UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, DC 20549

 

FORM 10-Q

 

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended:  October 29, 2005

 

Commission File Number:  0-17586

 

STAPLES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

 

04-2896127

(State or other jurisdiction of

 

 

(I.R.S. Employer

incorporation or organization)

 

 

Identification No.)

 

Five Hundred Staples Drive, Framingham, MA  01702

(Address of principal executive office and zip code)

 

508-253-5000

(Registrant’s telephone number, including area code)

 

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  ý     No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ý     No  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  o     No  ý

 

The registrant had 731,390,310 shares of Staples common stock outstanding as of  November 11, 2005.

 

 



 

STAPLES, INC. AND SUBSIDIARIES

FORM  10-Q
October 29, 2005
TABLE OF CONTENTS

 

Part I – Financial Information:

 

 

 

Item 1. Financial Statements (unaudited):

 

Consolidated Balance Sheets

 

Consolidated Statements of Income

 

Consolidated Statements of Cash Flows

 

Notes to Consolidated Financial Statements

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

 

 

Item 4. Controls and Procedures

 

 

 

Part II – Other Information

 

 

 

Signatures

 

 

 

Exhibit Index

 

 

2



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

STAPLES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar Amounts in Thousands, Except Share Data)

 

 

 

October 29,

 

January 29,

 

 

 

2005

 

2005

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

770,270

 

$

997,310

 

Short-term investments

 

558,858

 

472,231

 

Receivables, net

 

568,430

 

485,126

 

Merchandise inventories, net

 

1,708,701

 

1,602,530

 

Deferred income tax asset

 

115,153

 

86,041

 

Prepaid expenses and other current assets

 

132,994

 

138,374

 

Total current assets

 

3,854,406

 

3,781,612

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Land and buildings

 

684,987

 

649,175

 

Leasehold improvements

 

842,310

 

762,946

 

Equipment

 

1,250,050

 

1,140,234

 

Furniture and fixtures

 

646,360

 

597,293

 

Total property and equipment

 

3,423,707

 

3,149,648

 

Less accumulated depreciation and amortization

 

1,762,144

 

1,548,774

 

Net property and equipment

 

1,661,563

 

1,600,874

 

 

 

 

 

 

 

Lease acquisition costs, net of accumulated amortization

 

35,838

 

38,400

 

Intangible assets, net of accumulated amortization

 

232,263

 

222,520

 

Goodwill

 

1,383,424

 

1,321,464

 

Other assets

 

89,129

 

106,578

 

Total assets

 

$

7,256,623

 

$

7,071,448

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,365,968

 

$

1,241,433

 

Accrued expenses and other current liabilities

 

947,223

 

954,184

 

Debt maturing within one year

 

1,352

 

1,244

 

Total current liabilities

 

2,314,543

 

2,196,861

 

 

 

 

 

 

 

Long-term debt

 

526,455

 

557,927

 

Deferred income tax liability

 

22,616

 

23,314

 

Other long-term obligations

 

223,636

 

178,150

 

 

 

 

 

 

 

Minority interest

 

4,288

 

 

 

 

 

 

 

 

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 823,548,329 shares at October 29, 2005 and 813,049,136 shares at January 29, 2005

 

494

 

488

 

Additional paid-in capital

 

2,426,414

 

2,254,947

 

Cumulative foreign currency translation adjustments

 

76,039

 

114,427

 

Retained earnings

 

3,239,188

 

2,818,163

 

Less: Treasury stock at cost - 92,315,397 shares at October 29, 2005, and 68,547,587 shares at January 29, 2005

 

(1,577,050

)

(1,072,829

)

Total stockholders’ equity

 

4,165,085

 

4,115,196

 

Total liabilities, minority interest and stockholders’ equity

 

$

7,256,623

 

$

7,071,448

 

 

See notes to consolidated financial statements.

 

3



 

STAPLES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 29,

 

October 30,

 

October 29,

 

October 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

4,245,519

 

$

3,830,466

 

$

11,616,535

 

$

10,371,873

 

Cost of goods sold and occupancy costs

 

3,024,061

 

2,734,250

 

8,342,472

 

7,469,347

 

Gross profit

 

1,221,458

 

1,096,216

 

3,274,063

 

2,902,526

 

 

 

 

 

 

 

 

 

 

 

Operating and other expenses:

 

 

 

 

 

 

 

 

 

Operating and selling

 

687,494

 

608,426

 

1,934,128

 

1,729,657

 

General and administrative

 

156,262

 

153,748

 

471,831

 

436,734

 

Amortization of intangibles

 

3,178

 

2,297

 

10,021

 

6,147

 

Total operating expenses

 

846,934

 

764,471

 

2,415,980

 

2,172,538

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

374,524

 

331,745

 

858,083

 

729,988

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

15,928

 

8,811

 

40,719

 

19,206

 

Interest expense

 

(14,916

)

(10,777

)

(39,955

)

(27,977

)

Miscellaneous expense

 

(927

)

(856

)

(1,086

)

(1,431

)

Income before income taxes and minority interest

 

374,609

 

328,923

 

857,761

 

719,786

 

Income tax expense

 

136,732

 

120,057

 

313,083

 

262,722

 

Income before minority interest

 

237,877

 

208,866

 

544,678

 

457,064

 

Minority interest

 

53

 

 

251

 

 

Net income

 

$

237,824

 

$

208,866

 

$

544,427

 

$

457,064

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.33

 

$

0.28

 

$

0.74

 

$

0.62

 

Diluted earnings per common share

 

$

0.32

 

$

0.28

 

$

0.73

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

 

$

 

$

0.17

 

$

0.13

 

 

See notes to consolidated financial statements.

