractually bound. Any of the foregoing could materially adversely impact our business, financial condition and operations.

In the future, if we offer new payment options to consumers, such as mobile or other payment methods, we may be subject to additional regulations, compliance requirements and fraud. If we fail to comply with the rules or requirements of any provider of a payment method we accept, we may, among other things, be subject to fines, legal proceedings, or higher transaction fees and may lose, or face restrictions placed upon, our ability to accept credit card payments from consumers or facilitate other types of electronic payments.

Failure to comply with anti-bribery, anti-corruption, economic sanctions, export control, anti-terrorism and anti-money laundering laws could subject us to penalties and other adverse consequences.

We are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), the UK Bribery Act 2010, regulations of the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) and other anti-bribery, anti-corruption, economic sanctions, export control, anti-terrorism and anti-money laundering laws in various jurisdictions around the world. The FCPA, the UK Bribery Act 2010 and similar applicable laws generally prohibit companies, as well as their officers, directors, employees and third-party intermediaries, business partners and agents, from making improper payments or providing other improper things of value to government officials or other persons. We, our franchisees and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and other third parties where we may be held

 

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liable for corrupt or other illegal activities, even if we do not explicitly authorize them. OFAC regulations generally prohibit U.S. companies from directly or indirectly transacting with certain designated jurisdictions and with certain designated persons or entities subject to sanctions.

There can be no assurance that our employees, business partners, agents, and others acting on our behalf will not violate these regulations, either knowingly or inadvertently. In the event that we believe or have reason to believe that our directors, officers, employees or third-party intermediaries, agents or business partners have or may have violated such laws, we may be required to investigate or to have outside counsel investigate the relevant facts and circumstances. Detecting, investigating and resolving actual or alleged violations can require a significant diversion of time, resources and attention from senior management. Any violation of the FCPA, the UK Bribery Act 2010, OFAC regulations or other applicable anti-bribery, anti-corruption, economic sanctions, export control, anti-terrorism and anti-money laundering laws, or any allegations of such violations, could result in whistleblower complaints, adverse media coverage, significant legal and investigatory fees, loss of export privileges, harm to our reputation (which in turn could diminish the value of our brand and reduce demand for our merchandise), criminal or civil sanctions, penalties and fines and related shareholder lawsuits, any of which may adversely affect our business, financial condition and results of operations.

Risks related to our common stock and this offering

There is no existing market for our common stock and we do not know if one will develop, which could impede your ability to sell your shares and may depress the market price of our common stock.

There has not been a public market for our common stock prior to this offering. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market on the New York Stock Exchange, or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for the common stock will be determined by negotiations between us and the underwriters, and may not be indicative of prices that will prevail in the open market following this offering. See “Underwriting (Conflicts of Interest).” The market price of shares of our common stock may decline below the initial public offering price, and you may be unable to sell our common stock at prices equal to or greater than the price you pay in this offering.

The price of our common stock may fluctuate significantly and you could lose all or part of your investment.

The trading price of our common stock is likely to be volatile and subject to wide price fluctuations in response to various factors, including those described above in “—Risks related to our business and industry.” In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your common stock at or above the initial public offering price, if at all. In addition to the factors described above, some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

 

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our operating and financial performance and prospects;

 

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market conditions in the broader stock market in general, or in our industry in particular;

 

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introduction of new products and services by us or our competitors;

 

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changes in earnings estimates or recommendations by securities analysts who track our common stock or industry;

 

•

our inability to meet the financial estimates of analysts who follow our company;

 

50

•

strategic actions by us or our competitors, such as acquisitions, restructurings, significant contracts, joint marketing relationships, joint ventures or capital commitments;

 

•

sales of large blocks of our common stock;

 

•

additions or departures of key personnel;

 

•

changes in accounting standards, policies, guidance, interpretations or principles;

 

•

the public reactions to our press releases, other public announcements and filings with the SEC;

 

•

any increased indebtedness we may incur in the future;

 

•

regulatory developments;

 

•

actions by institutional stockholders;

 

•

litigation and governmental investigations;

 

•

market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

•

the number of shares to be publicly traded after this offering; and

 

•

sales of common stock by us, Elliott Investment Management L.P. (together with its affiliates, “Elliott”) and Monarch Alternative Capital LP (“Monarch”) or members of our management team.

These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. The stock market in general has from time to time experienced extreme price and volume fluctuations, including in recent months. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.

Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.

We may sell additional shares of common stock in subsequent public offerings or otherwise in connection with a capital raise or acquisition. Upon completion of this offering, we will have                  authorized shares of common stock, of which                  shares will be outstanding upon consummation of this offering (assuming no exercise of the underwriters’ option to purchase additional shares of common stock from us). The outstanding share number includes shares that we are selling in this offering, which will be freely tradable without restriction under the Securities Act of 1933, as amended (the “Securities Act”), except for any shares that may be held or acquired by our directors, executive officers or other affiliates, as that term is defined in the Securities Act, which will be control securities under the Securities Act. Control securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available. See “Shares Eligible for Future Sale.” Certain of the remaining outstanding shares are restricted from immediate resale under the lock-up agreements with the underwriters described in the “Underwriting (Conflicts of Interest)” section of this prospectus, but may be sold into the market in the near future. These shares will become available for sale following the expiration of the lock-up agreements, which, without the prior consent of Goldman Sachs & Co. LLC and Citigroup Global Markets Inc., is 180 days after the date of this prospectus, subject to certain exceptions and extensions. Immediately after the expiration of the lock-up period, the shares will be eligible for resale under Rule 144 of the Securities Act, subject to volume and manner of sale limitations. The market price of shares of our common stock may drop significantly when the restrictions on resale by our existing stockholders lapse. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

 

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As soon as practicable after the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering                  shares of our common stock reserved for issuance under our 2018 Plan and our 2022 Plan. Accordingly, shares of our common stock registered under such registration statement may become available for sale in the open market upon grants under the plan, subject to vesting restrictions, Rule 144 limitations applicable to our affiliates and the contractual lock-up provisions described in the “Underwriting (Conflicts of Interest)” section of this prospectus.

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including any shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

You will experience an immediate and substantial dilution in the net tangible book value of the common stock you purchase.

