10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 28, 2009

Or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission file number: 001-33048

Bare Escentuals, Inc.

(Exact name of registrant as specified in its charter)

Delaware	20-1062857
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

71 Stevenson Street, 22^nd Floor

San Francisco, CA 94105

(Address of principal executive offices with zip code)

(415) 489-5000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

Large accelerated filer  x	Accelerated filer  ¨	Non-accelerated filer  ¨	Smaller reporting company  ¨
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

At July 29, 2009, the number of shares outstanding of the registrant’s common stock, $0.001 par value, was 91,995,001.

Table of Contents

Bare Escentuals, Inc.

INDEX

PART I—FINANCIAL INFORMATION		3
Item 1	Financial Statements (unaudited):	3
	Condensed Consolidated Balance Sheets—June 28, 2009 and December 28, 2008	3
	Condensed Consolidated Statements of Income—Three and Six Months Ended June 28, 2009 and June 29, 2008	4
	Condensed Consolidated Statements of Cash Flows—Six Months Ended June 28, 2009 and June 29, 2008	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4	Controls and Procedures	31
PART II—OTHER INFORMATION		32
Item 1	Legal Proceedings	32
Item 1A	Risk Factors	32
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3	Defaults Upon Senior Securities	33
Item 4	Submission of Matters to a Vote of Security Holders	33
Item 5	Other Information	33
Item 6	Exhibits	34
Signatures		35

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BARE ESCENTUALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	June 28, 2009			December 28, 2008(a)
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	97,499		$	47,974
Inventories		75,032			92,576
Accounts receivable, net of allowances of $4,965 and $8,930 at June 28, 2009 and December 28, 2008, respectively		29,090			42,304
Prepaid expenses and other current assets		11,867			10,302
Prepaid income taxes		2,541			—
Deferred tax assets, net		10,011			10,011
Total current assets		226,040			203,167
Property and equipment, net		78,883			71,157
Goodwill		15,409			15,409
Intangible assets, net		5,460			6,943
Other assets		3,112			3,105
Total assets	$	328,904		$	299,781
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt	$	17,216		$	17,216
Accounts payable		12,286			16,534
Accrued liabilities		22,263			20,260
Income taxes payable		—			3,053
Total current liabilities		51,765			57,063
Long-term debt, less current portion		216,921			223,808
Other liabilities		18,779			19,218
Commitments and contingencies
Stockholders’ equity (deficit):
Preferred stock; $0.001 par value; 10,000 shares authorized; zero shares issued and outstanding		—			—
Common stock; $0.001 par value; 200,000 shares authorized; 91,995 and 91,608 shares issued and outstanding at June 28, 2009 and December 28, 2008, respectively		92			92
Additional paid-in capital		428,885			425,352
Accumulated other comprehensive loss		(2,392	)		(4,155	)
Accumulated deficit		(385,146	)		(421,597	)
Total stockholders’ equity (deficit)		41,439			(308	)
Total liabilities and stockholders’ equity (deficit)	$	328,904		$	299,781

(a) Condensed consolidated balance sheet as of December 28, 2008 has been derived from the audited consolidated financial statements as of that date.

See accompanying notes.

3

BARE ESCENTUALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

	Three months ended						Six months ended
	(unaudited)						(unaudited)
	June 28, 2009			June 29, 2008			June 28, 2009			June 29, 2008
Sales, net	$	132,467		$	138,518		$	256,720		$	278,876
Cost of goods sold		35,533			39,017			68,870			77,674
Gross profit		96,934			99,501			187,850			201,202
Expenses:
Selling, general and administrative		56,165			50,691			110,227			101,155
Depreciation and amortization, relating to selling, general and administrative		4,247			2,821			8,341			5,442
Stock-based compensation, relating to selling, general and administrative		1,543			968			3,014			2,880
Operating income		34,979			45,021			66,268			91,725
Interest expense		(2,825	)		(4,280	)		(5,614	)		(8,924	)
Other income (expense), net		599			(40	)		161			667
Income before provision for income taxes		32,753			40,701			60,815			83,468
Provision for income taxes		12,991			16,009			24,364			32,993
Net income	$	19,762		$	24,692		$	36,451		$	50,475
Net income per share:
Basic	$	0.22		$	0.27		$	0.40		$	0.55
Diluted	$	0.21		$	0.26		$	0.39		$	0.54
Weighted-average shares used in per share calculations:
Basic		91,844			91,377			91,766			91,319
Diluted		93,371			93,363			93,124			93,320

See accompanying notes.

4

BARE ESCENTUALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Six months ended
	June 28, 2009			June 29, 2008
	(unaudited)
Operating activities
Net income	$	36,451		$	50,475
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment		6,807			3,958
Amortization of intangible assets		1,483			1,484
Amortization of debt issuance costs		97			123
Stock-based compensation		3,014			2,880
Excess tax benefit from stock option exercises		(158	)		(2,474	)
Deferred income tax benefit		(729	)		(866	)
Loss on disposal of property and equipment		484			—
Changes in assets and liabilities:
Inventories		17,886			(21,826	)
Accounts receivable		13,584			(1,897	)
Income taxes		(5,335	)		(6,286	)
Prepaid expenses and other current assets		(1,441	)		(570	)
Other assets		(85	)		(151	)
Accounts payable and accrued liabilities		(2,950	)		2,381
Other liabilities		1,465			680
Net cash provided by operating activities		70,573			27,911
Investing activities
Purchase of property and equipment		(14,769	)		(16,744	)
Proceeds from sale of property and equipment		—			1,299
Net cash used in investing activities		(14,769	)		(15,445	)
Financing activities
Repayments on First Lien Term Loan		(6,887	)		(17,023	)
Excess tax benefit from stock option exercises		158			2,474
Exercise of stock options		228			1,107
Net cash used in financing activities		(6,501	)		(13,442	)
Effect of foreign currency exchange rate changes on cash		222			(6	)
Net increase (decrease) in cash and cash equivalents		49,525			(982	)
Cash and cash equivalents, beginning of period		47,974			32,117
Cash and cash equivalents, end of period	$	97,499		$	31,135
Supplemental disclosure of cash flow information
Cash paid for interest	$	5,490		$	7,469
Cash paid for income taxes	$	30,408		$	38,273

See accompanying notes.

5

BARE ESCENTUALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Business

Bare Escentuals, Inc., together with its subsidiaries (“Bare Escentuals” or the “Company”), develops, markets, and sells branded cosmetics, skin care and body care products under the bareMinerals, RareMinerals, Buxom and md formulations brands. The bareMinerals cosmetics, particularly the core foundation products which are mineral-based, offer a highly differentiated, healthy alternative to conventional cosmetics. The Company uses a multi-channel distribution model utilizing traditional retail distribution channels consisting of premium wholesale customers including Sephora, Ulta and select department stores; company-owned boutiques; and spas and salons; as well as direct to consumer media distribution channels consisting of home shopping television on QVC, infomercials, and online shopping. The Company also sells products internationally in the United Kingdom, Japan, France, Germany and Canada as well as in smaller international markets via distributors.

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in Note 2 in the Company’s Form 10-K for the year ended December 28, 2008. The Company’s significant accounting policies have not changed significantly as of June 28, 2009 with the exception of the adoption of the new accounting pronouncements as noted below.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of June 28, 2009, the condensed consolidated statements of income for the three and six months ended June 28, 2009 and June 29, 2008, and the condensed consolidated statements of cash flows for the six months ended June 28, 2009 and June 29, 2008, are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information, Form 10-Q and Article 10 of Regulation S-X. In the opinion of the Company’s management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of June 28, 2009, its results of operations for the three and six months ended June 28, 2009 and June 29, 2008, and its cash flows for the six months ended June 28, 2009 and June 29, 2008. The results for the interim periods are not necessarily indicative of the results to be expected for any future period or for the fiscal year ending January 3, 2010. We have evaluated subsequent events through August 5, 2009, which is the date these financial statements were issued (Note 18).

These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s 2008 Annual Report on Form 10-K filed with the SEC on February 26, 2009.

Fiscal Quarter

The Company’s fiscal quarters end on the Sunday closest to March 31, June 30, September 30 and December 31. The three months ended June 28, 2009 and June 29, 2008 each contained 13 weeks. The six months ended June 28, 2009 and June 29, 2008 each contained 26 weeks.

Concentration of Credit Risk and Credit Risk Evaluation

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are held by or invested in various financial institutions with high credit standing and as such, management believes that minimal credit risk exists with respect to these balances.

Sales generated through credit card purchases were approximately 43.3% and 45.6% of total net sales for the three and six months ended June 28, 2009, respectively, and approximately 43.2% and 44.4% of total net sales for the three and six months ended June 29, 2008, respectively. The Company uses a third party to collect its credit card sales and, as a consequence, believes that its credit risks related to these channels of distribution are limited. The Company performs ongoing credit evaluations of its third-party resellers not paying by credit card. Generally, the Company does not require collateral. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection using specific identification of doubtful accounts and an aging of receivables analysis based on invoice due dates. Actual collection losses may differ from management’s estimates, and such differences could be material to the Company’s consolidated financial position, results of operations, and cash flows. Uncollectible receivables are written off against the allowance for doubtful accounts when all efforts to collect them have been exhausted, and recoveries are recognized when they are received. Generally, accounts receivable are past due after 30 days of an invoice date unless special payment terms are provided.

6

The table below sets forth the percentage of consolidated accounts receivable, net for customers who represented 10% or more of consolidated accounts receivable:

	June 28, 2009		December 28, 2008
Customer A	28	%	15	%
Customer B	15	%	19	%
Customer C	17	%	39	%

The table below sets forth the percentage of consolidated sales, net for customers who represented 10% or more of consolidated net sales:

	Three months ended				Six months ended
	June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
Customer A	16	%	17	%	12	%	15	%
Customer B	11	%	11	%	12	%	12	%
Customer C	13	%	13	%	12	%	14	%

As of June 28, 2009 and December 28, 2008, the Company had no off-balance sheet concentrations of credit risk.

Derivative Financial Instruments

The Company accounts for derivative financial instruments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Certain Hedging Activities, as amended (“Statement 133”), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Statement 133 also requires that all derivative instruments be recognized as either assets or liabilities on the balance sheet and that they be measured at fair value. On December 29, 2008, the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB No. 133 (“Statement 161”), which supplements the required disclosures under Statement 133 and its related interpretations.

Earnings per Share

A calculation of earnings per share, as reported, is as follows (in thousands, except per share data):

	Three months ended				Six months ended
	June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
Numerator:
Net income	$	19,762	$	24,692	$	36,451	$	50,475
Denominator:
Weighted average common shares used in per share calculations — basic		91,844		91,377		91,766		91,319
Add: Dilution from employee stock plans		1,527		1,986		1,358		2,001
Weighted-average common shares used in per share calculations — diluted		93,371		93,363		93,124		93,320
Net income per share
Basic	$	0.22	$	0.27	$	0.40	$	0.55
Diluted	$	0.21	$	0.26	$	0.39	$	0.54

For the three and six months ended June 28, 2009, options to purchase 1,241,420 and 1,699,809 shares of common stock, respectively, were excluded from the calculation of weighted average shares for diluted net income per share as their impact was anti-dilutive. For the three and six months ended June 29, 2008, options to purchase 582,900 and 495,938 shares of common stock, respectively, were excluded from the calculation of weighted average shares for diluted net income per share as their impact was anti-dilutive.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) consists of foreign currency translation adjustments and changes in unrealized gains or losses on interest rate swap, net of tax.

7

Reclassifications

Certain reclassifications of prior year amounts have been made to conform to the current year presentation. In the fourth quarter of fiscal 2008, the Company changed its operating segments, and historical segment financial information presented have been revised to reflect these new operating segments (Note 17).

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“Statement 157”). Statement 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 also applies under other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements. For financial assets and liabilities, the provisions of Statement 157 are effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which amends Statement 157 by delaying the effective date of Statement 157 to fiscal years ending after November 15, 2008 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company adopted Statement 157 on December 31, 2007 for financial assets and financial liabilities and on December 29, 2008 for nonfinancial assets and liabilities. It did not have any material impact on the Company’s results of operations or financial position (Note 14).

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“Statement 141(R)”). Statement 141(R) significantly changed the accounting for future business combinations after adoption. Statement 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired business. Statement 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Statement 141(R) is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company adopted Statement 141(R) on December 29, 2008, as required. It did not have any material impact on the Company’s results of operations or financial position.

In March 2008, the FASB issued Statement 161 which amends and expands the disclosure requirements of Statement 133 with the intent to provide users of financial statements with an enhanced understanding of: 1) how and why an entity uses derivative instruments; 2) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and 3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted Statement 161 on December 29, 2008. The adoption of Statement 161 had no financial impact on the financial position or results of operations as it is disclosure-only in nature.

In April 2009, the FASB issued FASB Staff Position SFAS 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (“SFAS 107-1 and APB 28-1”), which requires quarterly disclosure of information about fair value of financial instruments within the scope of Statement 107, Disclosures about Fair Values of Financial Instruments. SFAS 107-1 and APB 28-1 are effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company adopted the provisions of SFAS 107-1 and APB 28-1 in the second quarter of 2009. The adoption of SFAS 107-1 and APB 28-1 had no financial impact on the financial position or results of operations as it is disclosure-only in nature.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“Statement 165”). Statement 165 establishes general standards of accounting for, and requires disclosures of, events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. Statement 165 is effective for interim or annual financial periods ending after June 15, 2009, and should be applied prospectively. The Company adopted Statement 165 in the second quarter of 2009. It did not have any material impact on the Company’s results of operations or financial position.

In June 2009, the FASB issued SFAS No. 168, FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162 (“Statement 168”). Statement 168 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles. Statement 168 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. Statement 168 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. The Company will adopt Statement 168 in the third quarter of 2009, as required. The Company does not expect Statement 168 to have a material impact on its financial position or results of operations.