 

4



 

STAPLES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

(Unaudited)

 

 

 

39 Weeks Ended

 

 

 

October 29,

 

October 30,

 

 

 

2005

 

2004

 

Operating Activities:

 

 

 

 

 

Net income

 

$

544,427

 

$

457,064

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

223,429

 

206,381

 

Deferred tax (expense) benefit

 

(24,738

)

4,841

 

Other

 

40,600

 

39,437

 

Changes in assets and liabilities:

 

 

 

 

 

Increase in receivables

 

(73,434

)

(49,656

)

Increase in merchandise inventories

 

(106,333

)

(103,004

)

Increase in prepaid expenses and other assets

 

(5,323

)

(9,876

)

Increase in accounts payable

 

120,804

 

242,056

 

Increase in accrued expenses and other liabilities

 

18,381

 

39,282

 

Increase in other long-term obligations

 

16,082

 

5,087

 

Net cash provided by operating activities

 

753,895

 

831,612

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Acquisition of property and equipment

 

(289,338

)

(200,662

)

Acquisition of businesses, net of cash acquired

 

(40,560

)

(86,390

)

Increase in investment, net of cash acquired

 

(16,636

)

(9,650

)

Purchase of short-term investments

 

(6,037,124

)

(8,263,263

)

Proceeds from the sale of short-term investments

 

5,950,498

 

8,668,722

 

Net cash (used in) provided by investing activities

 

(433,160

)

108,757

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans

 

102,929

 

148,031

 

Payments on borrowings

 

(18,850

)

(3,216

)

Cash dividends paid

 

(123,402

)

(99,527

)

Purchase of treasury stock, net

 

(504,221

)

(344,711

)

Net cash used in financing activities

 

(543,544

)

(299,423

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(4,231

)

15,081

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(227,040

)

656,027

 

Cash and cash equivalents at beginning of period

 

997,310

 

457,465

 

Cash and cash equivalents at end of period

 

$

770,270

 

$

1,113,492

 

 

See notes to consolidated financial statements.

 

5



 

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note A  - Basis of Presentation

 

The accompanying interim unaudited consolidated financial statements include the accounts of Staples, Inc. and its subsidiaries (“Staples”, “the Company”, “we”, “our” or “us”).  These financial statements are for the period covering the thirteen and thirty-nine weeks ending October 29, 2005 (also referred to as the “third quarter of 2005” and the “year-to-date 2005”) and the period covering the thirteen and thirty-nine weeks ending October 30, 2004 (also referred to as the “third quarter of 2004” and the “year-to-date 2004”).  All intercompany accounts and transactions are eliminated in consolidation. Certain previously reported amounts have been reclassified to conform with the current period presentation.

 

All share and per share amounts reflect, or have been restated to reflect, the three-for-two common stock split that was effected in the form of a common stock dividend distributed on April 15, 2005.

 

These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, such interim financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.  These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended January 29, 2005.

 

New Accounting Pronouncements:  On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123R”).  Under SFAS No. 123R, companies must calculate and record in the income statement the cost of equity instruments, such as stock options, awarded to employees for services received; pro forma disclosure is no longer permitted.  The cost of the equity instruments is to be measured based on fair value of the instruments on the date they are granted (with certain exceptions) and is required to be recognized over the period during which the employees are required to provide services in exchange for the equity instruments.

 

SFAS No. 123R provides two alternatives for adoption: (1) a “modified prospective” method in which compensation cost is recognized for all awards granted subsequent to the effective date of this statement as well as for the unvested portion of awards outstanding as of the effective date; or (2) a “modified retrospective” method which follows the approach in the “modified prospective” method, but also permits entities to restate prior periods to record compensation cost calculated under SFAS No. 123 for the pro forma disclosure.  The Company plans to adopt SFAS No. 123R using the modified retrospective method.  Since the Company currently accounts for stock options granted to employees and shares issued under employee stock purchase plans in accordance with the intrinsic value method permitted under APB No. 25, no compensation expense is recognized.  The adoption of SFAS No. 123R is expected to have a significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position.  The impact of adopting SFAS No. 123R cannot be accurately estimated at this time, as it will depend on the market value and the amount of share based awards granted in future periods.

 

On April 14, 2005, the Securities and Exchange Commission announced that it would delay the required implementation of SFAS No. 123R, allowing companies that are not small business issuers to adopt the Statement no later than the beginning of the first fiscal year beginning after June 15, 2005.  As a result of this delay, the Company plans to adopt SFAS No. 123R as of January 29, 2006.

 

Note B – Employee Benefit Plans

 

Staples accounts for its stock-based plans under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and provides pro forma disclosures of the compensation expense determined under the fair value provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” as amended by Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148”).