After giving effect to this offering, the Corporate Conversion and the other adjustments described elsewhere in this prospectus under “Dilution,” we expect that our pro forma as adjusted net tangible book value as of April 30, 2022 would be $             per share. Based on an assumed initial public offering price of $             per share, the midpoint of the estimated offering range set forth on the cover page of this prospectus, you will experience immediate and substantial dilution of approximately $             per share in net tangible book value of the common stock you purchase in this offering (after giving effect to the     -for-     stock split). That is because the price that you pay will be substantially greater than the pro forma as adjusted net tangible book value per share of common stock that you acquire. This dilution is due in large part to the fact that our earlier investors effectively paid substantially less than the initial public offering price when they purchased their shares of our common stock. See “Dilution,” including the discussion of the effects on dilution from a change in the price of this offering.

Moreover, the terms of the Series A Preferred Units require the payment of a make whole premium to the holders of the Series A Preferred Units upon completion of this offering. The make whole premium is required to be paid in cash only to the extent of the net proceeds of the offering (excluding the net proceeds from any exercise by the underwriters of their option to purchase additional shares of common stock from us), with the remainder of the make whole premium to be paid in common shares. The number of common shares to be issued in this regard will be calculated by dividing the amount of the make whole premium that is not paid in cash by the initial public offering price per common share in this offering. The aggregate amount of the make whole premium for all outstanding Series A Preferred Units is $            . Using the mid-point of the price range indicated on the cover page of this prospectus, assuming that the number of common shares offered remains the same as that set forth on the cover page of this prospectus, we expect that net proceeds of the offering (excluding the net proceeds from any exercise by the underwriters of their option to purchase additional shares of common stock from us) in the amount of $             will be the amount of cash we use to pay part of the make whole premium and that we will issue                  common shares to pay the amount of the make whole premium not paid in cash. See “Corporate Conversion.”

If securities or industry analysts do not publish research or reports about our business, or they publish inaccurate or unfavorable reports about our business, the price of our common stock and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares of common

 

52

stock or change their opinion of our common stock, our common stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our common stock price or trading volume to decline.

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. Notwithstanding the foregoing, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act, the Securities Act or any other claim for which the federal courts have exclusive jurisdiction. Our amended and restated certificate of incorporation will also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. However, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce a duty or liability created by the Securities Act or the rules and regulations thereunder; accordingly, we cannot be certain that a court would enforce such provision. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the foregoing forum selection provisions. However, our stockholders will not be deemed to have waived (and cannot waive) compliance with the federal securities laws and the rules and regulations thereunder.

The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations.

Although we ceased to be an “emerging growth company,” we can continue to take advantage of certain reduced disclosure requirements applicable to emerging growth companies in this prospectus, which may make our common stock less attractive to investors.

At the time of the initial confidential submission of the registration statement of which this prospectus forms a part, we qualified as an “emerging growth company” as defined in the JOBS Act. Although we ceased to be an emerging growth company on January 29, 2022 because our annual revenues exceeded $1.07 billion for fiscal year 2021, we are permitted to avail ourselves of the reduced disclosure requirements applicable to emerging growth companies until the completion of this offering. In this prospectus, we take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including the reduced disclosure requirements relating to executive compensation.

We cannot predict if investors will find our common stock less attractive because we intend to rely upon these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

 

53

Affiliates of each of Elliott and Monarch may each continue to have significant influence over us after this offering, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.

After giving effect to the Corporate Conversion, and the completion of this offering, affiliates of each of Elliott and Monarch will control approximately     % and     %, respectively, of the outstanding voting power of our company. As long as each of Elliott and Monarch beneficially own or control at least     % and     %, respectively, of our outstanding voting power, each may individually have the ability to exercise significant influence over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the election and removal of directors and the size of our board of directors, any amendment of our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets. Even if their ownership falls below     % and     %, respectively, each of Elliott and Monarch will continue to be able to influence our decisions.

Additionally, each of Elliott’s and Monarch’s interests may not align with the interests of each other or of our other stockholders. Each of Elliott and Monarch, and other investment funds affiliated with them, are in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. Each of Elliott and Monarch, and other investment funds affiliated with them, may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Since we have no current plans to pay regular cash dividends on our shares of common stock following this offering, you may not receive any return on investment unless you sell your shares of common stock for a price greater than that which you paid for it.

We do not anticipate paying any regular cash dividends on our shares of common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur, including under the Credit Facilities. Therefore, any return on investment in our shares of common stock is solely dependent upon the appreciation of the price of our shares of common stock on the open market, which may not occur. Please read “Dividend Policy” for more detail.

We are a holding company with nominal net worth and will depend on dividends and distributions from our subsidiaries to pay any dividends.

Claire’s Holdings LLC is a holding company with nominal net worth. We do not have any material assets or conduct any business operations other than our investments in our subsidiaries. Our business operations are conducted primarily out of our subsidiary, Claire’s Stores, Inc. and its subsidiaries. As a result, in addition to the restrictions on payment of dividends that apply under the terms of our existing indebtedness, our ability to pay dividends, if any, will be dependent upon cash dividends and distributions or other transfers from our subsidiaries, including from Claire’s Stores, Inc. Payments to us by our subsidiaries will be contingent upon their respective earnings and subject to any limitations on the ability of such entities to make payments or other distributions to us.

 

54

Risks related to our status as a public company

Failure to establish and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and reputation.

We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”) and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Furthermore, we will be required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting beginning with our second annual report for fiscal year 2023. Our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed.

When evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. Testing and maintaining our internal control over financial reporting may also divert management’s attention from other matters that are important to the operation of our business. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. Moreover, any material weakness or other deficiencies in our internal control over financial reporting may impede our ability to file timely and accurate reports with the SEC. Any of the above could cause a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and cash flows.

The requirements of being a public company may strain our resources and divert management’s attention.