8

3. Acquisition

On April 3, 2007, the Company completed its acquisition of U.K.-based Cosmeceuticals Limited (“Cosmeceuticals”), which distributed Bare Escentuals’ bareMinerals, md formulations and MD Forte brands primarily to spas and salons and QVC U.K. The acquired entity has been renamed Bare Escentuals U.K. Ltd. The Company’s primary reason for the acquisition was to reacquire its distribution rights and to expand its market share. The consideration for the purchase was cash of $23.1 million, comprised of $22.4 million in cash consideration and $0.7 million of transaction costs. The Company’s consolidated financial statements include the operating results of the business acquired from the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material.

The total purchase price of $23.1 million was allocated as follows: $12.6 million to goodwill included as corporate assets (not deductible for income tax purposes), $8.9 million to identifiable intangible assets comprised of customer relationships of $8.0 million and $0.9 million for non-compete agreements, $4.4 million to net tangible assets acquired, and $2.8 million to deferred tax liability. The estimated useful economic lives of the identifiable intangible assets acquired are three years. The most significant factor that resulted in the recognition of goodwill in the purchase price allocation was the ability to expand on an accelerated basis into trade areas beyond the acquired distribution rights.

During the six months ended June 29, 2008, the Company sold $1.3 million of the net tangible assets acquired to a third party for proceeds of $1.3 million. There was no gain or loss recorded in this transaction.

4. Comprehensive Income

The components of comprehensive income were as follows (in thousands):

	Three months ended				Six months ended
	June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
Net income	$	19,762	$	24,692	$	36,451	$	50,475
Foreign currency translation adjustments, net of tax		1,149		55		565		(6	)
Unrealized gain (loss) on interest rate swap, net of tax		659		1,277		1,198		(191	)
Comprehensive income	$	21,570	$	26,024	$	38,214	$	50,278

The components of accumulated other comprehensive loss were as follows (in thousands):

	June 28, 2009			December 28, 2008
Foreign currency translation adjustments, net of tax	$	(1,927	)	$	(2,492	)
Unrealized loss on interest rate swap, net of tax		(465	)		(1,663	)
Total accumulated other comprehensive loss	$	(2,392	)	$	(4,155	)

5. Inventories

Inventories consisted of the following (in thousands):

	June 28, 2009		December 28, 2008
Work in process	$	12,367	$	14,058
Finished goods		62,665		78,518
	$	75,032	$	92,576

9

6. Property and Equipment, Net

Property and equipment, net, consisted of the following (in thousands):

	June 28, 2009			December 28, 2008
Furniture and equipment	$	19,446		$	16,749
Computers and software		26,940			22,347
Leasehold improvements		52,292			45,959
		98,678			85,055
Accumulated depreciation		(23,316	)		(17,285	)
		75,362			67,770
Construction-in-progress		3,521			3,387
Property and equipment, net	$	78,883		$	71,157

10

7. Intangible Assets, Net

Intangible assets, net, consisted of the following (in thousands):

	June 28, 2009			December 28, 2008
Customer relationships	$	8,000		$	8,000
Trademarks		3,233			3,233
Domestic customer base		939			939
International distributor base		820			820
Non-compete agreements		900			900
		13,892			13,892
Accumulated amortization		(8,432	)		(6,949	)
Intangible assets, net	$	5,460		$	6,943

8. Other Assets

Other assets consisted of the following (in thousands):

	June 28, 2009		December 28, 2008
Debt issuance costs, net of accumulated amortization of $667 and $570 at June 28, 2009 and December 28, 2008, respectively	$	451	$	548
Other assets		2,661		2,557
	$	3,112	$	3,105

9. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	June 28, 2009		December 28, 2008
Employee compensation and benefits	$	9,888	$	6,793
Gift cards and customer liabilities		2,350		2,817
Royalties		1,683		1,646
Sales taxes and local business taxes		1,807		1,983
Interest		233		311
Other		6,302		6,710
	$	22,263	$	20,260

10. Revolving Lines of Credit

At June 28, 2009, $24,680,000 was available under our revolving line of credit (the “Revolver”) and $320,000 was outstanding in letters of credit. Borrowings under the Revolver bear interest at a rate equal to, at the Company’s option, either LIBOR or the lenders’ base rate, plus an applicable margin based on a grid in which the pricing depends on the Company’s consolidated total leverage ratio and debt rating (2.25% plus LIBOR or 1.25% plus lenders’ base rate; actual rate of 2.57% at June 28, 2009 and 2.76% at December 28, 2008). The Company is also required to pay commitment fees of 0.5% per annum on any unused portions of the facility.

11

11. Long-Term Debt

Long-term debt consisted of the following (in thousands):

	June 28, 2009			December 28, 2008
First Lien Term Loan	$	234,137		$	241,024
Less current portion		(17,216	)		(17,216	)
Total long-term debt, net of current portion	$	216,921		$	223,808

First Lien Term Loan

The First Lien Term Loan has an original term of seven years expiring on February 18, 2012 and bears interest at a rate equal to, at the Company’s option, either LIBOR or the lenders’ base rate, plus an applicable margin varying based on the Company’s consolidated total leverage ratio. As of June 28, 2009 and December 28, 2008, the interest rate on the First Lien Term Loan was accruing at 2.57% and 2.76%, respectively (without giving effect to the interest rate swap agreement).

Borrowings under the Revolver (Note 10) and the First Lien Term Loan are secured by substantially all of the Company’s assets, including, but not limited to, all accounts receivable, inventory, property and equipment, and intangibles. The terms of the senior secured credit facilities require the Company to comply with financial covenants, including maintaining a leverage ratio and entering into interest rate swap or similar agreements with respect to 40% of the principal amounts outstanding under the Company’s senior secured credit facilities as of October 2, 2007. The secured credit facility also contains nonfinancial covenants that restrict some of the Company’s activities, including its ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments, and engage in specified transactions with affiliates. As of June 28, 2009, the Company was in compliance with its financial and nonfinancial covenants.

Scheduled Maturities of Long-Term Debt

At June 28, 2009, future scheduled principal payments on long-term debt were as follows (in thousands):

Year ending:
Remainder of the year ending January 3, 2010	$	10,330
January 2, 2011		13,773
January 1, 2012		158,386
December 30, 2012		51,648
	$	234,137

12. Derivative Financial Instruments

On December 29, 2008, the Company adopted Statement 161. The Company is exposed to interest rate risks primarily through borrowings under its senior secured credit facilities. Interest on all of the Company’s borrowings under its senior secured credit facilities is based upon variable interest rates. As of June 28, 2009, the Company had borrowings of $234.1 million outstanding under its senior secured credit facilities which bear interest at a rate equal to, at the Company’s option, either LIBOR or the lenders’ base rate, plus an applicable margin varying based on the Company’s consolidated total leverage ratio. As of June 28, 2009, the interest rate on the First Lien Term Loan was accruing at 2.57% (without giving effect to the interest rate swap agreement discussed below). At all times after October 2, 2007, the Company is required under its senior secured credit facilities to enter into interest rate swap or similar agreements with respect to at least 40% of the outstanding principal amount of all loans under its senior loan facilities, unless the Company satisfies specified coverage ratio tests. For the three and six months ended June 28, 2009, the Company satisfied these tests.

In August 2007, the Company entered into a two-year interest rate swap agreement under the Company’s senior secured credit facilities. The interest rate swap was designated as a cash flow hedge of future interest payments of LIBOR and had an initial notional amount of $200 million which declined to $100 million after one-year under which, on a net settlement basis, the Company will make monthly fixed rate payments, excluding a margin of 2.25%, at the rate of 5.03% and the counterparty makes monthly floating rate payments based upon one-month U.S. dollar LIBOR. As a result of the interest rate swap transaction, the Company has fixed for a two-year period the interest rate subject to market-based interest rate risk on $200 million of borrowings for the first year and $100 million of borrowings for the second year under its First Lien Credit Agreement. The Company’s obligations under the interest rate swap transaction as to the scheduled payments are guaranteed and secured on the same basis as is its obligations under the First Lien Credit Agreement.

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The following table summarizes the fair value and presentation within the unaudited condensed consolidated balance sheets for derivatives designated as hedging instruments under Statement 133 (in thousands):

	Liability Derivative
	June 28, 2009			December 28, 2008
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swap	Other liabilities	$	770	Other liabilities	$	2,752

The following table presents the impact of derivative instruments and their location within the unaudited condensed consolidated statements of income and accumulated other comprehensive income (AOCI) (in thousands):

Derivatives in Statement 133 Cash Flow Hedging Relationships

	Amount of (Gain) Loss Recognized in AOCI on Derivatives (Effective Portion)						Amount of (Gain) Loss Reclassified from AOCI into Income (Effective Portion)				Amount of (Gain) Loss Recognized in Income on Derivatives (Ineffective Portion)
	Three months ended						Three months ended				Three months ended
	June 28, 2009			June 29, 2008			June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
Interest rate swap, net of tax	$	(659	)	$	(1,277	)	$	—	$	—	$	—	$	—
	Amount of (Gain) Loss Recognized in AOCI on Derivatives (Effective Portion)						Amount of (Gain) Loss Reclassified from AOCI into Income (Effective Portion)				Amount of (Gain) Loss Recognized in Income on Derivatives (Ineffective Portion)
	Six months ended						Six months ended				Six months ended
	June 28, 2009			June 29, 2008			June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
Interest rate swap, net of tax	$	(1,198	)	$	191		$	—	$	—	$	—	$	—

13. Commitments and Contingencies

Lease Commitments

The Company leases retail boutiques, distribution facilities, office space and certain office equipment under non-cancelable operating leases with various expiration dates through January 2021. Additionally, the Company subleases certain real property to third parties. Portions of these payments are denominated in foreign currencies and were translated in the tables below based on their respective U.S. dollar exchange rates at June 28, 2009. These future payments are subject to foreign currency exchange rate risk. The future minimum annual payments and anticipated sublease income under such leases in effect at June 28, 2009, were as follows (in thousands):

	Minimum Rental Payments		Sublease Rental Income		Net Minimum Lease Payments
Year ending:
Remainder of the year ending January 3, 2010	$	9,143	$	12	$	9,131
January 2, 2011		20,049		25		20,024
January 1, 2012		20,067		25		20,042
December 30, 2012		20,223		1		20,222
December 29, 2013		20,632		—		20,632
Thereafter		93,276		—		93,276
	$	183,390	$	63	$	183,327

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Many of the Company’s retail boutique leases require additional contingent rents when certain sales volumes are reached. Total rent expense was $6,546,000 and $12,630,000 for the three and six months ended June 28, 2009, respectively, and $4,982,000 and $9,403,000 for the three and six months ended June 29, 2008, respectively. Total rent expense included contingent rents of $155,000 and $345,000 for the three and six months ended June 28, 2009, respectively, and $384,000 and $940,000 for the three and six months ended June 29, 2008, respectively. Several leases entered into by the Company include options that may extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inception.

As of June 28, 2009, under the terms of its corporate office lease, the Company had outstanding an irrevocable standby letter of credit of $100,000 to the lessor for the term of the lease.

Royalty Agreements

The Company is party to a license agreement (the “License”) for use of certain patents associated with some of the skin care products sold by the Company. The License requires that the Company pay a quarterly royalty of 4% of the net sales of certain skin care products for an indefinite period of time. The License also requires minimum annual royalty payments of $600,000 from the Company. The Company can terminate the agreement at any time with six months written notice. The Company’s royalty expense under the License for the three and six months ended June 28, 2009 was $150,000 and $300,000, respectively and $150,000 and $300,000, for the three and six months ended June 29, 2008, respectively.

In March 2009, the Company entered into a new agreement for the license rights to proprietary mineral extraction technology and a limited exclusive right to purchase certain ingredients based on such technology. The license is exclusive to the Company for a specified period from the date of the agreement in certain defined fields of use and is otherwise nonexclusive for the term of the agreement. However, the Company has the right to extend the term of the exclusivity in the defined fields of use to the full term of the agreement upon a one-time payment of a specified amount or achievement of a specified level of annual aggregate gross revenues from the sale of licensed products in the defined fields of use. The Company is required to pay three lump-sum commencement payments over the course of the first year of the term of the agreement. In addition, on a quarterly basis during the term of the agreement, the Company is required to pay royalties on its net revenue resulting from the sale of products containing the licensed ingredients. Such royalties are not subject to any minimum annual amounts. The new agreement has an initial term of 10 years. As a result of the new agreement, the Company’s previous agreement was terminated. The Company’s expense under these agreements for the three and six months ended June 28, 2009 was $83,000 and $126,000, respectively, and was $259,000 and $569,000 for the three and six months ended June 29, 2008.

Contingencies

The Company is involved in various legal and administrative proceedings and claims arising in the ordinary course of its business. The ultimate resolution of such claims would not, in the opinion of management, have a material effect on the Company’s financial position, results of operations or cash flows.

14. Fair Value Measurements

The Company adopted Statement 157 as of December 31, 2007 for financial assets and liabilities and as of December 29, 2008 for nonfinancial assets and liabilities. The Company also adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (“Statement 159”), in which entities are permitted to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value option for any of its eligible financial assets or liabilities under Statement 159.

Statement 157 established a three-tier hierarchy for fair value measurements, which prioritizes the inputs used in measuring fair value as follows:

• Level 1 – observable inputs such as quoted prices for identical instruments in active markets.

• Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.

• Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions.

As of June 28, 2009 and December 28, 2008, the Company held certain assets that are required to be measured at fair value on a recurring basis. These included the Company’s interest rate swap agreement and certain investments associated with the Company’s Long-Term Employee-Related Benefits Plan. The fair value of the Company’s interest rate swap agreement is determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized the interest rate swap as Level 2. The fair value of the Company’s investments associated with its Long-Term Employee-Related Benefits Plan is based on third-party reported net asset values, which is primarily based on quoted market prices of the underlying assets of the funds and have been categorized as Level 2.