 

Pro forma information regarding net income and earnings per share is required by SFAS No. 148, which also requires reporting the information as if Staples had accounted for its employee stock options granted subsequent to January 28, 1995 under the fair value method of that Statement. For options granted prior to May 1, 2005, the fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model. For stock options granted on or after May 1, 2005, the fair value of

 

6



 

each award is estimated on the date of grant using a binomial valuation model. The binomial model considers characteristics of fair value option pricing that are not available under the Black-Scholes model. Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility, dividend yield rate, and risk free interest rate. However, in addition, the binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option. For these reasons, the Company believes that the binomial model provides a fair value that is more representative of actual experience and future expected experience than the value calculated using the Black-Scholes model.

 

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. For purposes of SFAS No. 148’s disclosure requirements, Staples’ employee stock purchase plans are considered compensatory plans. The expense was calculated based on the fair value of the employees’ purchase rights. Staples’ pro forma information follows (in thousands, except per share data):

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 29,
2005

 

October 30,
2004

 

October 29,
2005

 

October 30,
2004

 

Net income as reported

 

$

237,824

 

$

208,866

 

$

544,427

 

$

457,064

 

Add: Stock based compensation, net of related tax effects, included in reported net income

 

8,316

 

7,318

 

24,304

 

21,474

 

Deduct: Stock based compensation determined under the fair value based method for all awards, net of related tax effects

 

(20,733

)

(17,876

)

(60,125

)

(52,699

)

Pro forma net income

 

$

225,407

 

$

198,308

 

$

508,606

 

$

425,839

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.33

 

$

0.28

 

$

0.74

 

$

0.62

 

Pro forma

 

$

0.31

 

$

0.27

 

$

0.69

 

$

0.57

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.32

 

$

0.28

 

$

0.73

 

$

0.60

 

Pro forma

 

$

0.30

 

$

0.26

 

$

0.68

 

$

0.56

 

 

Note C - Comprehensive Income

 

Comprehensive income includes net income, foreign currency translation adjustments and changes in the fair value of derivatives that are designated as hedges of net investments in foreign subsidiaries (net of the related tax effects), which are reported separately in stockholders’ equity (in thousands):

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 29,
2005

 

October 30,
2004

 

October 29,
2005

 

October 30,
2004

 

Net income

 

$

237,824

 

$

208,866

 

$

544,427

 

$

457,064

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

10,840

 

53,879

 

(29,886

)

45,178

 

Change in the fair value of derivatives

 

(9,041

)

(21,524

)

(14,660

)

(22,152

)

Tax effect of changes in the fair value of derivatives

 

3,797

 

9,040

 

6,158

 

9,304

 

Total comprehensive income

 

$

243,420

 

$

250,261

 

$

506,039

 

$

489,394

 

 

7



 

Note D – Stockholders’ Equity

 

On February 22, 2005, the Board approved a three-for-two split of Staples common stock to shareholders of record as of March 29, 2005. The split was effected in the form of a stock dividend, which was distributed on April 15, 2005.  All share and per share data has been restated to reflect the effect of this three-for-two common stock split.

 

Note E - Computation of Earnings Per Common Share

 

The computation of basic and diluted earnings per share for the third quarter and year-to-date 2005 and 2004 is as follows (in thousands, except per share data):

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 29,
2005

 

October 30,
2004

 

October 29,
2005

 

October 30,
2004

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

237,824

 

$

208,866

 

$

544,427

 

$

457,064

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

729,572

 

741,787

 

733,019

 

742,129

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options and restricted stock

 

15,171

 

16,203

 

15,502

 

16,435

 

Weighted-average common shares outstanding assuming dilution

 

744,743

 

757,990

 

748,521

 

758,564

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.33

 

$

0.28

 

$

0.74

 

$

0.62

 

Diluted earnings per common share

 

$

0.32

 

$

0.28

 

$

0.73

 

$

0.60

 

 

Note F - Segment Reporting

 

Staples has three reportable segments: North American Retail, North American Delivery, and International Operations, formerly referred to as European Operations.  Staples’ North American Retail segment consists of the U.S. and Canadian business units that operate office products stores.  The North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Staples Business Delivery, Quill and Staples’ Contract operations (Staples National Advantage and Staples Business Advantage).  The International Operations segment consists of operating units that operate office products stores and that sell and deliver office products and services directly to customers in 19 countries in Europe, South America and Asia.

 

Staples evaluates performance and allocates resources based on profit or loss from operations before interest and income taxes, the impact of changes in accounting principles and non-recurring items (“business unit income/loss”).  Intersegment sales and transfers are recorded at Staples’ cost; therefore, there is no intercompany profit or loss recognized on these transactions.