As a public company, we will be subject to the reporting and other compliance requirements of the Exchange Act, the Sarbanes-Oxley Act and stock exchange rules promulgated in response to the Sarbanes-Oxley Act. The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. These expenses will likely be even more significant because we will no longer be able to rely on certain reduced reporting requirements and certain significant relief available to emerging growth companies upon the closing of this offering. After the closing of this offering, we will be obligated to file with the SEC annual and quarterly reports and other reports that are specified in the Exchange Act, and therefore will be required to prepare financial statements that are compliant with all SEC reporting requirements on a timely basis. In addition, we will be subject to other reporting and corporate governance requirements, including certain requirements of the New York Stock Exchange and certain provisions of the Sarbanes-Oxley Act and the regulations promulgated thereunder, which will impose significant compliance obligations upon us. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard,

 

55

significant resources and management oversight may be required, and management’s attention may be diverted from other business concerns. These rules and regulations could also make it more difficult for us to attract and retain qualified independent members of our board of directors. The increased costs of compliance with public company reporting requirements and our potential failure to satisfy these requirements could have a material adverse effect on our operations, business, financial condition and results of operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, include, among others, our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are based on our current expectations concerning future events. There are important factors that could cause our actual or preliminary results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Risk Factors.” You should specifically consider the numerous risks outlined under “Risk Factors.” These risks and uncertainties include factors related to:

 

•

the continued impact of the COVID-19 pandemic, including new variants;

 

•

our ability to maintain, enhance and protect the value and goodwill of our brands;

 

•

our ability to anticipate, identify and respond to merchandise, marketing and promotional trends or consumer shopping patterns and successfully maintain proper merchandise assortment, and our ability to adequately forecast the demand for our products;

 

•

our ability to recruit, train, motivate and retain suitably qualified store associates, distribution center workers and other employees;

 

•

the failure to grow our store (including store-in-store) and concessions businesses or grow our digital business;

 

•

a decline in the number of people who go to shopping malls, especially those mall locations where we experience high sales volumes;

 

•

our sourcing of a substantial majority of our products through production arrangements in Asia;

 

•

our ability to source our merchandise efficiently and cost effectively if new trade restrictions are imposed, existing trade restrictions become more burdensome or relationships with manufacturers are impaired or terminated;

 

•

negative publicity that is accelerated by social media or emergent forms of communication and our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media;

 

•

the retail market is highly competitive and our ability to effectively compete;

 

•

our ability to deliver our products to market if we encounter problems with distribution;

 

•

our concessions and store-in-store locations are operated under agreements that are subject to revocation or modification;

 

•

recent changes to our executive team;

 

•

our ability to renew or replace our distribution center and store leases, or enter into leases for new distribution centers or stores on favorable terms, or if our current leases are terminated prior to the expiration of their stated term and we cannot find suitable alternate locations;

 

•

fluctuations in foreign currency exchange rates;

 

•

macroeconomic conditions, including the recent inflationary environment, which may adversely impact levels of discretionary consumer spending;

 

57

•

litigation matters and regulatory enforcement actions relating to our business;

 

•

natural disasters or unusually adverse weather conditions, public health crises, political crises and other catastrophic events or other events outside of our control;

 

•

the willingness of vendors and service providers to supply us with goods and services pursuant to customary credit arrangements that may not be available to us in the future;

 

•

some of our European workforce is covered by collective bargaining agreements, national collective agreements and/or works councils;

 

•

goodwill impairments;

 

•

our ability to use our net operating losses to offset future taxable income;

 

•

additional tax liabilities in connection with our operations or due to future legislation;

 

•

failure to maintain our franchising relationships;

 

•

our debt agreements contain restrictions that limit our flexibility in operating our business;

 

•

if our or our third-party providers’ information technology systems are interrupted for a significant period of time or fail to perform as designed;

 

•

if we or our third-party providers experience any compromise or breach of our or our third-party service providers’ data security or information technology systems, including the security of customer, associate, third-party or company information, as we have in the past;

 

•

we may be unable to obtain, maintain, protect or enforce our trademarks and other intellectual property rights;

 

•

legal claims alleging that we, our vendors, our franchisees or licensees or the manufacturers of our merchandise infringe, misappropriate or otherwise violate the intellectual property rights of third parties;

 

•

if our franchisees, vendors and other licensees do not observe our required quality and trademark usage standards;

 

•

our business, including our marketing programs, e-commerce initiatives and use of consumer information, is governed by an evolving set of laws and enforcement trends relating to data privacy or security, and any actual or perceived failure by us to comply with any such existing or future laws or with other obligations relating to data privacy and security;

 

•

our cost of doing business could increase as a result of changes in regulations regarding the content and sale of our merchandise and our piercing services;

 

•

failure to comply with standards, rules and laws governing electronic payments;

 

•

failure to comply with anti-bribery, anti-corruption, economic sanctions, export control, anti-terrorism and anti-money laundering laws; and

 

•

the other risks described under “Risk Factors.”

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this prospectus to conform our prior statements to actual results or revised expectations.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions but before deducting the estimated offering expenses, will be approximately $            , or approximately $             if the underwriters exercise their option to purchase additional shares of common stock from us in full, assuming an initial public offering price at the midpoint of the estimated price range set forth on the cover page of this prospectus. We estimate that the offering expenses (other than the underwriting discounts and commissions) will be approximately $            .

We intend to use the net proceeds from this offering (before any exercise by the underwriters of their option to purchase additional shares of common stock from us) to pay, in part, the Series A Preferred Unit make whole premium to the holders of Series A Preferred Units. See “Corporate Conversion—Series A Preferred Unit Make Whole Premium.” If the underwriters’ option to purchase additional shares of common stock from us is exercised, the net proceeds therefrom are expected to be used for general corporate purposes, including the payment of offering expenses.

We will not receive any proceeds from the sale of shares of common stock offered by the selling stockholders pursuant to the underwriters’ option to purchase additional shares from the selling stockholders.

For further information on the relationship between the amount of net proceeds received by us and the payment of the Series A Preferred Unit make whole premium, see “Corporate Conversion—Pricing Sensitivity Analysis.”

 

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DIVIDEND POLICY

We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the growth of our business. The declaration, amount and payment of any dividends will be at the sole discretion of our board of directors and subject to certain considerations, including our results of operations, financial condition, capital requirements, investment opportunities, statutory restrictions on our ability to pay dividends and other factors our board of directors may deem relevant. In addition, our Credit Facilities place certain restrictions on our ability to pay cash dividends. See “Risk Factors—Risks related to our business and industry—Our debt agreements contain restrictions that limit our flexibility in operating our business,” “Risk Factors—Risks related to our common stock and this offering—We are a holding company with nominal net worth and will depend on dividends and distributions from our subsidiaries to pay any dividends” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and capital resources,” for descriptions of restrictions on our ability to pay dividends.

 

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CORPORATE CONVERSION

Conversion of Claire’s Holdings LLC to Claire’s Inc.