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The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 28, 2009 subject to the disclosure requirements of Statement 157 (in thousands):

			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
Other assets:
Deferred compensation	$	1,276	$	—	$	1,276	$	—
Other liabilities:
Interest rate swap	$	770	$	—	$	770	$	—
Deferred compensation		758		—		758		—
Total liabilities	$	1,528	$	—	$	1,528	$	—

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 28, 2008 subject to the disclosure requirements of Statement 157 (in thousands):

			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
Other assets:
Deferred compensation	$	1,232	$	—	$	1,232	$	—
Other liabilities:
Interest rate swap	$	2,752	$	—	$	2,752	$	—
Deferred compensation		886		—		886		—
Total liabilities	$	3,638	$	—	$	3,638	$	—

15. Income Taxes

As of June 28, 2009, the total amount of net unrecognized tax benefits was $2,829,000. This amount includes $260,000 of net unrecognized tax benefits that, if recognized, would affect the effective tax rate. The Company accrues interest related to unrecognized tax benefits in its provision for income taxes. As of June 28, 2009, the Company had approximately $365,000 of accrued interest, net of tax, related to uncertain tax positions.

The Company anticipates that it is reasonably possible that the gross amount of unrecognized tax benefits balance may change by a range of zero to $250,000 in the next twelve months as a result of the settlement of certain tax audits and expiration of applicable statutes of limitation in certain jurisdictions.

The Company files income tax returns in the United States and in various states, local and foreign jurisdictions. The tax years subsequent to 2003 remain open to examination by the major taxing jurisdictions in the United States.

16. Stock-Based Employee Compensation Plans

As of June 28, 2009, the Company had reserved 8,957,886 shares of common stock for future issuance.

2004 Equity Incentive Plan

On June 10, 2004, the board of directors adopted the 2004 Equity Incentive Plan (the “2004 Plan”). The 2004 Plan provides for the issuance of non-qualified stock options for common stock to employees, directors, consultants, and other associates. The options generally vest over a period of five years from the date of grant and have a maximum term of ten years.

In conjunction with the adoption of the 2006 Equity Incentive Plan in September 2006, no additional options are permitted to be granted under the 2004 Plan. In addition, any shares subject to outstanding options cancelled under the 2004 Plan became available to grant under the 2006 Equity Incentive Plan.

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A summary of activity under the 2004 Plan is set forth below:

			Options Outstanding
	Shares Subject to Options Available for Grant		Number of Shares		Weighted- Average Exercise Price
Balance at December 28, 2008	—		3,550,729		$	2.37
Exercised	—		(262,377	)		0.87
Canceled	70,386		(70,386	)		5.21
Rolled over to 2006 Plan	(70,386	)	—			—
Balance at June 28, 2009	—		3,217,966		$	2.42

At June 28, 2009, there were total outstanding vested options to purchase 1,583,100 shares under the 2004 Plan at a weighted-average exercise price of $1.91.

The total intrinsic value of options exercised under the 2004 Plan for the six months ended June 28, 2009 was $868,000.

2006 Equity Incentive Plan

On September 12, 2006, the Company’s stockholders approved the 2006 Equity Incentive Award Plan (the “2006 Plan”) for executives, directors, employees and consultants of the Company. A total of 4,500,000 shares of the Company’s Common Stock have been reserved for issuance under the 2006 Plan. Awards are granted with an exercise price equal to the closing market price of the Company’s Common Stock at the date of grant except for restricted stock awards (“RSAs”) and restricted stock units (“RSUs”). The awards generally vest over a period of one to five years from the date of grant and have a maximum term of ten years.

A summary of stock options activity under the 2006 Plan is set forth below:

			Options Outstanding
	Shares Subject to Options Available for Grant		Number of Shares		Weighted- Average Exercise Price
Balance at December 28, 2008	4,131,681		1,518,350		$	12.36
Rolled over from 2004 Plan	70,386		—			—
Granted	(351,985	)	351,985			5.33
Canceled	163,775		(163,775	)		15.39
Balance at June 28, 2009	4,013,857		1,706,560		$	10.62

At June 28, 2009, there were total outstanding vested options to purchase 164,593 shares under the 2006 Plan at a weighted-average exercise price of $25.40.

The total cash received from employees as a result of employee stock option exercises under all plans for the six months ended June 28, 2009 was $228,000. In connection with these exercises, the tax benefits realized by the Company for the six months ended June 28, 2009 were $158,000.

A summary of restricted stock activity under the 2006 Plan is set forth below:

	Shares
Balance at December 28, 2008	50,000
Granted	94,804
Vested	(12,500	)
Canceled	—
Balance at June 28, 2009	132,304

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The weighted average fair value of RSAs and RSUs granted during the six months ended June 28, 2009 was $4.54. The total fair value of RSAs vested during the six months ended June 28, 2009 was $248,000.

17. Segment and Geographic Information

Operating segments are defined as components of an enterprise engaging in business activities for which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and assessing performance. The Company’s Chief Executive Officer has been identified as the CODM as defined by Statement 131, Disclosures about Segments of an Enterprise and Related Information.

One of the Company’s key objectives is the further expansion of its business internationally and as a consequence, the operating results that the CODM reviews to make decisions about resource allocations and to assess performance have changed to be more geographically focused. In the fourth quarter of fiscal 2008, the Company re-evaluated its operating segments to bring them in line with these changes and how management currently reviews and evaluates the operating performance of the Company and accordingly, the new segments include: North America Retail, North America Direct to Consumer, and International. The North America Retail segment includes all products marketed in the United States and Canada and consists of sales to end users either directly through company-owned boutiques or through third-party resellers in a branded, prestige retail environment. The North America Direct to Consumer segment includes all products marketed in the United States and Canada and consists of sales through television or online media to end users who then receive their product via mail. The International segment includes all operations outside the United States and Canada, regardless of method of delivery to the end user. Prior to fiscal 2008, the Company’s operating segments were Retail and Wholesale. As a result, historical segment financial information presented has been revised to reflect these new operating segments.

These reportable segments are strategic business units that are managed separately based on the fundamental differences in their operations. The following table presents certain financial information for each segment. Operating income is the gross margin of the segment less direct expenses of the segment. Some direct expenses, such as media and advertising spend, do impact the performance of the other segments, but these expenses are recorded in the segment to which they directly relate and are not allocated among the segments. The Corporate column includes unallocated selling, general and administrative expenses, depreciation and amortization and stock-based compensation expenses. Corporate selling, general and administrative expenses include headquarters facilities costs, distribution center costs, product development costs, corporate headcount costs and other corporate costs, including information technology, finance, accounting, legal and human resources costs. These items, while often times related to the operations of a segment, are not considered by segment operating management and the CODM in assessing segment performance.

	North America Retail		North America Direct to Consumer		International		Corporate			Total
Three Months ended June 28, 2009
Sales, net	$	77,930	$	38,971	$	15,566	$	—		$	132,467
Cost of goods sold		17,508		12,595		5,430		—			35,533
Gross profit		60,422		26,376		10,136		—			96,934
Operating expenses:
Selling, general and administrative		25,332		9,449		5,690		15,694			56,165
Depreciation and amortization		1,444		—		1,036		1,767			4,247
Stock-based compensation		—		—		—		1,543			1,543
Total expenses		26,776		9,449		6,726		19,004			61,955
Operating income (loss)		33,646		16,927		3,410		(19,004	)		34,979
Interest expense											(2,825	)
Other income, net											599
Income before provision for income taxes											32,753
Provision for income taxes											12,991
Net income										$	19,762

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	North America Retail		North America Direct to Consumer		International		Corporate			Total
Three Months ended June 29, 2008
Sales, net	$	74,110	$	48,420	$	15,988	$	—		$	138,518
Cost of goods sold		16,827		16,360		5,830		—			39,017
Gross profit		57,283		32,060		10,158		—			99,501
Operating expenses:
Selling, general and administrative		17,953		13,937		3,249		15,552			50,691
Depreciation and amortization		755		7		844		1,215			2,821
Stock-based compensation		—		—		—		968			968
Total expenses		18,708		13,944		4,093		17,735			54,480
Operating income (loss)		38,575		18,116		6,065		(17,735	)		45,021
Interest expense											(4,280	)
Other expense, net											(40	)
Income before provision for income taxes											40,701
Provision for income taxes											16,009
Net income										$	24,692

	North America Retail		North America Direct to Consumer		International		Corporate			Total
Six Months ended June 28, 2009
Sales, net	$	151,139	$	74,141	$	31,440	$	—		$	256,720
Cost of goods sold		35,466		22,889		10,515		—			68,870
Gross profit		115,673		51,252		20,925		—			187,850
Operating expenses:
Selling, general and administrative		47,500		20,836		9,731		32,160			110,227
Depreciation and amortization		2,807		7		1,975		3,552			8,341
Stock-based compensation		—		—		—		3,014			3,014
Total expenses		50,307		20,843		11,706		38,726			121,582
Operating income (loss)		65,366		30,409		9,219		(38,726	)		66,268
Interest expense											(5,614	)
Other income, net											161
Income before provision for income taxes											60,815
Provision for income taxes											24,364
Net income										$	36,451

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	North America Retail		North America Direct to Consumer		International		Corporate			Total
Six Months ended June 29, 2008
Sales, net	$	152,152	$	96,668	$	30,056	$	—		$	278,876
Cost of goods sold		37,033		30,365		10,276		—			77,674
Gross profit		115,119		66,303		19,780		—			201,202
Operating expenses:
Selling, general and administrative		33,246		29,598		5,454		32,857			101,155
Depreciation and amortization		1,398		14		1,663		2,367			5,442
Stock-based compensation		—		—		—		2,880			2,880
Total expenses		34,644		29,612		7,117		38,104			109,477
Operating income (loss)		80,475		36,691		12,663		(38,104	)		91,725
Interest expense											(8,924	)
Other income, net											667
Income before provision for income taxes											83,468
Provision for income taxes											32,993
Net income										$	50,475

The Company’s long-lived assets, excluding goodwill and intangibles, by segment were as follows (in thousands):

	June 28, 2009		December 28, 2008
North America Retail	$	44,956	$	38,628
North America Direct to Consumer		—		84
International		5,616		2,594
Corporate		29,591		31,036
	$	80,163	$	72,342

Long-lived assets allocated to the North America Retail segment consist of fixed assets and deposits for retail stores. Long-lived assets in Corporate consist of fixed assets, tooling costs and deposits related to the Company’s corporate offices and distribution centers.

The Company’s long-lived assets, excluding goodwill and intangibles, by geographic area were as follows (in thousands). For the table below, Canada is included in International.

	June 28, 2009		December 28, 2008
United States	$	74,345	$	69,390
International		5,818		2,952
	$	80,163	$	72,342

No individual geographical area outside of the United States accounted for more than 10% of net sales in any of the periods presented. The Company’s sales by geographic area were as follows (in thousands). For the table below, Canada is included in International.

	Three months ended				Six months ended
	June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
United States	$	116,332	$	122,528	$	224,340	$	248,818
International		16,135		15,990		32,380		30,058
Sales, net	$	132,467	$	138,518	$	256,720	$	278,876

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18. Subsequent Event

On July 17, 2009, the Material Yard Workers Local 1175 Benefit Funds filed a stockholder class action in the United States District Court for the Northern District of California. The complaint names as defendants the Company, our Chief Executive Officer and our Chief Financial Officer. It was purportedly filed on behalf of all persons who purchased Company stock between November 7, 2006, and November 26, 2007 (the “Class Period”). The complaint alleges violations of the Securities Exchange Act of 1934 based on, among other things, alleged misrepresentations and omissions of material facts relating to the Company’s financial condition during the Class Period, and it seeks relief in the form of compensatory damages, attorneys’ fees and costs.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by words such as “anticipate,” “expect,” “believe,” “plan,” “intend,” “predict,” “will,” “may,” and similar terms. The forward-looking statements in this Form 10-Q include, but are not limited to, statements regarding our plans to grow our business by expanding product offerings and developing new brands or brand extensions; our planned opening of new boutiques; our intention to invest strategically in areas of our business and the potential for those investments to create long-term value; our plans to enhance our information technology systems and make other investments in domestic and international corporate infrastructure; our expectations for future revenue, margins, expenses, operating results, inventory levels and capital expenditures; our anticipated working capital needs and the adequacy of our capital resources; and our possible acquisition of or investment in complementary businesses or products. Such forward-looking statements are based on current expectations, estimates and projections about our industry, as well as our management’s beliefs and assumptions. Forward-looking statements, by their nature, involve risks and uncertainties and are not guarantees of future performance. Our actual results may differ materially from the results discussed in the forward-looking statements due to a variety of factors including, but not limited to, those discussed in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 28, 2008, filed with the SEC on February 26, 2009. The discussion throughout this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 “Financial Statements” in this Form 10-Q. Unless required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

Founded in 1976, Bare Escentuals is one of the leading prestige cosmetic companies in the United States and an innovator in mineral-based cosmetics. We develop, market and sell branded cosmetics and skin care products primarily under our bareMinerals, RareMinerals, Buxom and md formulations brands worldwide.

We utilize a distinctive marketing strategy and a multi-channel distribution model consisting of premium wholesale customers including Sephora, Ulta and select department stores; company-owned boutiques; spas and salons; home shopping television on QVC; infomercials; online shopping and international distributors. We believe that this strategy provides convenience to our consumers and allows us to reach a broad spectrum of consumers.

In the fourth quarter of fiscal 2008, we re-evaluated how we internally review our business performance and, in turn, changed our operating segments to be more geographically focused (and have revised historical segment financial information presented to reflect these new operating segments). As a result, our business is now comprised of three strategic business units constituting reportable segments that we manage separately based on fundamental differences in their operations:

• Our North America Retail segment includes the United States and Canada and consists of our company-owned boutiques; premium wholesale customers and spas and salons. Our company-owned boutiques enhance our ability to build strong consumer relationships and promote additional product use through personal demonstrations and product consultations. We also sell to retailers that we believe feature our products in settings that support and reinforce our brand image and provide a premium in-store experience. Similarly, our spa and salon customers provide an informative and treatment-focused environment in which aestheticians and spa professionals can communicate the benefits of our core products.

• Our North America Direct to Consumer segment includes infomercials, home shopping television in the United States and Canada and online shopping. We believe that our infomercial business helps us to build brand awareness, communicate the benefits of our core products and establish a base of recurring revenue. Our sales through home shopping television help us to build brand awareness, educate consumers through live product demonstrations and develop close connections with our consumers. In addition, our online shopping business allows us to educate consumers as to the benefits as well as proper usage and application techniques for each product offered.