 

The following is a summary of sales and business unit income by reportable segment for the third quarter and year-to-date 2005 and 2004 and a reconciliation of business unit income to consolidated income before income taxes (in thousands):

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 29,
2005

 

October 30,
2004

 

October 29,
2005

 

October 30,
2004

 

Sales:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

2,450,926

 

$

2,254,749

 

$

6,468,839

 

$

5,937,640

 

North American Delivery

 

1,285,905

 

1,086,820

 

3,617,436

 

3,074,274

 

International Operations

 

508,688

 

488,897

 

1,530,260

 

1,359,959

 

Total sales

 

$

4,245,519

 

$

3,830,466

 

$

11,616,535

 

$

10,371,873

 

 

8



 

Business Unit Income/(Loss):

 

 

 

 

 

 

 

 

 

North American Retail

 

$

245,265

 

$

220,883

 

$

527,975

 

$

423,205

 

North American Delivery

 

128,669

 

99,270

 

338,627

 

260,656

 

International Operations

 

590

 

11,592

 

(8,519

)

46,127

 

Total business unit income

 

$

374,524

 

$

331,745

 

$

858,083

 

$

729,988

 

Interest and other expense, net

 

85

 

(2,822

)

(322

)

(10,202

)

Income before income taxes and minority interest

 

$

374,609

 

$

328,923

 

$

857,761

 

$

719,786

 

 

Note G - Guarantor Subsidiaries

 

Under the terms of the Company’s 7.375% senior notes and 7.125% senior notes, certain subsidiaries guarantee repayment of the debt.  The 7.375% senior notes and 7.125% senior notes are fully and unconditionally guaranteed on an unsecured, joint and several basis by Staples the Office Superstore, LLC, Staples the Office Superstore East, Inc., Staples Contract & Commercial, Inc. and Staples the Office Superstore, Limited Partnership, all of which are wholly owned subsidiaries of Staples (the “Guarantor Subsidiaries”). The term of the guarantees is equivalent to the term of the related debt. The following condensed consolidating financial data is presented for the holders of the 7.375% senior notes and 7.125% senior notes and illustrates the composition of Staples (the “Parent Company”), the Guarantor Subsidiaries, and the non-guarantor subsidiaries for the third quarter and year-to-date 2005 and 2004.  The non-guarantor subsidiaries represent more than an inconsequential portion of the consolidated assets and revenues of Staples.

 

Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Parent Company’s investment accounts and earnings. The principal elimination entries eliminate the Parent Company’s investment in subsidiaries and intercompany balances and transactions.

 

Condensed Consolidating Balance Sheet

As of October 29, 2005

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

352,710

 

$

36,102

 

$

381,458

 

$

 

$

770,270

 

Short-term investments

 

558,858

 

 

 

 

558,858

 

Receivables

 

4,325

 

268,416

 

295,689

 

 

 

568,430

 

Merchandise inventories

 

 

1,048,699

 

660,002

 

 

1,708,701

 

Other current assets

 

(48,578

)

157,007

 

139,718

 

 

248,147

 

Total current assets

 

867,315

 

1,510,224

 

1,476,867

 

 

3,854,406

 

Net property, equipment and other assets

 

238,078

 

965,445

 

815,270

 

 

2,018,793

 

Goodwill

 

172,770

 

92,345

 

1,118,309

 

 

1,383,424

 

Investment in affiliates and intercompany, net

 

(129,358

)

2,409,667

 

997,831

 

(3,278,140

)

 

Total assets

 

$

1,148,805

 

$

4,977,681

 

$

4,408,277

 

$

(3,278,140

)

$

7,256,623

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

7,391

 

$

1,312,912

 

$

994,240

 

$

 

$

2,314,543

 

Total long-term liabilities

 

56,215

 

639,084

 

77,408

 

 

772,707

 

Minority interest

 

 

 

4,288

 

 

4,288

 

Total stockholders’ equity

 

1,085,199

 

3,025,685

 

3,332,341

 

(3,278,140

)

4,165,085

 

Total liabilities, minority interest and stockholders’ equity

 

$

1,148,805

 

$

4,977,681

 

$

4,408,277

 

$

(3,278,140

)

$

7,256,623

 

 

9



 

Condensed Consolidating Balance Sheet

As of January 29, 2005

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

529,275

 

$

44,300

 

$

423,735

 

$

 

$

997,310

 

Short-term investments

 

472,231

 

 

 

 

472,231

 

Merchandise inventories

 

 

1,004,819

 

597,711

 

 

1,602,530

 

Other current assets

 

80,358

 

255,319

 

373,864

 

 

709,541

 

Total current assets

 

1,081,864

 

1,304,438

 

1,395,310

 

 

3,781,612

 

Net property, equipment and other assets

 

239,982

 

920,213

 

808,177

 

 

1,968,372

 

Goodwill, net of amortization

 

140,570

 

52,067

 

1,128,827

 

 

1,321,464

 

Investment in affiliates and intercompany, net

 

374,885

 

2,013,548

 

882,308

 

(3,270,741

)

 

Total assets

 

$

1,837,301

 

$

4,290,266

 

$

4,214,622

 

$

(3,270,741

)

$

7,071,448

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

277,470

 

$

1,045,733

 

$

873,658

 

$

 

$

2,196,861

 

Total long-term liabilities

 

26,208

 

600,554

 

132,629

 

 

759,391

 

Total stockholders’ equity

 

1,533,623

 

2,643,979

 

3,208,335

 

(3,270,741

)

4,115,196

 

Total liabilities and stockholders’ equity

 

$

1,837,301

 

