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Staples, Inc. Announces Third Quarter Performance

Category:

Tuesday, November 27, 2007 7:00 am EST

Dateline:

FRAMINGHAM, Mass.

Public Company Information:

NASDAQ:
SPLS
"While the economic environment in North America remains challenging, we are pleased to deliver profitable growth."

FRAMINGHAM, Mass.--(BUSINESS WIRE)--Staples, Inc. (Nasdaq: SPLS) announced today the results for its third quarter ended November 3, 2007. Total company sales increased nine percent to $5.2 billion compared to the third quarter of 2006. Net income, on a GAAP basis, declined five percent year over year to $275 million, and net income on a pro forma basis grew 13 percent to $299 million. Diluted earnings per share, on a GAAP basis, decreased three percent to 38 cents, and diluted earnings per share on a pro forma basis were 42 cents, a 17 percent increase versus the third quarter of 2006.

Third quarter 2007 earnings results reflect a pre-tax charge of $38 million ($24 million after-tax) related to the previously disclosed settlement of California wage and hour class action litigation. Third quarter 2006 earnings results reflected a lower tax rate due to the previously disclosed favorable resolution of certain tax matters, and a correction for prior years stock-based compensation.

While the economic environment in North America remains challenging, we are pleased to deliver profitable growth. said Ron Sargent, Staples chairman and chief executive officer. We are executing well, doing the right things for our customers, and investing for the future. We have built a balanced portfolio of businesses that continues to deliver solid results.

North American Retail sales grew three percent in the third quarter, and comparable store sales decreased three percent versus 2006, reflecting lower sales in business machines, furniture and computers partially offset by strong sales in copy and print centers and positive sales in core office supplies. North American Delivery continued its industry-leading growth, increasing sales 15 percent versus last years third quarter. Total International sales increased 18 percent in US dollars, benefiting from a $55 million foreign currency impact, and increased eight percent in local currency. International comparable store sales were flat versus 2006.

Highlights for the third quarter include:

  • Total company operating income rate on a GAAP basis declined 17 basis points year over year to 8.29 percent. Total company operating income rate, excluding previously disclosed adjustments for the third quarters of 2007 and 2006, improved 34 basis points year over year to 9.02 percent.
  • North American Retail operating income rate was 11.12 percent, up 23 basis points versus 2006, reflecting favorable mix as well as tight expense controls.
  • North American Delivery drove strong sales growth across all major product categories, achieved excellent service and operational execution, and improved supply chain metrics, driving a 21 basis point improvement in operating income rate to 10.85 percent.
  • International Operations continued to drive significant profit improvement with operating income rate improving 185 basis points to 3.34 percent. Both retail and delivery contributed to this strong performance.
  • Staples reached a significant milestone with the opening of its 2000th store.
  • The company opened 37 new stores in the United States, six new stores in Canada, one new store in the Netherlands and closed one store in the UK. Staples opened two new stores and one Staples UPS Express joint venture store in China. Staples now operates 2,008 stores worldwide.
  • The company has generated $533 million of free cash flow year-to-date after $316 million of capital expenditures, compared to free cash flow of $277 million for the same period last year.
  • Staples repurchased 8.0 million shares of its stock for $181 million during the quarter. Year-to-date the company has repurchased 23.3 million shares for $567 million.

Q4 & FY2007 Outlook

Staples expects to achieve earnings per share growth of approximately 15 percent for both the fourth quarter and the full year. This guidance excludes the previously disclosed impact to 2007 earnings for the charge related to the litigation settlement as well as the previously disclosed impact to 2006 earnings for the 53rd week benefit, favorable tax events and the charge for prior years stock-based compensation. Staples anticipates low double-digit sales growth for the total company in the fourth quarter. Staples expects flat to slightly negative same store sales and high single-digit sales growth in North American Retail, mid-teens sales growth in North American Delivery, and high single-digit sales growth in local currency in International for the fourth quarter.