• Our International segment includes premium wholesale, spas and salons, home shopping television, infomercial, and international distributors outside of North America. We have partnered with a third party to build our infomercial business in Japan and currently have an international home shopping television presence and appear on QVC in Japan, the U.K. and Germany. We have a presence in brick-and-mortar locations overseas, including in certain international Sephora locations as well as spas, salons and department stores in the U.K. We also sell our products in smaller international markets primarily through a network of third-party distributors.

We manage our business segments to maximize overall sales growth and market share. We believe that our multi-channel distribution strategy enhances convenience for our consumers, reinforces brand awareness, increases consumer retention rates, and drives corporate cash flow and profitability. Further, we believe that the broad diversification within our segments provides us with expanded opportunities for growth and reduces our dependence on any single distribution channel. Within individual distribution channels, financial results can be affected by the timing of shipments as well as the impact of key promotional events.

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Our performance depends on economic conditions in the United States and globally and their impact on levels of consumer confidence and spending. We have continued to see a trend, driven in part by the recent challenging economic environment, across our distribution channels of customers favoring lower-ticket, non-kit items in lieu of higher-priced kits. Although this trend has the impact of reducing our sales growth, the impact to net income is partially mitigated as these non-kit items sell at a higher gross margin.

In the current economic environment, we continue to closely manage our expenses and allocate resources with the goal of maximizing cash flow and liquidity. This includes continuing a more conservative approach to inventory management in light of the challenging retail environment. At the same time, we continue to invest strategically in areas that we believe will create long-term value including our international operations, domestic distribution expansion, education and field teams, and customer acquisition activities. We anticipate that our capital expenditures for fiscal 2009 will be approximately $28.0 million to support boutique and department store build-outs as well as international infrastructure investments.

During the second quarter of fiscal 2009, net sales decreased $6.1 million, or 4.4%, to $132.5 million from the second quarter of fiscal 2008. Net sales for the six months ended June 28, 2009 decreased $22.2 million, or 8.0%, to $256.7 million from the same period last year. As anticipated, the economic environment remained challenging in the second quarter impacting our net sales.

Diluted earnings per share for the second quarter of fiscal 2009 decreased 19.2% to $0.21 compared to $0.26 per diluted share in the second quarter of fiscal 2008. Diluted earnings per share for the six months ended June 28, 2009 decreased 27.8% to $0.39 compared to $0.54 per diluted share in the same period last year. Diluted earnings per share decreased due to a decline in sales combined with selling, general and administrative increases largely resulting from an increase of 42 boutiques as compared with the prior year.

Basis of Presentation

The Company’s significant accounting policies are disclosed in Note 2 in the Company’s Form 10-K for the year ended December 28, 2008. The Company’s significant accounting policies have not changed significantly as of June 28, 2009.

Results of Operations

The following is a discussion of our results of operations and percentage of net sales for the three months ended June 28, 2009 compared to the three months ended June 29, 2008 and for the six months ended June 28, 2009 compared to the six months ended June 29, 2008.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three months ended										Six months ended
	June 28, 2009					June 29, 2008					June 28, 2009					June 29, 2008
	(in thousands, except percentages)
Sales, net	$	132,467		100.0	%	$	138,518		100	%	$	256,720		100.0	%	$	278,876		100.0	%
Cost of goods sold		35,533		26.8			39,017		28.2			68,870		26.8			77,674		27.9
Gross profit		96,934		73.2			99,501		71.8			187,850		73.2			201,202		72.1
Expenses:
Selling, general and administrative		56,165		42.4			50,691		36.6			110,227		42.9			101,155		36.3
Depreciation and amortization		4,247		3.2			2,821		2.0			8,341		3.3			5,442		1.9
Stock-based compensation		1,543		1.2			968		0.7			3,014		1.2			2,880		1.0
Operating income		34,979		26.4			45,021		32.5			66,268		25.8			91,725		32.9
Interest expense		(2,825	)	(2.1	)		(4,280	)	(3.1	)		(5,614	)	(2.2	)		(8,924	)	(3.2	)
Other income (expense), net		599		0.4			(40	)	0.0			161		0.1			667		0.2
Income before provision for income taxes		32,753		24.7			40,701		29.4			60,815		23.7			83,468		29.9
Provision for income taxes		12,991		9.8			16,009		11.6			24,364		9.5			32,993		11.8
Net income	$	19,762		14.9	%	$	24,692		17.8	%	$	36,451		14.2	%	$	50,475		18.1	%

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Net sales by business segment and percentage of net sales for the three and six months ended June 28, 2009 and the three and six months ended June 29, 2008 are as follows:

	Three months ended										Six months ended
	June 28, 2009					June 29, 2008					June 28, 2009					June 29, 2008
	(in thousands, except percentages)
North America Retail	$	77,930		58.8	%	$	74,110		53.5	%	$	151,139		58.9	%	$	152,152		54.5	%
North America Direct to Consumer		38,971		29.4			48,420		35.0			74,141		28.9			96,668		34.7
International		15,566		11.8			15,988		11.5			31,440		12.2			30,056		10.8
Sales, net	$	132,467		100.0	%	$	138,518		100.0	%	$	256,720		100.0	%	$	278,876		100.0	%
Gross profit and gross margin by business segment for the three and six months ended June 28, 2009 and the three and six months ended June 29, 2008 are as follows:
	Three months ended										Six months ended
	June 28, 2009					June 29, 2008					June 28, 2009					June 29, 2008
	(in thousands, except percentages)
North America Retail	$	60,422		77.5	%	$	57,283		77.3	%	$	115,673		76.5	%	$	115,119		75.7	%
North America Direct to Consumer		26,376		67.7			32,060		66.2			51,252		69.1			66,303		68.6
International		10,136		65.1			10,158		63.5			20,925		66.6			19,780		65.8
Gross profit/gross margin	$	96,934		73.2	%	$	99,501		71.8	%	$	187,850		73.2	%	$	201,202		72.1	%
Operating income (loss) by business segment for the three and six months ended June 28, 2009 and the three and six months ended June 29, 2008 are as follows:
	Three months ended										Six months ended
	June 28, 2009					June 29, 2008					June 28, 2009					June 29, 2008
	(in thousands, except percentages)
North America Retail	$	33,646		43.2	%	$	38,575		52.1	%	$	65,366		43.2	%	$	80,475		52.9	%
North America Direct to Consumer		16,927		43.4			18,116		37.4			30,409		41.0			36,691		38.0
International		3,410		21.9			6,065		37.9			9,219		29.3			12,663		42.1
Total		53,983		40.8	%		62,756		45.3	%		104,994		40.9	%		129,829		46.6	%
Corporate		(19,004	)				(17,735	)				(38,726	)				(38,104	)
Operating income	$	34,979		26.4	%	$	45,021		32.5	%	$	66,268		25.8	%	$	91,725		32.9	%

Three months ended June 28, 2009 compared to three months ended June 29, 2008

Sales, net

Net sales for the three months ended June 28, 2009 decreased to $132.5 million from $138.5 million in the three months ended June 29, 2008, a decrease of $6.1 million, or 4.4%. The decrease in our net sales was mainly driven by our North America Direct to Consumer segment.

North America Retail. North America Retail net sales increased 5.2% to $77.9 million in the three months ended June 28, 2009 from $74.1 million in the three months ended June 29, 2008. This increase as compared with the prior year was mainly due to an increase of 42 boutiques open as of June 28, 2009 compared to June 29, 2008. As of June 28, 2009 and June 29, 2008, we had 112 and 70 open company-owned boutiques, respectively.

North America Direct to Consumer. North America Direct to Consumer net sales decreased 19.5% to $39.0 million in the three months ended June 28, 2009 from $48.4 million in the three months ended June 29, 2008. This decrease primarily resulted from a reduction in net sales from our infomercial channel due to reduced media spending versus the prior year and a decline in home shopping television net sales due to lower on-air productivity compared to the prior year.

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International. International net sales decreased 2.6% to $15.6 million in the three months ended June 28, 2009 from $16.0 million in the three months ended June 29, 2008 mainly due to a decrease in net sales to our international distributors as their retailers delayed replenishment purchases. The decrease also reflects the impact of the recession in Japan which affected our home shopping television net sales.

Gross profit

Gross profit decreased $2.6 million, or 2.6%, to $96.9 million in the three months ended June 28, 2009 from $99.5 million in the three months ended June 29, 2008. Our North America Retail segment gross profit increased 5.5% to $60.4 million in the three months ended June 28, 2009 from $57.3 million in the three months ended June 29, 2008, as a result of higher sales across our boutique channel. Our North America Direct to Consumer segment gross profit decreased 17.7% to $26.4 million in the three months ended June 28, 2009 from $32.1 million in the three months ended June 29, 2008, primarily due to lower net sales from our infomercial and at QVC compared to the prior year. Our International segment gross profit slightly decreased 0.2% to $10.1 million in the three months ended June 28, 2009 from $10.2 million in the three months ended June 29, 2008.

Gross margin increased approximately 140 basis points to 73.2% in the three months ended June 28, 2009 from 71.8% in the three months ended June 29, 2008. This overall increase resulted primarily from a shift in product mix towards higher-margin open stock merchandise as well as a shift towards higher-margin sales channels.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $5.5 million, or 10.8%, to $56.2 million in the three months ended June 28, 2009 from $50.7 million in the three months ended June 29, 2008. This increase was primarily due to increased expenses to support distribution expansion, including $7.4 million in increased operating costs mainly relating to boutique expansion and $2.4 million in increased international infrastructure expenses. This increase was partially offset by decreased expenses of $4.5 million mainly from savings in infomercial operating expenses. As a percentage of net sales, selling, general and administrative expenses increased 580 basis points to 42.4% from 36.6%, primarily due to infrastructure expenses increasing at a greater rate than net sales.

Depreciation and amortization

Depreciation and amortization expenses increased $1.4 million, or 50.5%, to $4.2 million in the three months ended June 28, 2009 from $2.8 million in the three months ended June 29, 2008. This increase was primarily attributable to increases in depreciable assets as we continue to expand the number of company-owned boutiques and invest in our corporate infrastructure.

Stock-based compensation

Stock-based compensation expense increased $0.6 million, or 59.4%, to $1.5 million in the three months ended June 28, 2009 from $1.0 million in the three months ended June 29, 2008. This increase resulted primarily from the granting of additional stock awards offset in part by the effect of actual forfeitures.

Operating income

Operating income decreased 22.3% to $35.0 million in the three months ended June 28, 2009 from $45.0 million in the three months ended June 29, 2008, primarily due to decreases in operating income across all segments and an increase in operating loss in Corporate due to slightly higher corporate operating expenses.

Our North America Retail segment operating income decreased 12.8% to $33.6 million in the three months ended June 28, 2009 from $38.6 million in the three months ended June 29, 2008. This decrease was primarily driven by increased operating expenses of $8.1 million primarily related to the increase in the number of company-owned boutiques.

Our North America Direct to Consumer segment operating income decreased 6.6% to $16.9 million in the three months ended June 28, 2009 from $18.1 million in the three months ended June 29, 2008. This decrease was primarily driven by lower net sales from our infomercial compared to the prior year, partially offset by lower operating costs for this channel.

Our International segment operating income decreased 43.8% to $3.4 million in the three months ended June 28, 2009 from $6.1 million in the three months ended June 29, 2008 due to increased operating costs of $2.6 million.

Our Corporate operating loss increased 7.2% to $19.0 million in the three months ended June 28, 2009 from $17.7 million in the three months ended June 29, 2008 primarily due to an increase in stock-based compensation of $0.6 million and an increase in depreciation and amortization of $0.6 million.

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Interest expense

Interest expense decreased $1.5 million, or 34.0%, to $2.8 million in the three months ended June 28, 2009 from $4.3 million in the three months ended June 29, 2008. The decrease was attributable to lower average interest rates on our variable interest rate debt (excluding the debt under the interest rate swap agreement) versus the prior year, combined with decreased debt balances during the three months ended June 28, 2009 as a result of repayment of outstanding indebtedness.

Other income (expense), net

Other income (expense), net increased to net other income of $0.6 million in the three months ended June 28, 2009 from net other expense of $0.04 million in the three months ended June 29, 2008. The increase was primary attributable to a positive foreign currency impact resulting from fluctuations in the value of the U.S. dollar as compared to certain foreign currencies, offset by lower interest income on our cash and cash equivalent balances resulting from lower interest rates versus the prior year.

Provision for income taxes

The provision for income taxes was $13.0 million, or 39.7% of income before provision for income taxes, in the three months ended June 28, 2009 compared to $16.0 million, or 39.3% of income before provision for income taxes, in the three months ended June 29, 2008. The decrease resulted from lower income before provision for income taxes offset in part by a higher effective rate in the three months ended June 28, 2009 compared to the three months ended June 29, 2008.

Six months ended June 28, 2009 compared to six months ended June 29, 2008

Sales, net

Net sales for the six months ended June 28, 2009 decreased to $256.7 million from $278.9 million in the six months ended June 29, 2008, a decrease of $22.2 million, or 7.9%. The decrease in our net sales was driven by our North America Retail and North America Direct to Consumer segments.

North America Retail. North America Retail net sales decreased 0.7% to $151.1 million in the six months ended June 28, 2009 from $152.2 million in the six months ended June 29, 2008. Net sales to our premium wholesale customers decreased as a result of challenging macro-economic conditions and the corresponding inventory de-stocking by our major retail partners. Offsetting this decrease in part was an increase in net sales from boutiques versus the prior year due to a net increase of 42 boutiques open as of June 28, 2009 compared to June 29, 2008. As of June 28, 2009 and June 29, 2008, we had 112 and 70 open company-owned boutiques, respectively.

North America Direct to Consumer. North America Direct to Consumer net sales decreased 23.3% to $74.1 million in the six months ended June 28, 2009 from $96.7 million in the six months ended June 29, 2008. This decrease primarily resulted from a decline in net sales from our infomercial channel due to a reduction in infomercial performance and reduced media spending versus the prior year and a decline in home shopping television net sales due to lower on-air productivity compared to the prior year.

International. International net sales increased 4.6% to $31.4 million in the six months ended June 28, 2009 from $30.1 million in the six months ended June 29, 2008 as we expanded our business across our international channels. Net sales to our global premium wholesale customers increased due to continued expansion into additional locations. Partially offsetting this increase was a decrease in net sales from international distributors and international home shopping sales.