$

4,290,266

 

$

4,214,622

 

$

(3,270,741

)

$

7,071,448

 

 

Condensed Consolidating Statement of Income

For the 13 weeks ended October 29, 2005

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

2,813,534

 

$

1,431,985

 

$

4,245,519

 

Cost of goods sold and occupancy costs

 

360

 

2,007,105

 

1,016,596

 

3,024,061

 

Gross profit

 

(360

)

806,429

 

415,389

 

1,221,458

 

Operating and other expenses

 

31,605

 

535,835

 

279,409

 

846,849

 

Income (loss) before income taxes and minority interest

 

(31,965

)

270,594

 

135,980

 

374,609

 

Income tax expense

 

 

113,884

 

22,848

 

136,732

 

Income (loss) before minority interest

 

(31,965

)

156,710

 

113,132

 

237,877

 

Minority interest

 

 

 

53

 

53

 

Net income (loss)

 

$

(31,965

)

$

156,710

 

$

113,079

 

$

237,824

 

 

Condensed Consolidating Statement of Income

For the 13 weeks ended October 30, 2004

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

2,538,850

 

$

1,291,616

 

$

3,830,466

 

Cost of goods sold and occupancy costs

 

848

 

1,818,577

 

914,825

 

2,734,250

 

Gross profit

 

(848

)

720,273

 

376,791

 

1,096,216

 

Operating and other expenses

 

15,862

 

503,089

 

248,342

 

767,293

 

Income (loss) before income taxes

 

(16,710

)

217,184

 

128,449

 

328,923

 

Income tax expense

 

 

86,216

 

33,841

 

120,057

 

Net income (loss)

 

$

(16,710

)

$

130,968

 

$

94,608

 

$

208,866

 

 

10



 

Condensed Consolidating Statement of Income

For the 39 weeks ended October 29, 2005

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

7,679,788

 

$

3,936,747

 

$

11,616,535

 

Cost of goods sold and occupancy costs

 

1,113

 

5,553,671

 

2,787,688

 

8,342,472

 

Gross profit

 

(1,113

)

2,126,117

 

1,149,059

 

3,274,063

 

Operating and other expenses

 

79,935

 

1,511,708

 

824,659

 

2,416,302

 

Income (loss) before income taxes and minority interest

 

(81,048

)

614,409

 

324,400

 

857,761

 

Income tax expense

 

 

260,767

 

52,316

 

313,083

 

Income (loss) before minority interest

 

(81,048

)

353,642

 

272,084

 

544,678

 

Minority interest

 

 

 

251

 

251

 

Net income (loss)

 

$

(81,048

)

$

353,642

 

$

271,833

 

$

544,427

 

 

Condensed Consolidating Statement of Income

For the 39 weeks ended October 30, 2004

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

6,923,813

 

$

3,448,060

 

$

10,371,873

 

Cost of goods sold and occupancy costs

 

1,645

 

5,041,834

 

2,425,868

 

7,469,347

 

Gross profit

 

(1,645

)

1,881,979

 

1,022,192

 

2,902,526

 

Operating and other expenses

 

56,448

 

1,432,756

 

693,536

 

2,182,740

 

Income (loss) before income taxes

 

(58,093

)

449,223

 

328,656

 

719,786

 

Income tax expense

 

 

179,883

 

82,839

 

262,722

 

Net income (loss)

 

$

(58,093

)

$

269,340

 

$

245,817

 

$

457,064

 

 

11



 

Condensed Consolidating Statement of Cash Flows

For the 39 weeks ended October 29, 2005

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Net cash provided by operating activities

 

$

508,606

 

$

127,966

 

$

117,323

 

$

753,895

 

Investing Activities:

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(55,001

)

(136,164

)

(98,173

)

(289,338

)

Acquisition of businesses, net of cash acquired

 

 

 

(40,560

)

(40,560

)

Increase in investment, net of cash acquired

 

 

 

(16,636

)

(16,636

)

Purchase of short-term investments

 

(6,037,124

)

 

 

(6,037,124

)

Proceeds from sale of short-term investments

 

5,950,498

 

 

 

5,950,498

 

Cash used in investing activities

 

(141,627

)

(136,164

)

(155,369

)

(433,160

)

Financing Activities:

 

 

 

 

 

 

 

 

 

Payments on borrowings

 

(18,850

)

 

 

(18,850

)

Purchase of treasury stock

 

(504,221

)

 

 

(504,221

)

Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans

 

102,929

 

 

 

102,929

 

Cash dividends paid

 

(123,402

)

 

 

(123,402

)

Cash used in financing activities

 

(543,544

)

 

 

(543,544

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

(4,231

)

(4,231

)

Net decrease in cash and cash equivalents

 

(176,565

)

(8,198

)

(42,277

)

(227,040

)

Cash and cash equivalents at beginning of period

 

529,275

 

44,300

 

423,735

 

997,310

 

Cash and cash equivalents at end of period

 

$

352,710

 

$

36,102

 

$

381,458

 

$

770,270

 

 

Condensed Consolidating Statement of Cash Flows

For the 39 weeks ended October 30, 2004

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

494,297

 

$

81,124

 

$

256,191

 

