Research by: Burt I. Ross August 19, 2016

CLAIRE’S STORES, INC. Taking Advantage of the Exchange Offer Recommendation I recommend buying Claire’s Stores (“CLE”) 8.875% Senior Secured Second Lien Notes due 2019, and tendering the notes in CLE’s exchange offer by August 25, 2016. CLE’s 8.875% notes are currently trading at 20 and can be exchanged at 31.6 for higher lien loans. In less than a month this trade has the potential of returning 58% on invested capital. Thesis Overview CLE was taken private by Apollo Global Management (“Apollo”) in 2007 in a highly leveraged buyout. The company has struggled with falling same store sales and a mall retail environment that is significantly changed from 2007. Due to these struggles, and the company’s large debt burden, the price of the 8.875% Senior Secured Second Lien Notes has fallen dramatically since issuance. CLE is trying to restructure some of this debt outside of bankruptcy with an exchange offer. This exchange offer will be used to retire some of CLE’s outstanding debt by issuing new securities with a lower principal amount, combined with a longer maturity and a stronger lien on assets. CLE has offered 8.875% 2019 note holders 31.6 if they tender the notes by August 25, 2016. The 31.6 offered in the exchange is a higher value than would be obtained in a Chapter 11 reorganization, making it likely that the exchange offer will be successful. Given the current market price of 20 the exchange offer represents a premium of 11.6 over current prices. Key Risks to Thesis There are two potential risks to the thesis above. The first is that CLE does not receive enough tenders for the exchange offer to proceed. This scenario would eventually lead to a Chapter 11 bankruptcy, where recovery values would be negligible. The second scenario is that the exchange offer takes place, but the investor has difficulty selling the new securities in the open market to realize the expected return.

Trade BUYCatalyst Category Event DrivenPrice Target 31.6 Price (8/19/2016): 20 Security: CLE 8.875% 2019 Industry: Retail Trading Stats ($USD) Enterprise Value: $1.3B Total Debt: ~$2.5B EV / 2015 EBITDA: 6x Source: Company filings, Wall Street Consensus

Analyst Details Name: Burt I. Ross Email: ross.burt@gmail.com Phone: 917-689-3179 Analyst Disclosure CLE Position Held: No

Research by: Burt I. Ross August 19, 2016

Company Overview CLE is a specialty retailer of fashionable jewelry and accessories for young women and girls aged 3-35. The company operates 2,831 stores in 17 countries throughout North America and Europe, with an additional 733 concession locations. CLE also franchised 579 stores in 29 countries primarily located in the Middle East, Central and Southeast Asia, Central and South America, and Southern Africa. The company was purchased in a leveraged buyout by Apollo in May 2007 for $3.1 billion, of which approximately $2.37 billion was financed by debt. Since the buyout by Apollo CLE has faced a number of headwinds. First the company was hit with the financial crisis and the subsequent economic recession. Then CLE has had the decline of malls weighing on its performance. While CLE has been able to maintain sales per square foot in their stores, which is a positive compared to other mall retailers, it also means that revenue growth will not be coming from any of their main stores.

The company has mostly posted losses since its buyout in 2007, with only a couple of years of minimal net profits from operations. In the last three years these losses have accelerated to a substantial size.

The significant and sustained losses have hurt CLE’s balance sheet, necessitating a restructuring. CLE is attempting to restructure some of its debt outside of bankruptcy via an exchange offering. The exchange offer seeks to replace almost $800 million of current outstanding notes with $230 million of higher lien and longer duration loans. The following table shows consideration offered for the exchange:

Research by: Burt I. Ross August 19, 2016

The new loans will have an interest rate of 9% and mature in 2021. The exchange offer will give CLE a lifeline, but it certainly will not be out of the woods. The company still faces many operational challenges, and will still have a substantial debt loan.

Bankruptcy Recovery Analysis My recovery analysis for CLE indicates the DIP loan would recover par, the Bank Credit Facility and Senior Secured First Lien Notes would take a haircut, while the second lien, unsecured, and equity would be wiped out. As shown in the summary below, in a chapter 11 reorganization the first lien creditors can expect to recover 58%.

For this analysis it is assumed CLE enters bankruptcy in 2017. Under the reorganization scenario CLE will take 15 months to emerge from bankruptcy, earning approximately $37 million of cash. The reorganization analysis assumes some of the current 2,831 main locations will be closed, and that sales will decrease to $1.05 billion annually. Nine scenarios of Company performance and EBITDA multiples were modeled, indicating a recovery range for Senior Secured creditors from 43.8% to 74.2%, with an average undiscounted recovery value of 58.2% (see chart below for discounted recovery ranges).

Summary Recovery % ReorgDIP 100%Senior Secured 58%Lower Lien Recovery 0.0%

Research by: Burt I. Ross August 19, 2016

The exchange offer gives a value to the lower lien securities that is higher than these holders would obtain in bankruptcy. Given the higher value and lien status of the new loans it would make sense for the holders of the lower lien securities to participate in the exchange offer.

$ millionRECOVERY CALCULATIONS Low Mid HighNet Sales 1,050.0$ EBITDA MarginEBITDATEV/EBITDA 5.0x 6.0x 7.0x 5.0x 6.0x 7.0x 5.0x 6.0x 7.0xTEV 735.0 882.0 1,029.0 787.5 945.0 1,102.5 840.0 1,008.0 1,176.0 Cash on Hand 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 DIP 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cash Earned/(Burned) 36.9 36.9 36.9 36.9 36.9 36.9 36.9 36.9 36.9 Admin Claims (157.3) (157.3) (157.3) (157.3) (157.3) (157.3) (157.3) (157.3) (157.3) Remaining Value for Creditors 734.6 881.6 1,028.6 787.1 944.6 1,102.1 839.6 1,007.6 1,175.6 DIP (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) Remaining Value for Secured Creditors 634.6 781.6 928.6 687.1 844.6 1,002.1 739.6 907.6 1,075.6 Recovery % DIP 100% 100% 100% 100% 100% 100% 100% 100% 100%Bank Credit Facility (115.0) (115.0) (115.0) (115.0) (115.0) (115.0) (115.0) (115.0) (115.0) Senior Secured First Lien Notes (1,335.0) (1,335.0) (1,335.0) (1,335.0) (1,335.0) (1,335.0) (1,335.0) (1,335.0) (1,335.0) Remaining Value for Lower Lien Claims (815.4) (668.4) (521.4) (762.9) (605.4) (447.9) (710.4) (542.4) (374.4)Recovery % Secured Claims 43.8% 53.9% 64.0% 47.4% 58.2% 69.1% 51.0% 62.6% 74.2%Value of Lower Lien Claims (1,029.0) (1,029.0) (1,029.0) (1,029.0) (1,029.0) (1,029.0) (1,029.0) (1,029.0) (1,029.0) Recovery % Lower Lien Creditors 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Average Lower Lien Recovery 0.0% 0.0% 0.0%15 Month Workout discounted @ 10% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%15 Month Workout discounted @ 20% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

$147.0 $157.5 $168.0

Claire's Stores Reorganization Case

14.0% 15.0% 16.0%

Research by: Burt I. Ross August 19, 2016

Research by: Burt I. Ross August 19, 2016