Gross profit

Gross profit decreased $13.4 million, or 6.6%, to $187.9 million in the six months ended June 28, 2009 from $201.2 million in the six months ended June 29, 2008. Our North America Retail segment gross profit increased 0.5% to $115.7 million in the six months ended June 28, 2009 from $115.1 million in the six months ended June 29, 2008, as a result of the change in sales mix towards our higher margin boutiques. Our North America Direct to Consumer segment gross profit decreased 22.7% to $51.3 million in the six months ended June 28, 2009 from $66.3 million in the six months ended June 29, 2008, primarily due to lower net sales from our infomercial and at QVC compared to the prior year. Our International segment gross profit increased 5.8% to $20.9 million in the six months ended June 28, 2009 from $19.8 million in the six months ended June 29, 2008, due to increases in sales across our global premium wholesale channel.

Gross margin increased approximately 110 basis points to 73.2% in the six months ended June 28, 2009 from 72.1% in the six months ended June 29, 2008. This overall increase resulted primarily from a shift in product mix towards higher-margin open stock merchandise as well as a shift towards higher-margin sales channels.

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Selling, general and administrative expenses

Selling, general and administrative expenses increased $9.1 million, or 9.0%, to $110.2 million in the six months ended June 28, 2009 from $101.2 million in the six months ended June 29, 2008. The increase was primarily due to increased expenses to support distribution expansion including $14.3 million in increased operating costs mainly relating to boutique expansion and $4.3 million in increased international infrastructure expenses. This increase was partially offset by decreased expenses of $9.5 million mainly from savings in infomercial operating expenses and lower corporate infrastructure expenses due to cost-control efforts. As a percentage of net sales, selling, general and administrative expenses increased 660 basis points to 42.9% from 36.3%, primarily due to infrastructure expenses increasing at a greater rate than net sales.

Depreciation and amortization

Depreciation and amortization expenses increased $2.9 million, or 53.3%, to $8.3 million in the six months ended June 28, 2009 from $5.4 million in the six months ended June 29, 2008. This increase was primarily attributable to increases in depreciable assets as we continue to expand the number of company-owned boutiques and invest in our corporate infrastructure.

Stock-based compensation

Stock-based compensation expense increased $0.1 million, or 4.7%, to $3.0 million in the six months ended June 28, 2009 from $2.9 million in the six months ended June 29, 2008. This increase resulted primarily from the granting of additional stock awards offset in part by the effect of actual forfeitures.

Operating income

Operating income decreased 27.8% to $66.3 million in the six months ended June 28, 2009 from $91.7 million in the six months ended June 29, 2008, primarily due to decreases in operating income across all segments.

Our North America Retail segment operating income decreased 18.8% to $65.4 million in the six months ended June 28, 2009 from $80.5 million in the six months ended June 29, 2008. This decrease was primarily driven by lower sales and increased operating expenses of $15.7 million, primarily related to the increase in the number of company-owned boutiques.

Our North America Direct to Consumer segment operating income decreased 17.1% to $30.4 million in the six months ended June 28, 2009 from $36.7 million in the six months ended June 29, 2008. This decrease was primarily driven by sales declines due to the lower productivity of our infomercial program compared to the prior version, partially offset by lower operating costs for this channel.

Our International segment operating income decreased 27.2% to $9.2 million in the six months ended June 28, 2009 from $12.7 million in the six months ended June 29, 2008 due to increased operating costs of $4.6 million, which more than offset sales growth and gross margin improvements in this segment.

Our Corporate operating loss increased 1.6% to $38.7 million in the six months ended June 28, 2009 from $38.1 million in the six months ended June 29, 2008 primarily due to increases in depreciation and amortization of $1.2 million and stock-based compensation of $0.1 million, which was partially offset by a decrease in Corporate selling, general and administrative expense of $0.7 million resulting primarily from our cost-control measures.

Interest expense

Interest expense decreased $3.3 million, or 37.1%, to $5.6 million in the six months ended June 28, 2009 from $8.9 million in the six months ended June 29, 2008. The decrease was attributable to lower average interest rates on our variable interest rate debt (excluding the debt under the interest rate swap agreement) versus the prior year combined with decreased debt balances during the six months ended June 28, 2009 as a result of repayment of outstanding indebtedness.

Other income, net

Other income, net decreased $0.5 million, or 75.9%, to $0.2 million in the six months ended June 28, 2009 from net other income of $0.7 million in the six months ended June 29, 2008. The decrease was primary attributable to lower interest income on our cash and cash equivalent balances resulting from lower interest rates versus the prior year.

Provision for income taxes

The provision for income taxes was $24.4 million, or 40.1% of income before provision for income taxes, in the six months ended June 28, 2009 compared to $33.0 million, or 39.5% of income before provision for income taxes, in the six months ended June 29, 2008. The decrease resulted from lower income before provision for income taxes offset in part by a higher effective rate in the six months ended June 28, 2009 compared to the six months ended June 29, 2008.

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Seasonality

Because our products are largely purchased for individual use and are consumable in nature, we are not generally subject to significant seasonal variances in sales. However, fluctuations in sales and operating income in any fiscal quarter may be affected by the timing of wholesale shipments, home shopping television appearances and other promotional events. While we believe our overall business is not currently subject to significant seasonal fluctuations, we have experienced limited seasonality in our premium wholesale and company-owned boutique channels as a result of increased demand for our products in anticipation of, and during, the holiday season. To the extent our sales to specialty beauty retailers and through our boutiques increase as a percentage of our net sales, we may experience increased seasonality.

Liquidity and Capital Resources

Our primary liquidity and capital resource needs are to service our debt, finance working capital needs and fund ongoing capital expenditures. We have financed our operations through cash flows from operations, sales of common shares and borrowings under our credit facilities.

Our operations provided us cash of $70.6 million in the six months ended June 28, 2009. At June 28, 2009, we had working capital of $174.3 million, including cash and cash equivalents of $97.5 million, compared to working capital of $146.1 million, including $48.0 million in cash and cash equivalents, as of December 28, 2008. The $49.5 million increase in cash and cash equivalents resulted from cash provided by operations of $70.6 million, including net income for the six months ended June 28, 2009 of $36.5 million, partially offset by cash used in investing activities of $14.8 million related to capital expenditures and cash used in financing activities of $6.5 million. The $28.2 million increase in working capital was primarily driven by increases in cash and cash equivalents and prepaid income taxes and decreases in accounts payable and income taxes payable.

Net cash used in investing activities was $14.8 million in the six months ended June 28, 2009, attributable to the build-out of additional company-owned boutiques and department stores as well as our continued investment in our corporate and information systems infrastructure to support our distribution expansion both in the U.S. and internationally. Our future capital expenditures will depend on the timing and rate of expansion of our business, information technology investments, new store openings, store renovations and international expansion opportunities.

Net cash used in financing activities was $6.5 million in the six months ended June 28, 2009, which consisted of repayments of $6.9 million on our first-lien term loan partially offset by the exercise of stock options of $0.2 million.

Our revolving credit facility of $25.0 million, of which approximately $0.3 million was utilized for outstanding letters of credit as of June 28, 2009, and our first-lien term loan of $234.1 million, bear interest at a rate equal to, at our option, either LIBOR or the lender’s base rate, plus an applicable variable margin based on our consolidated total leverage ratio and debt rating. The current applicable interest margin for the revolving credit facility and first-lien term loan is 2.25% for LIBOR loans and 1.25% for base rate loans based on our current Moody’s rating. As of June 28, 2009, interest on the first-lien term loan was accruing at 2.57% (without giving effect to the interest rate swap transaction discussed below).

Borrowings under our revolving credit facility and the first-lien term loan are secured by substantially all of our assets, including, but not limited to, all accounts receivable, inventory, property and equipment, and intangibles. The terms of the senior secured credit facilities require us to comply with financial covenants, including maintaining a leverage ratio, entering into interest rate swap or similar agreements with respect to 40% of the principal amounts outstanding under our senior secured credit facilities as of October 2, 2007.

In August 2007, we entered into a two-year interest rate swap transaction under our senior secured credit facilities. The interest rate swap had an initial notional amount of $200 million which declined to $100 million after one-year under which, on a net settlement basis, we make monthly fixed rate payments at the rate of 5.03% and the counterparty makes monthly floating rate payments based upon one-month U.S. dollar LIBOR. As a result of the interest rate swap transaction, we have fixed the interest rate for a two-year period subject to market-based interest rate risk on $200 million of borrowings for the first year and $100 million for the second year under our First Lien Credit Agreement. Our obligations under the interest rate swap transaction as to the scheduled payments are guaranteed and secured on the same basis as our obligations under the First Lien Credit Agreement. The fair value of the interest rate swap as of June 28, 2009 was $0.8 million, which was recorded in other liabilities in the condensed consolidated balance sheet, with the related $0.8 million unrealized loss recorded and included in equity as a component of accumulated other comprehensive loss, net of a $0.3 million tax benefit.

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The terms of our senior secured credit facilities require us to comply with a number of financial covenants, including maintaining a maximum leverage ratio (consolidated total debt to Adjusted EBITDA as defined in the agreement) of not greater than 4.5 to 1.0. As of June 28, 2009, our leverage ratio was 0.80 to 1.0. If we fail to comply with any of the financial covenants, the lenders may declare an event of default under the secured credit facility. An event of default resulting from a breach of a financial covenant may result, at the option of lenders holding a majority of the loans, in an acceleration of repayment of the principal and interest outstanding and a termination of the revolving credit facility. The secured credit facility also contains non-financial covenants that restrict some of our activities, including our ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments and engage in specified transactions with affiliates. The secured credit facility also contains customary events of default, including defaults based on events of bankruptcy and insolvency, nonpayment of principal, interest or fees when due, subject to specified grace periods, breach of specified covenants, change in control and material inaccuracy of representations and warranties. We have been in compliance with all financial ratio and other covenants under our credit facilities during all reported periods, and we were in compliance with these covenants as of June 28, 2009.

Subject to specified exceptions, including for investment of proceeds from asset sales and for permitted equity contributions for capital expenditures, we are required to prepay outstanding loans under our amended senior secured credit facilities with the net proceeds of certain asset dispositions, condemnation settlements and insurance settlements from casualty losses, issuances of certain debt and, if our consolidated leverage ratio is 2.25 to 1.0 or greater, a portion of excess cash flow.

Liquidity sources, requirements and contractual cash requirement and commitments

We believe that cash flow from operations, cash on hand and amounts available under our revolving credit facility will provide adequate funds for our working capital needs, debt payments and planned capital expenditures for the next 12 months. As part of our business strategy, we intend to invest in making improvements to our information technology systems. We opened 45 boutiques in 2008 and closed two locations. We plan to open approximately 27 new boutiques in 2009 (18 of which were opened as of June 28, 2009), which will require additional capital expenditures. Additionally, we also plan to continue to invest in our corporate infrastructure, particularly in support of our international growth. We may also look to acquire or invest in businesses or products complementary to our own. We anticipate that our capital expenditures in the year ending January 3, 2010 will be approximately $28.0 million. Our ability to fund our working capital needs, planned capital expenditures and scheduled debt payments, as well as to comply with all of the financial covenants under our debt agreements, depends on our future operating performance and cash flow, which in turn are subject to prevailing economic conditions, including the limited availability of capital in light of the current financial crisis, and to financial, business and other factors, some of which are beyond our control.

Contractual commitments

We lease retail stores, warehouses, corporate offices and certain office equipment under noncancelable operating leases with various expiration dates through January 2021. Portions of these payments are denominated in foreign currencies and were translated in the tables below based on their respective U.S. dollar exchange rates at June 28, 2009. These future payments are subject to foreign currency exchange rate risk. As of June 28, 2009, the scheduled maturities of our long-term contractual obligations were as follows:

	Remainder of the year ending January 3, 2010		1 - 3 Years		4 - 5 Years		After 5 Years		Total
	(amounts in millions)
Operating leases, net of sublease income	$	9.1	$	60.3	$	41.4	$	72.5	$	183.3
Principal payments on long-term debt, including the current portion		10.3		223.8		—		—		234.1
Interest payments on long-term debt, including the current portion(1)		4.2		9.8		—		—		14.0
Payments under licensing arrangements		0.3		0.2		—		—		0.5
Purchase obligations(2)		1.8		—		—		—		1.8
Total	$	25.7	$	294.1	$	41.4	$	72.5	$	433.7

(1) For purposes of the table, interest expense is calculated after giving effect to our interest rate swap as follows: (i) during the remaining two-month term of the swap agreement, interest expense is based on $100 million of our first-lien term loan and based on the fixed rate of the swap of 5.03% plus a margin of 2.25% and interest expense on the remaining amount of the loan is estimated based on the rate in effect as of June 28, 2009 and (ii) after the remaining two-month term of the swap agreement, interest expense on the loan is estimated for all periods based on the rate in effect as of June 28, 2009. A 1% change in interest rates on our variable rate debt, including the effect of the interest rate swap, would result in a change of $5.0 million in our total interest payments, of which $1.2 million would be in the remainder of the year ended January 3, 2010 and $3.8 million would be in years 1-3.

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(2) Purchase obligations include agreements to purchase goods that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Agreements that are cancelable without penalty have been excluded.

We are also party to a sublicense agreement for use of certain patents associated with certain of our mineral-based skin care products. The agreement requires that we pay a quarterly royalty of 4.0% of the net sales of these skin care products up to the date of the last to expire licensed patent rights. This sublicense also requires minimum annual royalty payments of approximately $0.6 million for 2007 and thereafter. The minimum annual royalty payments have not been included in the schedule of long-term contractual obligations above as we can terminate the agreement at any time with six months written notice.

Off-balance-sheet arrangements

We do not have any off-balance-sheet financing or unconsolidated special purpose entities.