$

831,612

 

Investing Activities:

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(37,336

)

(102,683

)

(60,643

)

(200,662

)

Acquisition of businesses, net of cash acquired

 

 

(2,781

)

(83,609

)

(86,390

)

Investment in joint venture

 

(9,650

)

 

 

(9,650

)

Purchase of short-term investments

 

(8,263,263

)

 

 

(8,263,263

)

Proceeds from the sale of short-term investments

 

8,668,722

 

 

 

8,668,722

 

Cash provided by (used in) investing activities

 

358,473

 

(105,464

)

(144,252

)

108,757

 

Financing Activities:

 

 

 

 

 

 

 

 

 

Payments on borrowings

 

(3,216

)

 

 

(3,216

)

Purchase of treasury stock

 

(344,711

)

 

 

(344,711

)

Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans

 

148,031

 

 

 

148,031

 

Cash dividends paid

 

(99,527

)

 

 

(99,527

)

Cash used in financing activities

 

(299,423

)

 

 

(299,423

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

15,081

 

15,081

 

Net increase (decrease) in cash and cash equivalents

 

553,347

 

(24,340

)

127,020

 

656,027

 

Cash and cash equivalents at beginning of period

 

111,274

 

55,507

 

290,684

 

457,465

 

Cash and cash equivalents at end of period

 

$

664,621

 

$

31,167

 

$

417,704

 

$

1,113,492

 

 

12



 

STAPLES, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Our business is comprised of three segments: North American Retail, North American Delivery and International Operations.  Our North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Staples Business Delivery, Quill, and our Contract operations (Staples National Advantage and Staples Business Advantage). The International Operations segment consists of operating units that operate office products stores and that sell and deliver office products and services directly to customers in 19 countries in Europe, South America and Asia.

 

During 2004 and the first three quarters of 2005,  we invested in a mail order and internet company in the People’s Republic of China (“Staples China”).  We have been the majority shareholder of Staples China since the first quarter of 2005 and have included the operating results of Staples China in our consolidated financial statements since then. The results of Staples China are reported as part of our International Operations segment for segment reporting.

 

We acquired four businesses during 2004 (the “2004 acquisitions”).  On August 4, 2004, we acquired the United Kingdom office products company Globus Office World plc (“Office World”). In September 2004, we acquired Pressel Versand International GmbH, a mail order company based in Austria and operating in nine European countries, and Malling Beck A/S, a mail order company operating in Denmark.  On November 29, 2004, we entered the South American market by acquiring Officenet SA, a mail order and internet business operating in Brazil and Argentina.  The results of the 2004 acquisitions have been included in the consolidated financial statements since the dates of acquisition and are reported as part of our International Operations segment for segment reporting.

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q and, in particular, this management’s discussion and analysis, contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”).  These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions. Any statements contained herein (including, without limitation, statements to the effect that Staples or its management “believes”, “expects”, “anticipates”, “plans” and similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included in this report.  These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. There are a number of important factors that could cause our actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below under the heading “Cautionary Statements.” We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

 

Results of Operations

 

We have provided below a summary of our operating results at the consolidated level, followed by an overview of our segment performance.  Our results for the third quarter and year-to-date 2005 reflect, and our results for the third quarter and year-to-date 2004 have been restated to give effect to, a three-for-two common stock dividend distributed on April 15, 2005 to shareholders of record on March 29, 2005.

 

Consolidated Performance:

 

Net income for the third quarter of 2005 was $237.8 million or $0.32 per diluted share compared to $208.9 million or $0.28 per diluted share for the third quarter of 2004, an increase in net income of 13.9%. Net income for year-to-date 2005 was $544.4 million or $0.73 per diluted share compared to $457.1 million or $0.60 per diluted share for year-to-date 2004, an increase in year-to-date net income of 19.1%.  The year-to-date 2005 results were achieved by continuing to execute our strategy of driving profitable sales growth, improving profit margins and increasing asset productivity.  This includes delivering on our “Easy” brand promise to make buying office products easy for our customers in order to

 

13



 

differentiate us from our competitors.  Our commitment to customer service, the continued positive impact of targeting our product mix and marketing at more profitable small businesses and home offices, and the continued success of our customer acquisition efforts, solid execution and expense management were key drivers for the year-to-date 2005 results.  Our positive year-to-date performance was slightly offset by the continued costs associated with the integration of the Office World stores in the United Kingdom and investments in our European delivery businesses, as well as planned investments for long-term growth including labor and marketing to grow our copy center businesses and marketing investments for our Chicago market entry.

 

Sales:  Sales for the third quarter of 2005 were $4.2 billion, an increase of 10.8% from the third quarter of 2004. Sales for year-to-date 2005 were $11.6 billion, an increase of 12.0% from year-to-date 2004. Comparable sales for our North American retail locations increased 3% for the third quarter and year-to-date 2005 and comparable sales for our International retail locations decreased 2% for the third quarter of 2005 and decreased 1% for year-to-date 2005. We had 1,748 open stores as of October 29, 2005 compared to 1,662 stores as of October 29, 2004 and 1,680 stores as of January 29, 2005.  This includes 32 stores opened during the third quarter of 2005 and 75 stores opened and 7 stores closed during year-to-date 2005. North American Delivery sales increased 18.3% for the third quarter of 2005 and 17.7% for year-to-date 2005.  The increase in total sales also reflects a positive impact of foreign currency of $39.0 million for the third quarter of 2005 and $134.1 million for year-to-date 2005.