We currently operate as a Delaware limited liability company under the name Claire’s Holdings LLC. Prior to the effectiveness of the registration statement of which this prospectus forms a part, Claire’s Holdings LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to Claire’s Inc. Prior to the closing of this offering, Claire’s Inc. will effect the other corporate actions described below. In this prospectus, we refer to all of the transactions related to our conversion to a corporation as the Corporate Conversion.

The purpose of the Corporate Conversion is to convert the top-tier entity in our corporate structure—the entity that is offering common stock to the public in this offering—from a limited liability company to a corporation so that our existing and future investors will own shares of our common stock rather than membership interests in a limited liability company. Immediately prior to the Corporate Conversion, the outstanding limited liability company membership interests of Claire’s Holdings LLC consist of Common Units and Series A Preferred Units. In connection with the Corporate Conversion and the closing of the offering, all holders of outstanding membership interests of Claire’s Holdings LLC at the time of its conversion to Claire’s Inc. will be issued shares of common stock of Claire’s Inc. The number of common shares to be issued to a former holder of a Series A Preferred Unit will be calculated by dividing the stated value of a Series A Preferred Unit by $            . For details of the number of common shares to be issued in this regard, see “—Pricing Sensitivity Analysis.” In addition, former holders of Series A Preferred Units will be issued common shares as part of their make whole premium, as described below under “—Series A Preferred Unit Make Whole Premium.” Holders of a Common Unit will receive one common share. Such common shares will be subject to a     -for-     split of our common stock to occur after the effectiveness of the registration statement of which this prospectus forms a part and prior to the closing of this offering.

Following the Corporate Conversion, Claire’s Inc. will continue to hold all the property and assets of Claire’s Holdings LLC and continue to be responsible for all of the debts and obligations of Claire’s Holdings LLC. As of the closing of this offering, Claire’s Inc. will be governed by a certificate of incorporation filed with the Delaware Secretary of State and bylaws, the material provisions of which are described in “Description of Capital Stock.”

Except as otherwise noted herein, the consolidated financial statements included elsewhere in this prospectus are those of Claire’s Holdings LLC and its consolidated operations. We do not expect that the Corporate Conversion will have a material effect on the results of our core operations.

Series A Preferred Unit Make Whole Premium

The terms of the Series A Preferred Units require the payment of a make whole premium to the holders of the Series A Preferred Units upon completion of this offering. The make whole premium is required to be paid in cash only to the extent of the net proceeds of the offering (excluding the net proceeds from any exercise by the underwriters of their option to purchase additional shares of common stock from us), with the remainder of the make whole premium to be paid in common shares. The number of common shares to be issued in this regard will be calculated by dividing the amount of the make whole premium that is not paid in cash by $            .

The aggregate amount of the make whole premium for all outstanding Series A Preferred Units is $            . Using the mid-point of the price range indicated on the cover page of this prospectus,

 

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assuming that the number of common shares offered remains the same as that set forth on the cover page of this prospectus, we expect that net proceeds of the offering (excluding the net proceeds from any exercise by the underwriters of their option to purchase additional shares of common stock from us) in the amount of $             will be the amount of cash we use to pay part of the make whole premium and that we will issue                  common shares to pay the amount of the make whole premium not paid in cash. See also “—Pricing Sensitivity Analysis.”

Pricing Sensitivity Analysis

As described above, assuming that the number of common shares offered remains the same as that set forth on the cover page of this prospectus, the number of common shares that will be issued at closing of the offering to a former holder of a Series A Preferred Unit to pay the amount of the make whole premium not paid in cash will depend on the initial public offering price per common share in this offering and the resulting net proceeds available to pay part of the make whole premium in cash.

To the extent that the initial public offering price per common share in this offering is higher than the midpoint of the price range set forth on the cover page of this prospectus (assuming that the number of common shares offered remains the same as that set forth on the cover page of this prospectus):

 

•

the net proceeds from the offering will be higher;

 

•

the amount of the make whole premium to be paid in cash will be higher and the amount of the make whole premium to be paid in common shares will be lower; and

 

•

the number of common shares issued to the former holders of the Series A Preferred Units will be lower.

To the extent the initial public offering price per common share in this offering is lower than the midpoint of the price range set forth on the cover page of this prospectus (assuming that the number of common shares offered remains the same as that set forth on the cover page of this prospectus):

 

•

the net proceeds from the offering will be lower;

 

•

the amount of the make whole premium to be paid in cash will be lower and the amount of the make whole premium to be paid in common shares will be higher; and

 

•

the number of common shares issued to the former holders of the Series A Preferred Units will be higher.

 

62

The following table presents how each of (i) the aggregate make whole premium, (ii) the aggregate amount of the make whole premium to be paid in cash, (iii) the number of common shares to be issued to pay the amount of the make whole premium not paid in cash and (iv) the total number of common shares to be outstanding following the Corporate Conversion and the offering would be affected by an initial public offering price per common share at the low-, mid- and high-points of the price range indicated on the cover page of this prospectus, assuming that the underwriters’ option to purchase additional common shares from us is not exercised and that the number of common shares offered remains the same as that set forth on the cover page of this prospectus.

 

Initial Public Offering Price per Common Share

$

$

$

(unaudited)

(Dollars in millions, except shares)

Aggregate Series A Preferred Unit make whole premium amount

$

$

$

Aggregate amount of the make whole premium to be paid in cash

$

$

$

Number of common shares to be issued in the aggregate to former holders of Series A Preferred Units to pay the amount of the make whole premium not paid in cash

Total number of common shares to be outstanding after the Corporate Conversion and the offering (including all shares of common stock issued to former holders of Common Units and Series A Preferred Units, including in connection with the payment of the make whole premium, as well as shares of common stock issued in the offering)

Share Sensitivity Analysis

As described above, assuming that the number of common shares offered remains the same as that set forth on the cover page of this prospectus, the number of common shares that will be issued at closing of the offering to a former holder of a Series A Preferred Unit to pay the amount of the make whole premium not paid in cash will depend on the initial public offering price per common share in this offering and the resulting net proceeds available to pay part of the make whole premium in cash.

To the extent that the number of common shares that will be issued in this offering is higher than the number set forth on the cover page of this prospectus (assuming that the initial public offering price per common share in this offering is at the midpoint of the price range set forth on the cover page of this prospectus):

 

•

the net proceeds from the offering will be higher;

 

•

the amount of the make whole premium to be paid in cash will be higher and the amount of the make whole premium to be paid in common shares will be lower; and

 

•

the number of common shares issued to the former holders of the Series A Preferred Units will be lower.