Effects of inflation

Our monetary assets, consisting primarily of cash and receivables, are not significantly affected by inflation because they are short-term in nature. Our non-monetary assets, consisting primarily of inventory, intangible assets, goodwill and prepaid expenses and other assets, are not currently affected significantly by inflation. We believe that replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our cost of goods sold and expenses, such as those for employee compensation, which may not be readily recoverable in the price of the products offered by us. In addition, an inflationary environment could materially increase the interest rates on our debt and reduce consumers’ discretionary spending.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2008, which was filed with the SEC on February 26, 2009. We believe that there have been no significant changes during the six months ended June 28, 2009 to the items that we disclosed in our critical accounting policies and estimates with the exception of the adoption of the new accounting pronouncements as noted below.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“Statement 157”). Statement 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 also applies under other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements. For financial assets and liabilities, the provisions of Statement 157 are effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which amends Statement 157 by delaying the effective date of Statement 157 to fiscal years ending after November 15, 2008 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We adopted Statement 157 on December 31, 2007 for financial assets and financial liabilities and on December 29, 2008 for nonfinancial assets and liabilities. It did not have any material impact on our results of operations or financial position.

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In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“Statement 141(R)”). Statement 141(R) significantly changed the accounting for future business combinations after adoption. Statement 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired business. Statement 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Statement 141(R) is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We adopted Statement 141(R) on December 29, 2008, as required. It did not have any material impact on our results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“Statement 161”). Statement 161 which amends and expands the disclosure requirements of Statement 133 with the intent to provide users of financial statements with an enhanced understanding of: 1) how and why an entity uses derivative instruments; 2) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and 3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted Statement 161 on December 29, 2008. The adoption of Statement 161 had no financial impact on the financial position or results of operations as it is disclosure-only in nature.

In April 2009, the FASB issued FASB Staff Position SFAS 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (“SFAS 107-1 and APB 28-1”), which requires quarterly disclosure of information about fair value of financial instruments within the scope of Statement 107, Disclosures about Fair Values of Financial Instruments. SFAS 107-1 and APB 28-1 are effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. We adopted the provisions of FSP FAS 107-1 and APB 28-1 in the second quarter of 2009. The adoption of SFAS 107-1 and APB 28-1 had no financial impact on the financial position or results of operations as it is disclosure-only in nature.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“Statement 165”). Statement 165 establishes general standards of accounting for, and requires disclosures of, events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. Statement 165 is effective for interim or annual financial periods ending after June 15, 2009, and should be applied prospectively. We adopted Statement 165 in the second quarter of 2009. It did not have any material impact on our results of operations or financial position.

In June 2009, the FASB issued SFAS No. 168, FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162 (“Statement 168”). Statement 168 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles. Statement 168 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. Statement 168 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. We will adopt Statement 168 in the third quarter of 2009, as required. We do not expect Statement 168 to have a material impact our financial position or results of operations.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate sensitivity

We are exposed to interest rate risks primarily through borrowings under our credit facilities. We have reduced our exposure to interest rate fluctuations by entering into an interest rate swap agreement covering a portion of our variable rate debt. In August 2007, we entered into a two-year interest rate swap transaction under our senior secured credit facilities. The interest rate swap had an initial notional amount of $200 million declining to $100 million after one-year under which, on a net settlement basis, we make monthly fixed rate payments at the rate of 5.03% and the counterparty makes monthly floating rate payments based upon one-month U.S. dollar LIBOR. Our weighted average borrowings outstanding during the six months ended June 28, 2009 were $235.9 million and the annual effective interest rate for the period was 4.70%, after giving effect to the interest swap agreement. A hypothetical 1% increase or decrease in interest rates would have resulted in a $1.2 million change to our interest expense in the six months ended June 28, 2009 and $2.4 million on an annualized basis.

Foreign currency risk

Most of our sales, expenses, assets, liabilities and cash holdings are currently denominated in U.S. dollars but a portion of the net revenues we receive from sales is denominated in currencies other than the U.S. dollar. Additionally, portions of our costs of goods sold and other operating expenses are incurred by our foreign operations and denominated in local currencies. While fluctuations in the value of these net revenues, costs and expenses as measured in U.S. dollars have not materially affected our results of operations historically, we cannot assure that adverse currency exchange rate fluctuations will not have a material impact in the future. In addition, our balance sheet reflects non-U.S. dollar denominated assets and liabilities which can be adversely affected by fluctuations in currency exchange rates. We do not currently hedge against foreign currency risks.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management is responsible for establishing and maintaining adequate internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer determined that our disclosure controls and procedures were effective as of the end of the quarter covered by this report at a reasonable assurance level.

There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On July 17, 2009, the Material Yard Workers Local 1175 Benefit Funds filed a stockholder class action in the United States District Court for the Northern District of California. The complaint names as defendants the Company, our Chief Executive Officer and our Chief Financial Officer. It was purportedly filed on behalf of all persons who purchased Company stock between November 7, 2006, and November 26, 2007 (the “Class Period”). The complaint alleges violations of the Securities Exchange Act of 1934 based on, among other things, alleged misrepresentations and omissions of material facts relating to the Company’s financial condition during the Class Period, and it seeks relief in the form of compensatory damages, attorneys’ fees and costs.

ITEM 1A. RISK FACTORS

An investment in our common stock involves a high degree of risk. Our Annual Report on Form 10-K for the year ended December 28, 2008 includes a detailed discussion of our risk factors under the heading “Part I, Item 1A—Risk Factors.” Set forth below are changes from the risk factors previously disclosed in our Annual Report on Form 10-K. You should carefully consider the risk factors discussed in this report and our Annual Report on Form 10-K as well as the other information in this report, before making an investment decision. If any of the following risks or the risks discussed in the Annual Report on Form 10-K occur, our business, financial condition, results of operations or future growth could suffer.

If we are unable to retain key executives and other personnel, particularly Leslie Blodgett, our Chief Executive Officer and primary spokesperson, and recruit additional executives and personnel, we may not be able to execute our business strategy and our growth may be hindered.

Our success largely depends on the performance of our management team and other key personnel and our ability to continue to recruit qualified senior executives and other key personnel. Our future operations could be harmed if any of our senior executives or other key personnel ceased working for us. Our President of Retail resigned in July 2009, and, as a result, we will need to recruit a new executive with the requisite skills and experience to serve as President. Competition for qualified senior management personnel is intense, and there can be no assurance that we will be able to attract additional qualified personnel or to retain our current personnel. The loss of a member of senior management, such as the President of Retail, will require the remaining executive officers and other personnel to divert immediate and substantial attention to fulfilling his or her duties and to seeking a replacement. We may not be able to continue to attract or retain qualified executive personnel in the future. Any inability to fill vacancies in our senior executive positions on a timely basis could harm our ability to implement our business strategy, which would harm our business and results of operations.

We are particularly dependent on Leslie Blodgett, our Chief Executive Officer and primary spokesperson, as her talents, efforts, personality and leadership have been, and continue to be, critical to our success. Many of our customers identify our products by their association with Ms. Blodgett, and she greatly enhances the success of our sales and marketing. There can be no assurance that we will be successful in retaining her services. We maintain key executive life insurance policies with respect to Ms. Blodgett totaling approximately $34 million, which is payable to the lenders under our senior secured credit facility in the event we collect payments on the policy. A diminution or loss of the services of Ms. Blodgett would significantly harm our net sales, and as a result, our business, prospects, financial condition and results of operations.

Our senior management team has limited experience working together as a group, and may not be able to manage our business effectively.

Several members of our senior management team have relatively recently joined the company. Additionally, our President of Retail resigned in July 2009, and we are currently seeking to fill this vacancy on the senior management team. As a result, our senior management team has, and will continue to have, limited experience working together as a group. This lack of shared experience could harm our senior management team’s ability to quickly and efficiently respond to problems and effectively manage our business. Our success also depends on our ability to continue to attract, manage and retain other qualified senior management members as we grow.

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We are currently subject to securities class action litigation and may be subject to similar litigation in the future. If the outcome of this litigation is unfavorable, it could have a material adverse effect on our financial condition, results of operations and cash flows.

In July 2009, a purported stockholder class action was filed against us, our Chief Executive Officer and our Chief Financial Officer. The complaint was filed by a pension fund on behalf of persons who purchased our stock during a “class period” from November 7, 2006 through November 26, 2007. The complaint alleges violations of the Securities Exchange Act of 1934, purportedly arising from non-disclosure of material facts relating to our financial condition during the class period, and seeks relief in the form of compensatory damages, attorneys’ fees and costs, and such other relief as the court may deem proper. It is possible that, in the future, especially following periods of volatility in the market price of our shares, other purported class action or derivative complaints may be filed against us alleging failure to disclose risks or other claims. The outcome of any litigation is difficult to predict and quantify, and the defense against such claims or actions can be costly. In addition to diverting financial and management resources and general business disruption, we may suffer from adverse publicity that could harm our brand or reputation, regardless of whether the allegations are valid or whether we are ultimately held liable. A judgment or settlement that is not covered by or is significantly in excess of our insurance coverage for any claims could materially and adversely affect our financial condition, results of operations and cash flows.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The following is a tabulation of the votes on proposals considered at our annual meeting of stockholders held on May 6, 2009:

1. To elect three directors to serve on our board of directors for a three-year term.

	For	Withheld
Leslie A. Blodgett	81,339,454	105,982
Karen M. Rose	81,347,279	98,157
John S. Hamlin	81,338,434	107,002

The Company’s board of directors is comprised of the individuals elected this year and the following directors for the following terms: Ross M. Jones, Glen T. Senk and Kristina M. Leslie whose terms expire in 2010 and Lea Anne S. Ottinger, Ellen L. Brothers and Bradley M. Bloom whose terms expire in 2011.

2. To ratify the selection of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending January 3, 2010.

For	81,378,499
Against	29,132
Abstain	37,804

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibits

The following documents are incorporated by reference or filed herewith as Exhibits to this report:

Exhibit Number	Description
3.1(1)	Amended and Restated Certificate of Incorporation.
3.2(2)	Amended and Restated Bylaws.
10.1*	Separation and Release Agreement between Bare Escentuals Beauty, Inc., a wholly owned subsidiary of the Registrant, and Michael Dadario dated July 20, 2009.
10.2(3)*	Description of 2009 Corporate Bonus Plan included under Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers of our Current Report on Form 8-K and filed with the SEC on April 3, 2009.
31.1	Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and the Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference from our Quarterly Report on Form 10-Q for the period ended October 1, 2006 filed on November 15, 2006.

(2) Incorporated by reference from our Current Report on Form 8-K filed on November 30, 2007.

(3) Incorporated by reference from our Current Report on Form 8-K filed on April 3, 2009.

* Indicates management contract or compensatory plan or arrangement

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BARE ESCENTUALS, INC.
Date: August 5, 2009	By:	/s/    LESLIE A. BLODGETT
		Leslie A. Blodgett
		Chief Executive Officer and Director
	By:	/s/    MYLES B. MCCORMICK
		Myles B. McCormick
		Executive Vice President, Chief Financial Officer and Chief Operating Officer

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EXHIBIT INDEX

Exhibit Number	Description
3.1(1)	Amended and Restated Certificate of Incorporation.
3.2(2)	Amended and Restated Bylaws.
10.1*	Separation and Release Agreement between Bare Escentuals Beauty, Inc., a wholly owned subsidiary of the Registrant, and Michael Dadario dated July 20, 2009.
10.2(3)*	Description of 2009 Corporate Bonus Plan included under Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers of our Current Report on Form 8-K and filed with the SEC on April 3, 2009.
31.1	Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and the Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference from our Quarterly Report on Form 10-Q for the period ended October 1, 2006 filed on November 15, 2006.

(2) Incorporated by reference from our Current Report on Form 8-K filed on November 30, 2007.

(3) Incorporated by reference from our Current Report on Form 8-K filed on April 3, 2009.

* Indicates management contract or compensatory plan or arrangement

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EX-10.1

Exhibit 10.1

SEPARATION AND RELEASE AGREEMENT

This Separation and Release Agreement (“Agreement”) is made by and between Bare Escentuals Beauty, Inc. (“Company”) and Michael Dadario (“Employee”). “Company” shall also include all subsidiary, parent or related corporations of Bare Escentuals, Inc.

WHEREAS, Employee was an at-will employee of Company; and

WHEREAS, Employee tendered his resignation from Company, which Company accepted, pursuant to the terms of this Agreement;

NOW THEREFORE, in consideration of the promises made herein, Company and Employee (collectively referred to as the “Parties”) hereby agree as follows:

1. Resignation. Employee tendered, and Company accepted, Employee’s resignation, effective as of July 14, 2009, which was Employee’s last date of employment with Company (the “Separation Date”).

2. Waiver of Signing Bonus Repayment. Company agrees to waive its right to full repayment of Employee’s hiring bonus of $120,000, to which Company is entitled under its employment agreement with Employee dated May 18, 2008 (the “Employment Agreement”). Employee agrees Company’s waiver of repayment of the hiring bonus is in full and fair consideration for the general release provided in this Agreement, and represents full settlement of all claims that Employee has made or could have made against Company.

3. No Severance. Employee acknowledges and agrees that he is not entitled to receive any severance pursuant to the Employment Agreement or otherwise.

4. Restricted Stock; Stock Option. Employee acknowledges that he currently holds 37,500 shares of Company’s Common Stock (the “Stock”) pursuant to a Restricted Stock Award Grant Notice, a Restricted Stock Award Agreement (the “Stock Agreement”), and Company’s 2006 Equity Incentive Award Plan (the “Plan”). Employee acknowledges further that all shares of the Stock remain subject to Company’s Repurchase Option, as provided in the Stock Agreement. Company hereby provides notice to Employee of its exercise of the Repurchase Option as to all shares of the Stock, pursuant to the terms of the Stock Agreement.

Employee acknowledges further that he holds an option to purchase 80,000 shares of Company’s Common Stock (the “Option”), pursuant to a Stock Option Grant Notice, a Stock Option Agreement and the Plan. Employee acknowledges and agrees that no shares of the Option will have vested as of the Separation Date, and accordingly the Option will terminate in full on such date.