 

Gross Profit: Gross profit as a percentage of sales was 28.8% for the third quarter of 2005 and 28.2% for year-to-date 2005 compared to 28.6% and 28.0% for the corresponding periods in 2004. The increase in the gross profit rate for the third quarter and year-to-date 2005 from the gross profit rate for the third quarter and year-to-date 2004 is due to the continued positive impact of targeting our product mix at more profitable small business customers and home offices, strong results in our copy center businesses, our continued focus on Staples brand products and supply chain initiatives which lower the cost of moving product from our vendors to our customers.

 

Operating and Selling Expenses:   Operating and selling expenses, which consist of payroll, advertising and other operating expenses, were 16.2% of sales for the third quarter of 2005 and 16.6% for year-to-date 2005 compared to 15.9% and 16.7% for the corresponding periods in 2004. The increase in operating expenses as a percentage of sales for the third quarter of 2005 reflects planned investments for long-term growth including labor and marketing to grow our copy center businesses, marketing investments for our Chicago market entry and weakness in our International Operations segment, offset by our continued focus on expense management and leveraging of fixed expenses on higher sales. The slight decrease in operating expenses as a percentage of sales for year-to-date 2005 reflects our continued focus on expense management and leveraging of fixed expenses on higher sales which were primarily offset by weakness in our International Operations segment and planned investments for long-term growth including labor and marketing to grow our copy center businesses and marketing investments for our Chicago market entry.

 

General and Administrative Expenses:  General and administrative expenses as a percentage of sales were 3.7% for the third quarter of 2005 and 4.1% for year-to-date 2005 compared to 4.0% for the third quarter of 2004 and 4.2% for year-to-date 2004.  The decrease for the third quarter of 2005 and year-to-date 2005 primarily reflect strong expense control slightly offset by higher general and administrative costs in our International Operations segment.

 

Amortization of Intangibles: Amortization of intangibles was $3.2 million for the third quarter of 2005 and $10.0 million for year-to-date 2005 compared to $2.3 million for the third quarter of 2004 and $6.1 million for year-to-date 2004, reflecting the amortization of customer-related intangible assets and noncompetition agreements relating to acquisitions.

 

Interest income: Interest income was $15.9 million for the third quarter of 2005 and $40.7 million for year-to-date 2005 compared to $8.8 million for the third quarter of 2004 and $19.2 million for year-to-date 2004.  The increase in interest income in fiscal 2005 is primarily due to a sustained increase in interest rates.

 

Interest expense: Interest expense was $14.9 million for the third quarter of 2005 and $40.0 million for year-to-date 2005 compared to $10.8 million for the third quarter of 2004 and $28.0 million for year-to-date 2004.  The increase in interest expense in 2005 is primarily due to an increase in interest rates, partially offset by a reduction in our outstanding borrowings. We use interest rate swap agreements to convert our fixed rate debt obligations into variable rate obligations and, as a result, have reduced interest expense for all periods presented.  Excluding the impact of our interest rate swap agreements, interest expense would have been $16.4 million for the third quarter of 2005 and $46.2 million for year-to-date 2005 compared to $16.4 million for the third quarter of  2004 and $45.7 million for year-to-date 2004.

 

14



 

Miscellaneous expense:  Miscellaneous expense was $0.9 million for the third quarter of 2005 and $1.1 million for year-to-date 2005 compared to $0.9 million for the third quarter of 2004 and $1.4 million for year-to-date 2004. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.

 

Income Taxes: Our effective tax rate was 36.5% for both the third quarter and year-to-date 2005 and the third quarter and year-to-date 2004.

 

Segment Performance:

 

The following tables provide a summary of our sales and business unit income by reportable segment (see reconciliation of business unit income to consolidated income before income taxes in Note F to our Consolidated Financial Statements):

 

 

 

(Amounts in thousands)

 

October 29,

 

October 30,

 

 

 

13 Weeks Ended

 

2005

 

2004

 

October 29,

 

October 30,

Increase From

 

Increase From

 

 

2005

 

2004

 

Prior Year

 

Prior Year

 

Sales:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

2,450,926

 

$

2,254,749

 

8.7

%

8.5

%

North American Delivery

 

1,285,905

 

1,086,820

 

18.3

%

12.8

%

International Operations

 

508,688

 

488,897

 

4.0

%

24.3

%

Total sales

 

$

4,245,519

 

$

3,830,466

 

10.8

%

11.5

%

 

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

13 Weeks Ended

 

October 29,

 

October 30,

 

 

 

October 29,

 

October 30,

 

2005

 

2004

 

 

 

2005

 

2004

 

% of Sales

 

% of Sales

 

 

 

 

 

 

 

 

 

 

 

Business Unit Income:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

245,265

 

$

220,883

 

10.0

%

9.8

%

North American Delivery

 

128,669

 

99,270

 

10.0

%

9.1

%

International Operations

 