FY2008 Outlook

The company expects to achieve high single-digit sales growth for the total company and a low single-digit comparable sales increase in North American Retail. The company expects to grow North American Delivery revenues in the low to mid-teens, and in International, Staples expects low double-digit growth in local currency. Based on the companys cautious outlook for 2008 and continued investment in growth initiatives, the company expects to achieve low teens earnings per share growth excluding the previously disclosed impact to 2007 earnings for the charge related to the litigation settlement. Staples maintains its long-term expectation to grow earnings per share 15-20 percent in a stronger economic environment.

Presentation of Non-GAAP Information

This press release presents net income and earnings per share results both with and without the expense related to the settlement of California wage and hour class action litigation described above for 2007, as well as the tax rate benefit and stock-based compensation correction described above for 2006. The presentation of results that exclude these items are non-GAAP financial measures that should be considered in addition to, and should not be considered superior to or as a substitute for, the presentation of results determined in accordance with GAAP. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are provided below under the heading Reconciliation of GAAP to Non-GAAP Financial Measures. Management believes that the non-GAAP financial measures presented in this press release provide a more meaningful comparison of the companys year-over-year performance. Management also uses these non-GAAP financial measures to evaluate the companys core operating results against plan, to compare the companys performance to that of its competitors, and to provide earnings guidance to the investing community.

Today's Conference Call

The company will host a conference call today at 8:00 a.m. (ET) to review these results and its outlook. Investors may listen to the call at http://investor.staples.com.

About Staples

Staples, Inc. invented the office superstore concept in 1986 and today is the world's largest office products company. With 74,000 talented associates, the company is committed to making it easy to buy a wide range of office products, including supplies, technology, furniture, and business services. With 2006 sales of $18.2 billion, Staples serves consumers and businesses ranging from home-based businesses to Fortune 500 companies in 22 countries throughout North and South America, Europe and Asia. Headquartered outside of Boston, Staples operates more than 2,000 office superstores and also serves its customers through mail order catalog, e-commerce and contract businesses. More information is available at www.staples.com.

Certain information contained in this news release constitutes forward-looking statements for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995 including, but not limited to, the information set forth under the headings Q4 & FY2007 Outlook and FY2008 Outlook and other statements regarding our future business and financial performance. Actual results may differ materially from those indicated by such forward-looking statements as a result of risks and uncertainties, including but not limited to: our market is highly competitive and we may not continue to compete successfully; we may be unable to continue to open new stores and enter new markets successfully; our growth may continue to strain operations, which could adversely affect our business and financial performance; our operating results may be impacted by changes in the economy that impact business and consumer spending; our business and financial performance is dependent upon our ability to attract and retain qualified associates; our stock price may fluctuate based on market expectations; our quarterly operating results are subject to significant fluctuation; our expanding international operations expose us to the unique risks inherent in foreign operations; our business may be adversely affected by the actions of and risks associated with our third party vendors; our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims; our debt level and operating lease commitments could impact our ability to obtain future financing and continue our growth strategy; fluctuations in our effective tax rate may adversely affect our business and results of operations; compromises of our information security may adversely affect our business; wage and hour class action lawsuits may adversely affect our business and financial performance; and those other factors discussed or referenced in our most recent annual report on Form 10-K filed with the SEC, under the heading Risk Factors and elsewhere, and any subsequent periodic or current reports filed by us with the SEC. In addition, any forward-looking statements represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.

STAPLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
         
 
November 3, February 3,
2007   2007  
ASSETS
Current assets:
Cash and cash equivalents $ 910,721 $ 1,017,671
Short-term investments 121,491 457,759
Receivables, net 873,457 720,797
Merchandise inventories, net 2,142,494 1,919,714
Deferred income tax asset 142,869 141,108
Prepaid expenses and other current assets   197,715     174,314  
Total current assets 4,388,747 4,431,363
Property and equipment:
Land and buildings 849,093 791,264
Leasehold improvements 1,118,708 996,434
Equipment 1,736,694 1,539,617
Furniture and fixtures   857,847     757,408  
Total property and equipment 4,562,342 4,084,723
Less accumulated depreciation and amortization   2,448,566     2,110,602  
Net property and equipment 2,113,776 1,974,121
Lease acquisition costs, net of accumulated amortization 32,242 33,579
Intangible assets, net of accumulated amortization 246,155 232,383
Goodwill 1,725,489 1,455,113
Other assets   289,912     270,706  
Total assets $ 8,796,321   $ 8,397,265  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,687,235 $ 1,486,188
Accrued expenses and other current liabilities 973,496 1,101,018
Debt maturing within one year   3,113     201,177  
Total current liabilities 2,663,844 2,788,383
Long-term debt 327,127 316,465
Deferred income tax liability 9,640 8,986
Other long-term obligations 361,009 252,657
Minority interest 2,925 9,109
-
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued - -
Common stock, $.0006 par value, 2,100,000,000 shares authorized;
issued 864,055,587 shares at November 3, 2007 and 849,338,568 shares at February 3, 2007 518 510
Additional paid-in capital 3,625,745 3,338,412
Cumulative foreign currency translation adjustments 435,107 189,115
Retained earnings 4,460,361 4,005,424
Less: Treasury stock at cost - 154,361,734 shares at November 3, 2007,
and 130,605,591 shares at February 3, 2007   (3,089,955 )   (2,511,796 )
Total stockholders' equity   5,431,776     5,021,665  
Total liabilities and stockholders' equity $ 8,796,321   $ 8,397,265  
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
 
13 Weeks Ended       39 Weeks Ended  
November 3,   October 28, November 3,   October 28,
2007   2006   2007   2006  
 
Sales $ 5,168,351 $ 4,756,550 $ 14,048,240 $ 12,874,870

Cost of goods sold and occupancy costs

  3,662,677     3,394,092     10,047,260     9,226,811  
Gross profit 1,505,674 1,362,458 4,000,980 3,648,059
Operating and other expenses:
Operating and selling 823,903 757,790 2,307,233 2,138,922

General and admini-
strative

249,095 199,066 650,676 559,113

Amort-
ization of intan-
gibles

  4,371     3,421     11,681     9,667  
Total operating expenses   1,077,369     960,277     2,969,590     2,707,702  
Operating income 428,305 402,181 1,031,390 940,357
 
Other income (expense):
Interest income 8,715 12,317 34,895 42,929
Interest expense (8,466 ) (10,934 ) (30,667 ) (36,678 )

Misc-
ellaneous income (expense)

    15     (62 )   (1,472 )   (921 )
Income before income taxes and minority interest 428,569 403,502 1,034,146 945,687
Income tax expense   154,285     113,555     372,293     308,742  
Income before minority interest 274,284 289,947 661,853 636,945
Minority interest   (234 )   19     (636 )   (234 )
Net income $ 274,518   $ 289,928   $ 662,489   $ 637,179  
 
Earnings Per Share:
 
Basic earnings per common share $ 0.39   $ 0.40   $ 0.94   $ 0.88  
 
Diluted earnings per common share $ 0.38   $ 0.39   $ 0.92   $ 0.86  
 
Dividends declared per common share $ -   $ -   $ 0.29   $ 0.22  
 
 
Weighted average shares outstanding:
 
Basic 702,258,662 718,172,288 707,301,022 722,468,584
 
Diluted 715,257,576 736,235,167 723,415,325 741,535,481
Reconciliation of GAAP to Non-GAAP Financial Measures
 
STAPLES, INC. AND SUBSIDIARIES
Proforma Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
 
13 Weeks Ended
November 3, 2007   October 28, 2006
As reported     Wage and hour settlement   Pro forma $   Pro forma % As reported   Tax benefit   Correction for prior years' stock-based compensation   Pro forma $   Pro forma %
   
 
Sales $ 5,168,351 $ - $ 5,168,351 100.00 % $ 4,756,550 $ - $ - $ 4,756,550 100.00 %
Cost of goods sold and occupancy costs   3,662,677     -     3,662,677   70.87 %   3,394,092     -     (343 )   3,393,749   71.35 %
Gross profit 1,505,674 - 1,505,674 29.13 % 1,362,458 - 343 1,362,801 28.65 %
 
Operating and other expenses:
Operating and selling 823,903 - 823,903 15.94 % 757,790 - (3,887 ) 753,903 15.85 %