5. Statement Regarding Resignation. Employee acknowledges that Company is obligated to report his resignation in a Form 8-K filed with the United States Securities and Exchange Commission (the “8-K”), within four business days after the Separation Date. Employee agrees that the 8-K may contain a statement substantially as follows (the “8-K Statement”):

Bare Escentuals has accepted the resignation of Michael Dadario, President Retail effective July 14, 2009. Mr. Dadario submitted his resignation and confirmed that despite briefly attending the State University of New York, Brockport, he did not receive a degree from the State University of New York, Brockport as he had previously represented. Leslie Blodgett said, “After consulting with our Board of Directors, the Company accepted Mr. Dadario’s resignation. The Board and I wish to acknowledge Mr. Dadario’s leadership of our Retail Division during some challenging economic times and his efforts in positioning Bare Escentuals for growth.”

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Ms. Blodgett concluded, “While Michael will be missed, we are very fortunate to have a strong retail team in place that is focused on the daily operations and performance within each of our Retail channels.”

6. Nondisparagement; Liquidated Damages. Employee agrees that neither Employee nor anyone acting by, through, under or in concert with Employee shall disparage or otherwise communicate negative statements or opinions about Company, its Board members, officers, employees or business. Company (by its officers and directors) shall not disparage or otherwise communicate negative statements or opinions about Employee; provided, however, that neither Company’s 8-K filing, nor communication to any other person, of the 8-K Statement shall constitute a violation of this Section 6. Employee and Company agree that it would be impracticable and extremely difficult to ascertain the amount of actual damages caused by either party’s breach of the party’s obligations under this Section 6. Therefore, each party agrees that in the event of any such breach, the breaching party shall pay the other party as the sole and exclusive measure of monetary damages for such breach the amount of $65,000.

7. Reimbursement of Expenses. Employee shall be reimbursed for any outstanding expenses according to Company’s ordinary expense reimbursement policies. Employee must turn in any outstanding expenses not later than ten (10) business days after the Effective Date. Any reimbursement of undisputed expenses that are not reasonably subject to calculation as of Effective Date will be paid by check sent directly to Employee’s home.

8. Confidential Information. Employee acknowledges and agrees that Employee shall continue to maintain the confidentiality of all Confidential Information of Company. “Confidential Information” includes: all information, regardless of its form, that: (a) was developed by or for Company; (b) relates to Company’s business; and (c) is not generally known to the public.

It is impossible to provide a comprehensive list of all information that may constitute Confidential Information. However, by way of example, the definition includes, but is not limited to, information relating to Company’s: products; trade secrets; research and development; production and manufacture methods, strategies and plans; marketing information, strategies and plans; merchandising information, strategies and plans; pricing information, strategies and plans; sales practices; employment and recruiting strategies and processes; compensation information; employee and potential employee information; customer and potential customer information; supplier and potential supplier information, revenues and expenses; investor information; technology and operations; and the identities and roles of key employees of Company. The definition of “Confidential Information” shall include both “know-how” (i.e., information about what works well) and “negative know-how” (i.e., information about what does not work well).

Employee shall return all Company property and Confidential Information in Employee’s possession on or before the Effective Date. Employee hereby expressly confirms Employee’s continuing obligations to Company pursuant to any and all agreements regarding Confidential Information entered into by Employee and attached hereto as Exhibit A. Employee represents and warrants that Employee always has complied, and despite Employee’s departure from Company, will continue to comply, with all of the obligations described in this Section 8. As part of Employee’s obligations under this Section 8, Employee represents and warrants that Employee will deliver to Company on or before the Effective Date, all (whether electronic, hard copy or otherwise) originals, copies and summaries of correspondence (including but not limited to letters, memos, email messages, instant messages or tweets), drawings, manuals, memos, notes, notebooks, reports, programs, plans, proposals, financial documents, or any other documents concerning Company’s customers, business plans, marketing strategies, products, processes, technology, operations or business of any kind and/or which contain Confidential Information or trade secrets which are in the possession or control of Employee or Employee’s agents or representatives.

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Employee shall return to Company any and all Company-issued computers and computer equipment and peripherals (collectively, “Computer Equipment”) at the time and in the manner directed by Company. Employee shall not copy, alter or delete any documents or data stored on any Computer Equipment, or any other Company-owned or operated systems or equipment (collectively, “Company Systems”), except as expressly directed or permitted by Company in writing.

In the event that Employee is ever compelled under force of law to disclose any Confidential Information, Employee will: (1) immediately notify Company’s legal counsel of such request and provide Company’s legal counsel with all material information pertaining to such request; (2) actually refrain from disclosing the Confidential Information pending Company’s legal counsel’s review and action on the request; and (3) take all steps reasonably necessary to prevent the compelled disclosure of Confidential Information until such time as Company has asserted objections to the disclosure of the Confidential Information in a court of law.

9. General Release of Claims by Employee. Employee, on behalf of Employee and Employee’s executors, heirs, administrators, representatives and assigns, hereby releases and forever discharges Company and all predecessors, successors and affiliates and their respective parent corporations, affiliates, related, and/or subsidiary entities, and all of their past and present investors, directors, shareholders, officers, general or limited partners, employees, attorneys, agents and representatives, and employee benefit plans in which Employee is or has been a participant by virtue of Employee’s employment with Company, from any and all claims, debts, demands, accounts, judgments, rights, causes of action, equitable relief, damages, costs, charges, complaints, obligations, promises, agreements, controversies, suits, expenses, compensation, responsibility and liability of every kind and character whatsoever (including attorneys’ fees, expenses and costs), whether in law or equity, known or unknown, asserted or unasserted, suspected or unsuspected (collectively, “Claims”), which Employee has or may have had against such individuals or entities based on any events or circumstances arising or occurring on or prior to the date Employee signs this Agreement, arising directly or indirectly out of, relating to, or in any other way involving in any manner whatsoever Employee’s employment by Company or the separation thereof, and any and all Claims arising under federal, state, or local laws relating to employment, including without limitation Claims of wrongful discharge, breach of express or implied contract, fraud, misrepresentation, defamation, or other liability in tort, Claims of any kind that may be brought in any court or administrative agency, any claims arising under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act (“ADEA”), the Older Workers Benefit Protection Act, the Americans with Disabilities Act, the Fair Labor Standards Act, the Employee Retirement Income Security Act, the Family and Medical Leave Act, the California Family Rights Act, the California Fair Employment and Housing Act, the California Labor Code and similar federal, state or local statutes, ordinances, and regulations.

This release does not extend to claims that are non-waivable under the law, including but not limited to claims to enforce Employee’s rights to indemnification under any applicable law or contract. Employee specifically acknowledges and agrees that Employee has been paid all wages owed as of the date Employee signs this Agreement, and that Employee has no claims for unpaid wages against Company.

This release does not extend to any claims based upon or relating to either Party’s breach of this Agreement.

To the extent permitted by law, Employee agrees that if a Claim is prosecuted in Employee’s name before any court or administrative agency, that Employee waives and agrees not to take any award of money or other damages from such suit. Employee also agrees that if a claim is prosecuted in Employee’s name that Employee will immediately request in writing that the claim on Employee’s behalf be withdrawn or dismissed.

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Employee specifically acknowledges and agrees that Employee is waiving on behalf of Employee and Employee’s attorneys’ all claims for attorneys fees and expenses and court costs, except as provided in Section 18 below.

EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE HAS BEEN ADVISED OF AND IS FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

BEING AWARE OF SAID CODE SECTION, EMPLOYEE HEREBY EXPRESSLY WAIVES ANY RIGHTS EMPLOYEE MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW PRINCIPLES OF SIMILAR EFFECT.

10. Acknowledgment. Employee acknowledges that Employee is knowingly and voluntarily waiving and releasing any rights Employee may have under the ADEA (the “ADEA Waiver”). Employee acknowledges further that (a) Employee has been advised to seek an attorney regarding the effect of this Agreement prior to signing it; (b) Employee has twenty-one (21) days from the date this offer is received to consider this Agreement before signing it (although Employee may choose voluntarily to sign it sooner); (c) the ADEA Waiver does not apply to any rights or claims that arise after the date Employee signs this Agreement; (d) Employee understands that Employee has seven (7) days following the date Employee signs this Agreement to revoke Employee’s acceptance of it; and (e) this Agreement will not be effective until the date upon which the revocation period has expired unexercised, which will be the eighth day after Employee signs this Agreement (the “Effective Date”).

11. Employee’s Representations and Warranties. Employee represents and warrants that: (a) during the course of Employee’s employment, Employee did not sustain any on-the-job or work-related injuries or illnesses for which Employee might be entitled to compensation pursuant to California’s Workers Compensation law; and (b) Employee has not initiated any adversarial proceedings of any kind against Company or against any other person or entity released herein, and will not initiate any such proceeding in the future, except as specifically allowed by this Agreement.

12. No Representations. Neither Party has relied upon any representations or statements made by the other Party hereto which are not specifically set forth in this Agreement.

13. No Admission. Nothing contained in this Agreement shall constitute, be construed as, or be deemed to be an admission of fault, liability or wrongdoing on either Party’s part. Employee expressly denies any fault, liability or wrongdoing on behalf of Company.

14. Entire Agreement. This Agreement, and the other agreements referenced herein, represent the entire Agreement and understanding between Company and Employee concerning Employee’s separation from Company, and (except as provided herein) supersede and replace any and all prior agreements and understandings concerning Employee’s relationship with Company, whether written or verbal, including but not limited to the Employment Agreement. To accept the Agreement, Employee must date and sign this Agreement and return it to: Human Resources, Attention Debbie Fletcher. (An extra copy for Employee’s files is enclosed.)

15. Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned.

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16. No Oral Modification. This Agreement may only be amended by a writing signed by Employee and either the Chief Executive Officer, Vice President of Human Resources or General Counsel of Company.

17. Severability. If any provision of this Agreement is found by a proper authority to be unenforceable, that provision shall be severed and the remainder of the Agreement will remain in full force and effect.

18. Dispute Resolution. The Parties agree that any and all disputes, claims, or causes of action, in law or equity, arising from or relating to the enforcement, breach, performance, or interpretation of this Agreement shall be resolved, to the fullest extent permitted by law, by final, binding and confidential arbitration in San Francisco, California conducted by JAMS, Inc. (“JAMS”) or its successor, under the laws of the State of California and JAMS’ then applicable rules and procedures, and before a single arbitrator mutually selected by the Parties. The Parties acknowledge that by agreeing to this arbitration procedure, they are waiving the right to resolve any such dispute through a trial by jury or judge or administrative proceeding. The Parties will have the right to be represented by legal counsel at any arbitration proceeding. The arbitrator shall be authorized to award all relief that the Parties would be entitled to seek in a court of law. The arbitrator shall have the authority to determine which Party in any such arbitration is the prevailing party, and to award the prevailing party its reasonable attorneys’ fees, costs and expenses incurred in connection with the arbitration.

19. Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto. The Parties acknowledge that: (a) they have read this Agreement; (b) they have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice, or that they have voluntarily declined to seek such counsel; (c) they understand the terms and consequences of this Agreement and of the releases it contains; and (d) they are fully aware of the legal and binding effect of this Agreement.

IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below.

MICHAEL DADARIO		BARE ESCENTUALS BEAUTY, INC.
Signature:	/s/    Michael Dadario	By:	/s/    Debbie Fletcher
			Debbie Fletcher
			Vice President of Human Resources
Dated: 7/20/09		Dated: 7/20/09

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EXHIBIT A

Agreements Signed by Employee

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EMPLOYEE INTELLECTUAL PROPERTY AND CONFIDENTIALITY AGREEMENT

THIS AGREEMENT is made effective as of the 29^th day of October, 2008 (the “Effective Date”) by and between Bare Escentuals Beauty, Inc. (“Company”) and Michael Dadario (“Employee”). “Company” shall also include all subsidiary, parent or related corporations of Bare Escentuals Beauty, Inc.

Employee understands and agrees that, as part of Employee’s employment with Company, Employee will have access to certain Confidential Information (as defined below). Employee understands and agrees that Employee’s employment with Company creates a relationship of confidence and trust between Employee and Company with respect to all Confidential Information.

Employee understands that Company takes its intellectual property rights seriously and therefore, as a condition of employment or continued employment (as the case may be), Employee agrees to all of the terms and conditions in this Agreement. Employee acknowledges and agrees that Employee’s at-will employment and compensation for at-will employment is sufficient consideration for the enforcement of this Agreement. Employee understands that this Agreement contains binding obligations. Employee acknowledges and agrees that Employee has had an opportunity to ask questions about this Agreement, and has read and understood this Agreement in its entirety before signing.

In light of the foregoing, Employee agrees to all of the following:

A. CONFIDENTIALITY

1. Confidential Information. For purposes of this Agreement, “Confidential Information” (or “CI”) will be defined as all information, regardless of its form, that: (a) was developed by or for Company; (b) relates to Company’s business; (c) that is not generally known to the public; and (d) that is of a private nature and/or affords Company an advantage over its competitors. In addition to the foregoing, the terms “Confidential Information” (and “CI”) will also include all “Third Party Information” (as defined below).

It is impossible to provide a comprehensive list of all information that may constitute CI. However, by way of example, the definition of CI includes, but is not limited to, information relating to Company’s: products; trade secrets; research and development; production and manufacturing methods, strategies and plans; marketing information, strategies and plans; merchandising information, strategies and plans; pricing information, strategies and plans; sales practices; employment and recruiting strategies and processes; compensation information; employee and potential employee information; customer and potential customer information; supplier and potential supplier information, revenues and expenses; investor information; and the identities and roles of key employees of Company. The definition of “CI” shall include both “know-how” (i.e., information about what works well) and “negative know-how” (i.e., information about what does not work well). If Employee is unsure if certain information falls within the definition of CI, Employee must err on the side of caution and treat such information as CI unless Employee seeks and obtains written confirmation from Company’s General Counsel that such information is not CI.

All CI, and all tangible materials containing CI are and shall remain the sole property of Company. Under no circumstances will Employee acquire any ownership interest in, or right to use, any CI or any of Company’s trademarks, inventions, copyrights or patents.

2. Limitations. The term “CI” does not include any information that Employee can demonstrate by competent written proof was acquired by means entirely unrelated to Employee’s employment with Company.

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3. Nondisclosure. Except as may be required in the ordinary course of Employee’s job responsibilities performed on Company’s behalf, Employee will, during and after employment with Company, maintain all CI in trust and confidence. Employee will not, directly or indirectly, disclose CI to any third party unless either (a) the Employee obtains the prior written consent of Company’s General Counsel or (b) Company has entered into a confidentiality agreement with the third party and such confidentiality agreement is in effect at the time of Employee’s disclosure of CI to the third party. Employee will refrain from all conduct that could reasonably or foreseeably be expected to compromise the confidentiality or value of CI.