The following table presents how each of (i) the aggregate make whole premium, (ii) the aggregate amount of the make whole premium to be paid in cash, (iii) the number of common shares to be issued to pay the amount of the make whole premium not paid in cash and (iv) the total number of common shares to be outstanding following the Corporate Conversion and the offering would be affected by an increase in the number of shares of common stock sold by us in the offering, as indicated in the table below, assuming in each case that the underwriters’ option to purchase additional

 

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common shares from us is not exercised and an initial public offering price per common share at the midpoint or the high point of the estimated price range set forth on the cover page of this prospectus.

 

Initial Public Offering Price per Common Share

$

$

Number of Common Shares Offered

+10%(1)

+20%(2)

+10%(3)

+20%(4)

(unaudited)

(Dollars in millions, except shares)

Aggregate Series A Preferred Unit make whole premium amount

$

$

$

$

Aggregate amount of the make whole premium to be paid in cash

$

$

$

$

Number of common shares to be issued in the aggregate to former holders of Series A Preferred Units to pay the amount of the make whole premium not paid in cash

Total number of common shares to be outstanding after the Corporate Conversion and the offering (including all shares of common stock issued to former holders of Common Units and Series A Preferred Units, including in connection with the payment of the make whole premium, as well as shares of common stock issued in the offering)

 

(1)

Reflects an increase in the number of shares of common stock of                  shares. (This increase represents the number of shares attributable to an increase of 10% of the maximum offering price indicated on the cover page of the registration statement of which this prospectus forms a part, assuming an initial public offering price per common share at the midpoint of the estimated price range set forth on the cover page of this prospectus.)

(2)

Reflects an increase in the number of shares of common stock of                  shares. (This increase represents the number of shares attributable to an increase of 20% of the maximum aggregate offering price indicated on the cover page of the registration statement of which this prospectus forms a part, assuming an initial public offering price per common share at the midpoint of the estimated price range set forth on the cover page of this prospectus.)

(3)

Reflects an increase in the number of shares of common stock of                  shares. (This increase represents the number of shares attributable to an increase of 10% of the maximum aggregate offering price indicated on the cover page of the registration statement of which this prospectus forms a part, assuming an initial public offering price per common share at the high point of the estimated price range set forth on the cover page of this prospectus.)

(4)

Reflects an increase in the number of shares of common stock of                  shares. (This increase represents the number of shares attributable to an increase of 20% of the maximum aggregate offering price indicated on the cover page of the registration statement of which this prospectus forms a part, assuming an initial public offering price per common share at the high point of the estimated price range set forth on the cover page of this prospectus.)

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and capitalization as of April 30, 2022:

 

•

on a historical basis;

 

•

on a pro forma basis to give effect to the conversion of Claire’s Holdings LLC into a Delaware corporation pursuant to a statutory conversion as described in “Corporate Conversion” and a     -for-     stock split that will occur prior to the closing of this offering; and

 

•

on a pro forma as adjusted basis to give further effect to (i) the sale of                  shares of our common stock in this offering (excluding the net proceeds from any exercise by the underwriters of their option to purchase additional shares of common stock from us) at an assumed initial offering price of $             per share, which is the midpoint of the estimated price range set forth on the cover of this prospectus, (ii) the application of the net proceeds from this offering to pay part of the Series A Preferred Unit make whole premium, as described in “Corporate Conversion” and “Use of Proceeds” and (iii) the issuance of                  common shares to former holders of Series A Preferred Units as described in “Corporate Conversion,” each of which will occur at, or in connection with, the closing of the offering.

The pro forma information set forth in the table below is illustrative only, gives effect to rounding and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. This table should be read in conjunction with “Corporate Conversion,” “Use of Proceeds,” “Summary Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included elsewhere in this prospectus.

 

		As of April 30, 2022
		Actual				Pro Forma				Pro Forma As Adjusted
		(In thousands, except share data)
Cash and cash equivalents		$	34,633			$				$
Debt, including current and long-term:
Term Loan			490,473
Unamortized debt issuance cost			1,914
Derivative liability			330,670
Total debt and derivative liability		$	823,057			$				$
Mezzanine equity:
Series A Preferred Units, $1,000 stated value: 533,124 issued and outstanding			359,601
Series A Preferred Shares, $1,000 stated value:                  and                 issued and outstanding			—
Members’ equity:
Common Units: 782,506 issued and outstanding			790,212
Common Shares:                  and                  issued and outstanding			—									(1)
Additional paid-in capital			15,077
Accumulated other comprehensive income (loss), net of tax			(8,394	)
Accumulated (deficit) earnings			(604,222	)								(2)
Total members’ (deficit) equity		$	192,673			$				$
Total capitalization		$	1,375,331			$				$

 

(1)	Reflects                  shares of common stock at $0.01 par value per share.

 

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(2)

Reflects the expected loss on derivative liability of $             as a result of the completion of the offering and elimination of the Series A Preferred Units. See the notes to our historical consolidated financial statements for additional information on the derivative liability associated with our Series A Preferred Units.

 

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DILUTION

If you invest in shares of our common stock, your investment will be immediately diluted to the extent of the difference between the initial public offering price per share of common stock and the pro forma as adjusted net tangible book value (deficit) per share of common stock immediately after this offering. Dilution results from the fact that the per share offering price of the shares of common stock in this offering is substantially in excess of the pro forma as adjusted net tangible book value (deficit) per share immediately after this offering.

Net tangible book value (deficit) represents total tangible assets less total liabilities. Tangible assets represent total assets excluding goodwill and other intangible assets. Net tangible book value (deficit) per share represents net tangible book value (deficit) divided by the aggregate number of shares of common stock outstanding.