General and admini-
strative

249,095 (38,000 ) 211,095 4.08 % 199,066 - (6,599 ) 192,467 4.05 %

Amort-
ization of intan-
gibles

  4,371     -     4,371   0.08 %   3,421     -     -     3,421   0.07 %

Total oper-
ating expenses

  1,077,369     (38,000 )   1,039,369   20.11 %   960,277     -     (10,486 )   949,791   19.97 %
 
Operating income 428,305 38,000 466,305 9.02 % 402,181 - 10,829 413,010 8.68 %
 
Interest and other income, net   (264 )   -     (264 ) (0.01 %)   (1,321 )   -       -     (1,321 ) (0.03 %)
Income before income taxes and minority interest 428,569 38,000 466,569 9.03 % 403,502 - 10,829 414,331 8.71 %
Income tax expense   154,285     13,680     167,965   3.25 %   113,555     33,343     2,262     149,160   3.14 %
Income before minority interest 274,284 24,320 298,604 5.78 % 289,947 (33,343 ) 8,567 265,171 5.57 %
Minority interest   (234 )         (234 ) (0.00 %)   19     -     -     19   0.00 %
Net income $ 274,518   $ 24,320   $ 298,838   5.78 % $ 289,928   $ (33,343 ) $ 8,567   $ 265,152   5.57 %
 
 
Earnings Per Share:
 
Basic earnings per common share $ 0.39   $ 0.04   $ 0.43   $ 0.40   $ (0.04 ) $ 0.01   $ 0.37  
 
Diluted earnings per common share $ 0.38   $ 0.04   $ 0.42   $ 0.39   $ (0.04 ) $ 0.01   $ 0.36  
 
 

Weighted average shares outst-
anding:

 
Basic 702,258,662 718,172,288
 
Diluted 715,257,576 736,235,167
Reconciliation of GAAP to Non-GAAP Financial Measures
 
STAPLES, INC. AND SUBSIDIARIES
Proforma Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
 
39 Weeks Ended  
  November 3, 2007     October 28, 2006  
As reported     Wage and hour settlement     Pro forma $     Pro forma % As reported  

Tax benefit

 

Correction for prior years' stock-
based compensation

    Pro forma $   Pro forma %
 
   
Sales $ 14,048,240 $ - $ 14,048,240 100.00 % $ 12,874,870 $ - $ - $ 12,874,870 100.00 %
Cost of goods sold and occupancy costs   10,047,260     -     10,047,260   71.52 %   9,226,811     -     (343 )   9,226,468   71.66 %
Gross profit 4,000,980 - 4,000,980 28.48 % 3,648,059 - 343 3,648,402 28.34 %
 
Operating and other expenses:
Operating and selling 2,307,233 - 2,307,233 16.42 % 2,138,922 - (3,887 ) 2,135,035 16.58 %

General and admin-
istrative

650,676 (38,000 ) 612,676 4.36 % 559,113 - (6,599 ) 552,514 4.29 %

Amort-
ization of intang-
ibles

  11,681     -     11,681   0.08 %   9,667     -     -     9,667   0.08 %

Total oper-
ating expenses

  2,969,590     (38,000 )   2,931,590   20.87 %   2,707,702     -     (10,486 )   2,697,216   20.95 %
 
Operating income 1,031,390 38,000 1,069,390 7.61 % 940,357 - 10,829 951,186 7.39 %
 
Interest and other income, net   (2,756 )   -     (2,756 ) (0.02 %)   (5,330 )   -     -     (5,330 ) (0.04 %)
Income before income taxes and minority interest 1,034,146 38,000 1,072,146 7.63 % 945,687 - 10,829 956,516 7.43 %
Income tax expense   372,293     13,680     385,973   2.75 %   308,742     33,343     2,262     344,347   2.67 %
Income before minority interest 661,853 24,320 686,173 4.88 % 636,945 (33,343 ) 8,567 612,169 4.75 %
Minority interest   (636 )         (636 ) (0.00 %)   (234 )   -     -     (234 ) (0.00 %)
Net income $ 662,489   $ 24,320   $ 686,809   4.89 % $ 637,179   $ (33,343 ) $ 8,567   $ 612,403   4.76 %
 
 
Earnings Per Share:
 
Basic earnings per common share $ 0.94   $ 0.03   $ 0.97   $ 0.88   $ (0.04 ) $ 0.01   $ 0.85  
 