4. Permissible/Impermissible Uses. Employee will use CI only in the discharge of Employee’s ordinary job responsibilities and in furtherance of Company’s legitimate business interests. Employee will not, directly or indirectly, use CI for any other purpose. Employee will not assist or encourage any other person or entity from using CI for any purpose other than the furtherance of Company’s legitimate business interests.

Employee will not reproduce or copy CI in any form except as is necessary to discharge Employee’s ordinary job responsibilities and in furtherance of Company’s legitimate business interests.

Employee will not use CI for any purpose or in any manner which would constitute a violation of any laws or regulations, including without limitation the export control laws of the United States.

5. Compelled Disclosures. Notwithstanding any other provision of this Agreement, disclosure of CI will be permitted if such disclosure is compelled by force of law, provided however, that Employee shall first: (a) give Company sufficient notice of any request for CI to permit Company to seek a protective order requiring that the CI not be disclosed or be used only for specific purposes; and (b) make a reasonable effort to obtain a protective order requiring that the CI so disclosed be used only for the purposes for which disclosure of this information was required.

6. Return of CI and Company Materials. Upon request by Company, or automatically in the event that Employee resigns or is terminated from Company for any reason, Employee will immediately return to Company, without retaining any copies, all property, documents and electronic records containing any CI. Upon occurrence of Employee’s resignation or termination for any reason, and in the event any CI is stored on or located in any computer, computer hard drive, or other electronic media storage device (collectively “Electronic Storage Device”) not owned by Company, Employee will permanently and completely erase and destroy all files and other repositories of CI stored on any Electronic Storage Device.

7. Third Party Information. Employee recognizes that Company has received, and in the future may receive, confidential, proprietary and/or sensitive information from third parties (collectively, “Third Party Information”). Employee acknowledges and agrees that such information may have been provided subject to a duty on Company’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Therefore, Employee further acknowledges and agrees: (a) to hold all Third Party Information in the strictest of confidence; (b) not to use or disclose Third Party Information to any person, firm or entity except as is necessary in carrying out Employee’s ordinary job responsibilities for Company consistent with any agreements Company may have with the provider of the Third Party Information; and (c) to treat Third Party Information as CI subject to all the restrictions described above.

8. Loss/Destruction. In the event of the loss or destruction of any CI during employment, Employee shall immediately: (a) notify Company of such loss or destruction; and (b) provide Company with a written affidavit incorporating a detailed list of the items that were destroyed or lost, and a statement of the facts surrounding such loss or destruction.

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B. DUTY OF LOYALTY, HONESTY AND DISCLOSURE

9. Conflicting Activities. Employee understands and agrees that, during the course of employment with Company, Employee owes a duty of loyalty to Company. Therefore, while employed with Company, Employee will not, without prior written approval from Company’s Vice President of Human Resources or General Counsel, directly or indirectly: (a) divert from Company any business opportunities; (b) interfere with Company’s relationship with any past, existing or prospective employee, supplier, contractor, or customer; (b) own, work for, or derive a material financial interest from any business that competes, directly or indirectly with Company; (c) violate any of the terms or conditions contained in Company’s Code of Business Conduct and Ethics; (d) attempt to do any of the foregoing; or (e) encourage or assist any other person or entity to do any of the foregoing.

10. Required Disclosures. Employee understands and agrees that, during the course of employment with Company, Employee owes duties to: (a) be honest with Company; and (b) to disclose to Company all information that could have a material impact on Company’s business or operations. Further, Employee is required to immediately disclose to Company’s General Counsel any conduct that Employee believes to constitute a violation of this Agreement by any employee, or a misuse of CI by any person or entity.

11. Inconsistent Obligations. Company does not want Employee to breach any agreement with or obligations owed to Employee’s prior employers or any other person or entity. Employee must not use on Company’s behalf, or in conjunction with work performed on Company’s behalf, any information constituting the confidential or proprietary information of a prior employer. If Employee is unsure if certain information falls within the restrictions defined in this Paragraph 11, Employee must err on the side of caution and refrain from using or disclosing such information without obtaining written authorization from Company’s Vice President of Human Resources or General Counsel.

Employee acknowledges and hereby affirms that either: (a) Employee is not subject to any obligations to any other employer, person or entity that would restrict or limit Employee’s ability to work for Company (an “Inconsistent Obligation”); or (b) Employee has complied with both of the following:

• Employee has, prior to the date of execution of this Agreement, disclosed all Inconsistent Obligations to Company in writing via a copy of the document attached hereto as Attachment A completed and signed by Employee; and

• Employee has, prior to the date of execution of this Agreement, received a copy of Attachment A signed by Employee and either Company’s Vice President of Human Resources or General Counsel.

Employee hereby agrees to indemnify Company for all damages and costs (including attorneys’ fees) incurred by or imposed on Company as a result of any misrepresentation or material omission by Employee in association with the disclosures required by this Paragraph 11 and/or Attachment A.

C. IMPERMISSIBLE SOLICITATION.

12. Employee Solicitation. Employee acknowledges that Company has devoted substantial time, effort and resources to identifying, recruiting, training and developing a staff of employees with unique skills. Therefore, during Employee’s employment, and for a period of one year after termination of employment for any reason, Employee will not directly or indirectly: (a) solicit, recruit, encourage, induce or attempt to cause any employee to leave his or her employment with Company; or (b) attempt to do any of the foregoing.

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13. Customer Solicitation. Employee acknowledges that Company has devoted substantial time, effort and resources to identifying, soliciting, developing relationships with, and marketing to, a unique portfolio of customers and potential customers. Therefore, during Employee’s employment, and for a period of one year after termination of employment for any reason, Employee will not directly or indirectly: (a) cause any customer to alter its relationship with Company in a manner that may be contrary to Company’s business interests; (b) cause any potential customer to refrain from doing business with Company, or limit its business with Company; (c) divert any business or business opportunities from Company; or (d) attempt to do any of the foregoing.

14. Supplier Solicitation. Employee acknowledges that Company has devoted substantial time, effort and resources to identifying, soliciting, and developing relationships with suppliers and potential suppliers. Therefore, during Employee’s employment, and for a period of one year after termination of employment for any reason, Employee will not directly or indirectly: (a) cause any supplier to alter its relationship with Company in a manner that may be contrary to Company’s business interests; (b) cause any potential supplier to refrain from doing business with Company, or limit its business with Company; (c) divert any business or business opportunities from Company; or (d) attempt to do any of the foregoing.

D. MISCELLANEOUS PROVISIONS

15. Notification of New Employer. At Company’s request, or on a mandatory basis if at the time of Employee’s resignation or termination for any reason Employee’s position is considered by Company as a director-level or above position, Employee will notify Company of the identity of Employee’s new employer, if any. Employee understands and agrees that if Employee resigns or is terminated for any reason Company may notify Employee’s new employer about Employee’s rights and obligations under this Agreement.

16. Representations. Employee agrees to execute any proper oath or verify any proper document required to carry out or evidence compliance with the terms of this Agreement.

17. Governing Law; Consent to Personal Jurisdiction. This Agreement shall be governed by the laws of the State of California, excluding its conflicts of laws principles. Employee hereby expressly consents to the personal jurisdiction of the state and federal courts located in California for any lawsuit arising from or relating to this Agreement.

18. Entire Agreement. This Agreement (and any fully executed copy of Attachment A) contains the final, complete and exclusive agreement of the parties relative to the subject matter hereof and supersedes all prior and contemporaneous understandings and agreements relating to its subject matter. This Agreement may not be changed, modified, amended or supplemented except by a written instruments signed by Company’s Vice President of Human Resources or General Counsel.

19. Severability. If any provision of this Agreement is found by a proper authority to be unenforceable, that provision shall be severed and the remainder of this Agreement will continue in full force and effect.

20. Equitable Remedies. Employee acknowledges that the violation of this Agreement would result in irreparable and severe injury to Company, such that no remedy at law will afford Company adequate relief. Accordingly, Company shall be entitled to temporary, preliminary and/or permanent injunctive and other equitable relief (including specific performance) in order to prevent Employee from any violation or threatened violation of this Agreement, without the necessity of proving actual damages or posting a bond or other security. Employee agrees that in any legal proceeding commenced for equitable relief, the losing party shall pay the prevailing party’s actual

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attorneys’ fees and expenses incurred in the preparation for, conduct of or appeal or enforcement of judgment from the proceeding. The phrase “prevailing party” shall mean the party who is determined in the proceeding to have prevailed or who prevails by dismissal, default or otherwise. Irrespective of the foregoing, nothing in this Agreement is intended to limit Company’s or Employee’s right to pursue any other remedy available pursuant to applicable law.

21. Notices. Any notices required or permitted hereunder shall be given to Company at the address specified below and in the case of Employee at the current address contained in Company records at the time the notice is given, or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery, or sent by certified or registered mail, postage prepaid, three (3) days after the date of mailing.

22. Indemnification. Employee agrees to indemnify Company for any loss or damage suffered as a result of any breach by the Employee of the terms of this Agreement, including any reasonable attorneys’ fees and costs incurred by Company in the collection of such indemnity or as a result of a successful action for breach of any provision of this Agreement.

23. Waiver. Company’s waiver of a breach of any provision of this Agreement by Employee does not waive any subsequent breach by Employee, nor does Company’s failure to take action against any other employee for similar breaches operate as a waiver by Company of Employee’s breach.

24. Duration of Obligations. This Agreement shall become effective immediately. Employee acknowledges and agrees that some of the obligations in this Agreement, as described above, apply both during employment and after termination of employment with Company. Employee acknowledges that the scope and duration of this Agreement is reasonable and narrowly tailored to protect Company’s legitimate interests.

25. No Employment Contract. Nothing in this Agreement shall be construed to create a contract of employment, either express or implied-in-fact, for any fixed term or requiring cause for termination. At all times, Employee’s employment with Company shall remain “at-will.”

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.

EMPLOYEE		BARE ESCENTUALS BEAUTY, INC.
Signature:	/s/    Michael Dadario	Signature:	/s/    Deanna Chechile
Print Name:	Michael Dadario	Print Name:	Deanna Chechile
Dated: 10/29/08		Title:	VP General Counsel
		Address:	71 Stevenson Street, 22nd Floor San Francisco, CA 94105
		Dated: 12/15/08

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ATTACHMENT A

MANDATORY EMPLOYEE/APPLICANT DISCLOSURES

Company does not want you to violate any obligations you may owe to any third parties. Furthermore, Company prohibits you, as an applicant or employee, from disclosing to Company any trade secrets or other non-public confidential or proprietary information (collectively, “Third Party Information”) that belongs to or were obtained from any third party, including any prior employers. Therefore, as a condition of your employment, no later than your first date of employment with the Company or a later date agreed to by Company, you must complete this agreement, sign it and return it to Company’s Human Resources Department. Failure to do so will prohibit you from obtaining employment or continuing in employment with Company (as the case may be) and any pending offer of employment may be revoked by Company in its sole discretion.

The intent of this agreement is to ensure that you have fully disclosed any contractual or other obligations you may owe to any third parties that may either: (a) prohibit you from working for Company; (b) in any way limit your ability to work for Company; (c) in any way limit the manner in which you may work for Company; or (d) relate to a third party’s intellectual property rights. If you are unsure whether you are subject to any of the types of obligations or restrictions described above, you must err on the side of caution and notify Company’s Human Resources Department of any possible restrictions or questions you may have.

Before signing this agreement, please check any box below that applies to you. If you have any questions about this document, you must consult with Company’s Human Resources Department before signing.

•        I am currently subject to some manner of restriction on my ability to, or the manner in which I may work for, Company (e.g., confidentiality obligations; obligations relating to restrictions on competition, solicitation of customers/employees/suppliers; etc.).
	x  Yes        ¨  No
•        I was solicited for employment with Company by a person who used to work with one or more of my current or prior employers.
	¨  Yes        x  No
•        I have in my possession, custody or control documents or other property belonging to one or more of my current or prior employers.
	¨  Yes        x  No
•        I am confident that I am able to work for Company without: (a) violating any obligations to any other person or entity; and (b) using or relying on trade secrets or confidential or proprietary business information belonging to any of my prior employers or my current employer if at the time of signing this agreement I am employed by an employer other than Company.
	x  Yes        ¨  No

By signing this agreement, you acknowledge that you have read and understood the document in its entirety, have answered all questions honestly and completely, and agree to indemnify Company for all costs and fees it may incur as a result of any misrepresentations. By signing this agreement, you further acknowledge that this agreement does not constitute a contract of employment and does not alter your status as an at-will employee if you are already an employee.

/s/    Michael Dadario

Signature

Michael Dadario

Print Name

Date: 10/29/08

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Leslie A. Blodgett, Chief Executive Officer of Bare Escentuals, Inc. certify that:

1. I have reviewed this quarterly report on Form 10-Q of Bare Escentuals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2009	By:	/s/    LESLIE A. BLODGETT
		Leslie A. Blodgett
		Chief Executive Officer and Director

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Myles B. McCormick, Chief Financial Officer of Bare Escentuals, Inc. certify that:

1. I have reviewed this quarterly report on Form 10-Q of Bare Escentuals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2009	By:	/s/    MYLES B. MCCORMICK
		Myles B. McCormick
		Executive Vice President, Chief Financial Officer and Chief Operating Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Leslie A. Blodgett, Chief Executive Officer, and I, Myles B. McCormick, Chief Financial Officer, each hereby certify, pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, the Quarterly Report of Bare Escentuals, Inc. (the “Company”) on Form 10-Q for the quarterly period ended June 28, 2009, to which this Certificate is attached as Exhibit 32.1 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 5, 2009

By:	/s/    LESLIE A. BLODGETT
	Leslie A. Blodgett
	Chief Executive Officer and Director
By:	/s/    MYLES B. MCCORMICK
	Myles B. McCormick
	Executive Vice President, Chief Financial Officer and Chief Operating Officer

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Bare Escentuals, Inc. under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.