Assuming no exercise of the underwriters’ option to purchase additional shares of common stock from us, the following table illustrates:

 

•

pro forma net tangible book value (deficit) per common share as of April 30, 2022 immediately prior to this offering after giving pro forma effect to the conversion of Claire’s Holdings LLC into a Delaware corporation pursuant to a statutory conversion as described in “Corporate Conversion” and a     -for-     stock split as if such corporate conversion and stock split had occurred on April 30, 2022;

 

•

pro forma as adjusted net tangible book value (deficit) per common share as of April 30, 2022 immediately after this offering after giving further effect to (i) the sale of                  shares of our common stock in this offering at an assumed initial offering price of $             per share, which is the midpoint of the estimated price range set forth on the cover of this prospectus, (ii) the application of the net proceeds from this offering to pay part of the Series A Preferred Unit make whole premium, as described in “Corporate Conversion” and “Use of Proceeds” and (iii) the issuance of common shares to former holders of Series A Preferred Units as described in “Corporate Conversion”;

 

•

the increase in pro forma net tangible book value (deficit) to the pre-offering common stockholders; and

 

•

the immediate dilution to new common stock investors, with such immediate dilution per share representing the difference between the price per share to be paid by new investors for the shares of our common stock sold in this offering and the pro forma as adjusted net tangible book value (deficit) per share immediately after this offering.

 

Assumed initial public offering price						$
Pro forma net tangible book value (deficit) per share immediately before the offering (1)		$
Increase in pro forma net tangible book value (deficit) per share attributable to existing common stockholders		$
Pro forma as adjusted net tangible book value (deficit) per share immediately after the offering (2)						$
Dilution per share to new investors						$

 

(1)	The computation of pro forma net tangible book value per share as of April 30, 2022 immediately before the offering, as described above, is set forth below:

 

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(in thousands, except per share data)
Book value of tangible assets		$
Less: total liabilities		$
Net tangible book value (deficit)		$
Pro forma shares of common stock outstanding
Pro forma net tangible book value (deficit) per share		$

 

(2)	The computation of pro forma as adjusted net tangible book value per share as of April 30, 2022 immediately after the offering, as described above, is set forth below:

 

(in thousands, except per share data)
Pro forma as adjusted book value of tangible assets		$
Less: Pro forma as adjusted total liabilities		$
Pro forma as adjusted net tangible book value (deficit)		$
Pro forma as adjusted shares of common stock outstanding
Pro forma as adjusted net tangible book value (deficit) per share		$

A $1.50 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after the offering by $            , and would increase (decrease) the dilution to new investors in the offering by $             per share, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions.

The following table illustrates, as of April 30, 2022, after giving effect to the sale by us of                  shares of our common stock in this offering at the initial public offering price of $             per share (the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus), the difference between the existing pre-offering LLC members holding common units (as described in note 1 to the table), and the investors purchasing shares of our common stock in this offering with respect to the number of shares of our common stock purchased from us, the total consideration paid or to be paid to us, and the average price per share paid or to be paid to us, before deducting underwriting discounts and commissions and the estimated offering expenses payable by us. In addition, the following table reflects the number of shares to be issued to former Series A Preferred Unit holders at closing of the offering, assuming that the number of common shares offered remains the same as that set forth on the cover page of this prospectus and the price per share is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, as described in “Corporate Conversion.”

 

		Shares purchased								Total consideration (in thousands)								Average price Per share
		Number				Percent				Amount				Percent
Pre-offering LLC members holding common units(1)								%		$						%		$
Investors purchasing shares of our common stock in this offering								%		$						%		$
Former LLC Series A Preferred Unit holders being issued shares of our common stock upon completion of the offering(2)								%		$						%		$
Total							100	%		$					100	%

 

(1)	The number of shares purchased by pre-offering LLC members holding common units is equal to the number of common units outstanding at April 30, 2022 immediately prior to this offering after giving pro forma effect to the conversion of Claire’s Holdings LLC into a Delaware corporation

 

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pursuant to a statutory conversion as described in “Corporate Conversion” and a     -for-     stock split as if such corporate conversion and stock split had occurred on April 30, 2022. The total consideration provided by pre-IPO LLC common members is equal to the Total Members’ equity of Claire’s Holdings LLC as of April 30, 2022.

(2)

As described in “Corporate Conversion,” in connection with the closing of the offering, the former holders of Series A Preferred Units will receive common shares in respect of the stated value of each unit as well as in part payment of the make whole premium in respect of such units, in each case using a price per common share of $            .

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a fully integrated global fashion brand powerhouse committed to inspiring self-expression through the creation and delivery of exclusive, well-curated products and experiences. We offer an immersive, experience-driven shopping environment for our consumers, with product offerings including jewelry, fashion accessories, tech accessories, cosmetics and more. Our trend-forward products are distributed in Claire’s^®-operated stores, via e-commerce and through our broad base of concession partners. For over 50 years, Claire’s^® has been a destination for the curious, creative and influential. Our entire ecosystem is anchored by our legacy in dynamic merchandising and our core piercing expertise and is informed by our unique understanding of and loyal relationship with our consumers worldwide.

We have two brands, Claire’s^®, our flagship brand, and Icing^®. Claire’s^® has a powerful following with the highly influential Generation Z audience, which consists of over 2.5 billion individuals globally. Based on customer feedback, we have a reputation for delivering a differentiated, trendsetting and diverse assortment of products, many of which are proprietary designs, that help young minds style and define themselves. We believe that we are the market share leader in retail piercing services in North America and the world’s largest ear piercing service provider, having pierced the ears of millions of customers over our 40-plus year history of piercing. Piercing services and related product sales represent a meaningful part of our revenue and serve as an important customer acquisition vehicle that draws new consumers to our stores every year. The dynamic combination of strong brand equity, unique and diverse product offerings and revenue from services offered in our stores creates a highly differentiated financial profile with attractive margins.

We are organized into two operating segments: North America and Europe. We identify our operating segments by how we manage and evaluate our business activities. We discuss our operating segments further under “—Segment Results.”

Factors Affecting Our Results of Operations

Our results of operations in any period may be affected by a number of factors. Set forth below is a brief discussion of some of the principal factors that have impacted, or that we expect may impact, our results of operations.

Macroeconomic conditions

General economic conditions and consumer activity in both North America and Europe, in particular general retail customer traffic and discretionary consumer spending, impact our business performance. General consumer demand for our products and services, which may differ between North America and Europe, is influenced by a number of general factors, including inflation, government fiscal policy, wages and employment, the availability of consumer credit and consumer debt, currency exchange rates, taxation, fuel and energy prices, interest rates, consumer confidence and other macroeconomic factors.