Diluted earnings per common share $ 0.92   $ 0.03   $ 0.95   $ 0.86   $ (0.04 ) $ 0.01   $ 0.83  
 
 

Weighted average shares outsta-
nding:

 
Basic 707,301,022 722,468,584
 
Diluted 723,415,325 741,535,481
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
         
39 Weeks Ended  
November 3, October 28,
2007   2006  
Operating Activities:
Net income

 

$ 662,489 $ 637,179
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization

 

285,940 247,832
Stock-based compensation 133,196 130,912
Deferred tax benefit 25,272 (62,484 )
Excess tax benefits from stock-based compensation arrangements (17,395 ) (25,523 )
Other

 

1,679 5,139
Changes in assets and liabilities:
Increase in receivables

 

(113,711 ) (134,543 )
Increase in merchandise inventories

 

(99,489 ) (184,154 )
Increase in prepaid expenses and other assets

 

(51,323 ) (22,721 )
Increase in accounts payable 114,724 76,694
Decrease in accrued expenses and other liabilities

 

(182,968 ) (54,075 )
Increase in other long-term obligations

 

  90,161     14,549  
Net cash provided by operating activities

 

848,575 628,805
 
Investing Activities:
Acquisition of property and equipment

 

(315,905 ) (352,186 )
Acquisition of businesses and investment in joint ventures, net of cash acquired (178,295 ) (2,596 )
Purchase of short-term investments (3,440,117 ) (5,820,743 )
Proceeds from the sale of short-term investments   3,776,385     5,897,590  
Net cash used in investing activities

 

(157,932 ) (277,935 )
 
Financing Activities:
Proceeds from the exercise of stock options and the sale of stock under employee stock
purchase plans

 

125,703 135,323
Payments on borrowings

 

(204,889 ) (3,104 )
Proceeds from borrowings

 

3,949 -
Excess tax benefits from stock-based compensation arrangements 17,395 25,523
Cash dividends paid (207,552 ) (160,883 )
Purchase of treasury stock   (578,159 )   (529,685 )
Net cash used in financing activities

 

(843,553 ) (532,826 )
 
Effect of exchange rate changes on cash and cash equivalents

 

45,960 8,878
 
Net decrease in cash and cash equivalents

 

(106,950 ) (173,078 )
Cash and cash equivalents at beginning of period

 

  1,017,671     977,822  
Cash and cash equivalents at end of period

 

$ 910,721   $ 804,744  
STAPLES, INC. AND SUBSIDIARIES
Segment Reporting
(Dollar Amounts in Thousands)
(Unaudited)
       
13 Weeks Ended   39 Weeks Ended  
 
November 3, October 28, November 3, October 28,
2007   2006   2007   2006  
 
Sales:
North American Retail $ 2,750,884 $ 2,665,031 $ 7,225,679 $ 6,983,439
North American Delivery 1,727,141 1,505,572 4,896,999 4,251,176
International Operations   690,326     585,947     1,925,562     1,640,255  
Total sales $ 5,168,351   $ 4,756,550   $ 14,048,240   $ 12,874,870  
 
Business Unit Income:
North American Retail $ 305,869 $ 290,076 $ 652,252 $ 626,587
North American Delivery 187,450 160,294 507,380 433,147
International Operations   23,064     8,736     42,954     11,535  
Total business unit income $ 516,383 $ 459,106 $ 1,202,586 $ 1,071,269
Stock-based compensation   (50,078 )   (46,096 )   (133,196 )   (120,083 )
Total reportable segments $ 466,305 $ 413,010 $ 1,069,390 $ 951,186
Interest and other income, net 264 1,321 2,756 5,330
Impact of correction of prior years' stock-based compensation - (10,829 ) - (10,829 )
Impact of wage and hour settlement   (38,000 )   -     (38,000 )   -  
Income before income taxes and minority interest $ 428,569   $ 403,502   $ 1,034,146   $ 945,687  


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Contact:

Staples, Inc.
Media Contact:
Paul Capelli, 508-253-8530
or
Owen Davis, 508-253-8468
or
Investor Contact:
Laurel Lefebvre, 508-253-4080
or
Chris Powers, 508-253-4632

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