Furthermore, macroeconomic conditions, including inflation, currency rates, supply chain disruptions and labor supply and transportation capacity, and in particular the COVID-19 pandemic, also affect our operating and product costs. While we have been able to partially offset inflation and wage rate increases through a combination of passing such costs through the price of our merchandise

 

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and services, adjusting merchandise assortment, optimizing labor resources, and managing other operating expenses, there can be no assurance that future operating cost increases can be fully offset or that higher prices will be fully passed on to our customers without any resulting change to their visit frequencies or purchasing patterns. For example, we have experienced increased wage rates and shipping and distribution costs in 2021 and 2022 as a result of market-driven cost increases, including due to world-wide supply chain disruptions. We expect increased costs to continue in the near term.

Competition

As a specialty retailer of jewelry, accessories and piercing services, we face competition from a variety of other specialty, apparel, online and mass retailers. The product assortment and the service offering, pricing and promotions provided by our competitors impact our results of operations. We also compete for retail talent in the marketplace, and the currently competitive labor environment creates inflationary pressure on our labor rates.

Real estate locations

The choice of location of our Claire’s^® and Icing^® stores, as well as our concessions locations, is an important factor that contributes to our performance. We believe that one of our largest immediate opportunities is to diversify and grow our retail footprint, both in North America and Europe. As a result, much of our real estate strategy in recent years has focused on diversification of store locations, with particular emphasis on leaving underperforming mall locations in the United States. Individual location performance is driven by a number of factors, including: shopping center health; co-tenancy and overall consumer foot traffic; and the availability of alternative nearby retail locations to a given site (including on-mall and off-mall options).

We operate our stores under lease agreements whose length are generally between two and five years in North America and between five and ten years in Europe. The number of new stores that we open and the number of stores that we close during a particular period will impact our results of operations for that period. Additionally, our ability to negotiate new lease agreements, renegotiate existing lease terms and relocate or close our stores based on market conditions or other factors (such as the COVID-19 pandemic or overall increases in occupancy expenses), may impact our results of operations.

Changes in sales between business channels and products and services

Our results of operations may vary based on the relative sales and growth rates generated at our stores (including store-in-store locations) compared to our concessions locations. The capital expenditures and start-up costs as well as timing differ between store growth and concessions growth. In addition, changes in the mix of sales between jewelry and accessories (including changes in the mix of piercing sales) may also impact our operating performance during a particular period.

Investments

We have invested significantly in supporting the growth of our business. For example, certain capital expenditures, start-up costs and inventory investments are required for opening new stores, upgrading our existing stores and expanding into new concessions locations. These expenditures are generally incurred before our new or upgraded stores or concessions start to generate sales or profits.

We are committed to using technology to enhance our competitive position and have made strategic investments to redesign our supply chain and develop improved planning and allocation capabilities, upgrade our store network and information technology, and develop data analysis capabilities to drive decision making across all areas of the organization, including consumer trends,

 

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promotion management, real estate strategy and cost optimization. We intend to continue to make investments in our information systems to facilitate growth and enhance our competitive position. As we continue to expand and upgrade our footprint and information technology systems, our operating costs, inventory and capital expenditures will likewise reflect this growth.

Seasonality and fashion trends

Our business is relevant to our core customers throughout the year, with less significant seasonal impacts than are typically experienced by most retailers. Our quarterly business performance has historically exhibited more stable quarterly sales activity compared to other retailers, with each quarter typically representing approximately 20% to 30% of annual revenue. Our results can also be impacted by changes in consumer receptivity to our product offering from ever-changing fashion and design trends.

COVID-19

As a result of the public health risk and government-imposed quarantines and other restrictions on commercial activity to contain the spread of COVID-19, the Company’s Retail and Concessions sales were significantly impacted during fiscal years 2020 and 2021. From March 2020 to May 2020, we temporarily closed all of our stores in North America and Europe. During this period, many of our concessions locations were likewise closed and in some geographies, non-essential products (including our own) could not be sold at concessions locations that otherwise remained open.

Though we cannot estimate the precise impact of the COVID-19 pandemic on our results of operations, we note that net sales, gross profit and operating income (loss) were $1,394.7 million, $809.1 million, and $170.7 million, respectively, in fiscal year 2021, compared to $910.3 million, $444.2 million and $(9.4) million, respectively, in fiscal year 2020, compared to $1,284.5 million, $690.2 million and $148.4 million, respectively, in fiscal year 2019. In addition, segment net sales for North America and Europe were $1,107.1 million and $377.6 million, respectively, in fiscal year 2021, compared to $621.9 million and $288.4 million, respectively, in fiscal year 2020, compared to $831.5 million and $453.0 million, respectively, in fiscal year 2019. Segment operating income (loss) for North America and Europe were $160.0 million and $10.7 million, respectively, in fiscal year 2021, compared to $20.8 million and $(30.2) million, respectively, in fiscal year 2020, compared to $110.9 million and $37.4 million, respectively, in fiscal year 2019. We believe that these reductions in net sales, gross profit, operating income (loss) and segment operating income (loss) during fiscal year 2020 were largely attributable to the impact of COVID-19, in particular due to the temporary closure of all of our stores during March 2020 to May 2020, which resulted in no revenues generated at our stores during such period. We also believe our net sales, gross profit, operating income (loss) and segment operating income (loss) continued to be adversely affected by COVID-19, particularly in Europe, in fiscal year 2021.

Beginning in May 2020, we began to reopen our stores, but closed some of our stores again in North America (particularly in California, New York, Texas and certain Canadian provinces) and Europe from October to December 2020. As of January 30, 2021, we had 53 and 568 stores temporarily closed in North America and Europe, respectively. Throughout the pandemic, some of our stores that remained in operation were subject to restrictions on the number of customers allowed in the stores. As of April 30, 2022 and January 29, 2022, none of our stores were closed as a direct result of the COVID-19 pandemic and we had resumed sales at all of our concessions locations. During store closures, we focused on managing costs to preserve financial strength and liquidity through, for example, employee furloughs, executive pay reductions, rent payment negotiations and inventory management. See Note 2, “Summary of Significant Accounting Policies,” and Note 4, “Leases,” of our audited consolidated financial statements included elsewhere in this prospectus for more information regarding the impact of the COVID-19 pandemic on our lease accounting.

 

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As a result of store closures, restricted business operations after reopening in many areas and other aspects of responding to the COVID-19 pandemic, we incurred a number of costs that do not align with our normal business operations. These include store occupancy costs (primarily lease costs) and store labor costs for periods when our stores were closed, as well as additional cleaning and protective equipment. We estimate that these costs (net of recoveries) for fiscal year 2020 were approximately $60 million, and these costs are included in net income and Adjusted EBITDA for the periods shown. In fiscal year 2020 and fiscal year 2021, we deferred occupancy payments for a significant number of our closed stores due to COVID-19 driven closures. These deferrals are accrued, and we continued to recognize expense during the deferral periods based on the contractual terms of our lease agreements. As of January 29, 2022 and January 30, 2021, approximately $7.1 million and $43.7 million, respectively, of payment deferrals remained outstanding and potentially payable to our lessors, and are included in “Accrued expenses and other current liabilities” on our consolidated balance sheets. In addition, during fiscal year 2021 we continued to incur occupancy and labor costs on stores closed due to the COVID-19 pandemic. Moreover, we anticipate we will continue to experience elevated costs in areas such as freight, energy and payroll as economies continue to recover from the COVID-19 pandemic.

During 2020, the U.S. government enacted a number of emergency and continuing economic stimulus packages, including the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), the Paycheck Protection Program Flexibility Act and the Consolidated Appropriations Act. These measures included spending and tax breaks to strengthen the U.S. economy and fund a nationwide effort to curtail the economic effects of COVID-19. In Canada, the government enacted the Canada Emergency Wage Subsidy and the Canadian Emergency Rent Subsidy, which partially subsidize employee wages and business rental payments, respectively. In the European Union (“EU”), leaders agreed on a recovery fund (“Next Generation EU”) to help the recovery from the economic and social impacts of the pandemic. We have benefited from these governmental packages, including tax benefits in the United States, Canada and Europe. For example, in the United States, we have received relief from several programs: we received approximately $2 million for employee retention credits; we were permitted to defer payment of approximately $5 million of employee FICA taxes to December 31, 2021 and December 31, 2022; and we were allowed additional interest deductions for tax purposes. In Canada, we have received approximately $2 million under the Canadian Emergency Wage Subsidy and the Canadian Emergency Rent Subsidy programs. In Europe, we have received approximately $16 million from a variety of government occupancy grants in many of the countries in which we operate. In addition, in March 2021, the U.S. government enacted the American Rescue Plan Act of 2021, which resulted in stimulus payments that we believe have had a positive impact on our sales in the United States in fiscal year 2021.

The COVID-19 pandemic continues to impact our business operations, and related government and private sector responsive actions could continue to affect our operations. We continue to assess the impact of the COVID-19 pandemic on the assumptions and estimates used when preparing our consolidated financial statements, including inventory valuation, lease accounting impacts, income taxes, and the impairment of long-lived store assets and operating lease assets. We cannot reasonably estimate the duration and severity of the COVID-19 pandemic, which has had and may continue to have a material impact on our business. As a result, the assumptions and estimates used when preparing our consolidated financial statements are subject to change and current financial information may not be necessarily indicative of future operating results and our plans to address the impact of the COVID-19 pandemic may change.

Key Business Metrics

In addition to the components of our results of operations described below in “—Components of our results of operations” (in particular, net sales and gross profit), we review a number of operating and financial metrics, including the following key business metrics, to evaluate the performance of our business, identify trends, formulate business plans, make strategic decisions and assess operational efficiencies. Our calculation of the key business metrics and other measures discussed below may differ from other similarly titled metrics used by other companies, securities analysts or investors.

 

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Store count

Store count represents company-operated stores open as of the end of the reporting period. Store count includes conventional retail formats, which we refer to as “standalone stores,” as well as our “store-in-store” locations (where we operate Claire’s^® stores inside a retail partner’s stores). Store count excludes our concessions locations and franchised stores. We consider store count to be a key metric in evaluating the operations and performance of our business. The following table summarizes our company-operated stores as of April 30, 2022, January 29, 2022, May 1, 2021, January 30, 2021 and February 1, 2020.

 

		As of
		April 30, 2022				January 29, 2022				May 1, 2021				January 30, 2021				February 1, 2020
Company-operated Claire’s® stores, North America(1)			1,574				1,489				1,388				1,390				1,312
Company-operated Claire’s® stores, Europe(1)			871				878				893				905				937
Company-operated Icing® stores(1)			187				189				194				195				198

 

(1)

As of January 30, 2021, 49 of our company-operated Claire’s® stores in North America were temporarily closed due to the COVID-19 pandemic. As of January 30, 2021, 568 of our company-operated Claire’s® stores in Europe were temporarily closed due to the COVID-19 pandemic. As of January 30, 2021, four of our company-operated Icing® stores were temporarily closed due to the COVID-19 pandemic. No company-operated stores were temporarily closed due to the COVID-19 pandemic as of April 30, 2022, January 29, 2022 or February 1, 2020.

Same-store sales

Same-store sales include net sales from company-operated stores that have been open for at least 60 weeks since their opening date, and all e-commerce sales. Same-store sales also include net sales from stores that remained open while being remodeled and that have been relocated within close proximity of their initial locations. Stores that are remodeled and are closed during the remodel or are relocated beyond close proximity of the initial location are excluded from same-store sales during the affected period. A store that is temporarily closed, such as during a government ordered shut-down resulting from the COVID-19 pandemic, is generally removed from the same-store sales computation until the store is reopened. A store that is closed permanently, such as upon termination of the lease, is immediately removed from the same-store sales computation. We compute same-store sales on a local currency basis, which eliminates any impact for changes in foreign currency exchange rates.

There may be variations in the way in which some of our competitors and other retailers calculate same-store sales or comparable metrics. As a result, our same-store sales may not be comparable to similar data made available by other retailers. Non-same-store sales consists of sales from new stores that have been open for less than 60 weeks, sales from existing store relocation projects that were temporarily closed, concessions sales and franchise sales.

Measuring the change in fiscal year-over-year same-store sales is a key retail metric that allows us to evaluate how we are performing. Various factors may impact same-store sales, including:

 

•

consumer preferences, buying trends and overall economic trends;

 

•

our ability to identify and respond effectively to customer preferences and trends, as well as changes in our merchandise assortment;

 

•

pricing and promotions;

 

•

the customer experience we provide in our stores;

 

•

the level of customer traffic near our locations in the mall, power, community and lifestyle retail centers in which we operate and the level of customer traffic at the retail partners in which our store-in-stores are located;

 

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