590

 

11,592

 

0.1

%

2.4

%

Total business unit income

 

$

374,524

 

$

331,745

 

8.8

%

8.7

%

 

 

 

(Amounts in thousands)

 

October 29,

 

October 30,

 

 

 

39 Weeks Ended

 

2005

 

2004

 

 

 

October 29,

 

October 30,

 

Increase From

 

Increase From

 

 

 

2005

 

2004

 

Prior Year

 

Prior Year

 

Sales:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

6,468,839

 

$

5,937,640

 

8.9

%

8.7

%

North American Delivery

 

3,617,436

 

3,074,274

 

17.7

%

11.6

%

International Operations

 

1,530,260

 

1,359,959

 

12.5

%

19.9

%

Total sales

 

$

11,616,535

 

$

10,371,873

 

12.0

%

10.9

%

 

15



 

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

39 Weeks Ended

 

October 29,

 

October 30,

 

 

 

October 29,

 

October 30,

 

2005

 

2004

 

 

 

2005

 

2004

 

% of Sales

 

% of Sales

 

 

 

 

 

 

 

 

 

 

 

Business Unit Income:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

527,975

 

$

423,205

 

8.2

%

7.1

%

North American Delivery

 

338,627

 

260,656

 

9.4

%

8.5

%

International Operations

 

(8,519

)

46,127

 

(0.6

)%

3.4

%

Total business unit income

 

$

858,083

 

$

729,988

 

7.4

%

7.0

%

 

North American Retail: Sales for North American Retail increased 8.7% for the third quarter of 2005 and 8.9% for year-to-date 2005 compared to the third quarter and year-to-date 2004.  The growth primarily reflects an increase in comparable store sales of 3% for the third quarter and year-to-date 2005, as well as non-comparable store sales for stores opened in the prior year and throughout year-to-date 2005.  We added a net 29 stores to the North American store base in the third quarter of 2005 and 65 stores during year-to-date 2005.  As of October 29, 2005, the North American store base included 1,491 open stores compared to 1,406 stores as of October 30, 2004 and 1,426 stores as of January 29, 2005. The increase in sales also reflects the positive impact of Canadian exchange rates to the U.S. dollar of $40 million for the third quarter of 2005 and $100 million for year-to-date 2005. Our strong sales growth reflects sales increases in our copy center businesses, computer peripherals, portable computers and digital cameras and accessories.  Business unit income as a percentage of sales increased to 10.0% for the third quarter of 2005 and 8.2% for year-to-date 2005 from 9.8% for the third quarter of 2004 and 7.1% for year-to-date 2004. The increase in business unit income primarily reflects the positive impact of targeting our product mix and marketing at more profitable small business customers and home offices, strong results in our copy center businesses, our continued focus on Staples brand products and supply chain initiatives which lower the cost of moving product from our vendors to our customers.  This increase also reflects our focus on expense management and leveraging of fixed expenses on higher sales, partially offset by planned investments for long-term growth including labor and marketing to grow our copy center businesses and marketing investments for our Chicago market entry.

 

North American Delivery: Sales for North American Delivery increased 18.3% for the third quarter of 2005 and 17.7% for year-to-date 2005 compared to the third quarter and year-to-date 2004. The sales growth for the third quarter and year-to-date 2005 reflects the increased productivity of our expanded contract sales force, more efficient and targeted marketing spend among our catalogs, websites and retail stores, as well as the continued success of our customer acquisition and retention efforts resulting from improved service levels. Business unit income increased to 10.0% of sales for the third quarter of 2005 and 9.4% for year-to-date 2005 from 9.1% in the third quarter of 2004 and 8.5% for year-to-date 2004.  The increase in business unit income primarily reflects more efficient marketing spend, continued increases in the number of orders placed electronically, fewer problem orders, productivity improvements in our supply chain and leveraging of fixed expenses on higher sales.

 

International Operations: Sales for International Operations increased 4.0% for the third quarter of 2005 and 12.5% for year-to-date 2005 compared to the third quarter and year-to-date 2004.  Excluding the impact of our non-comparable 2004 acquisitions and Staples China, sales decreased 3.4% for the third quarter of 2005 and decreased 1.1% for year-to-date 2005.  This sales performance, excluding our non-comparable 2004 acquisitions and Staples China, primarily reflects a comparable store sales decrease of 2% for the third quarter of 2005 and a decrease of 1% for year-to-date 2005 and a decrease in sales in our European delivery business, partially offset by non-comparable store sales for stores opened in the prior year and year-to-date 2005. As of October 29, 2005, the European store base included 257 open stores compared to 256 stores as of October 30, 2004 and 254 stores as of January 29, 2005.  European exchange rates to the U.S. dollar had a negative impact of $5 million for the third quarter of 2005 and positive impact of $23 million for year-to-date 2005. Business unit income decreased to $0.6 million for the third quarter of 2005 and a loss of $8.5 million for year-to-date 2005 from income of $11.6 million for the third quarter of 2004 and $46.1 million for year-to-date 2004. The decrease in business unit income reflects the continued costs associated with the integration of the Office World stores which was completed in September 2005, the integration of our two delivery businesses in the United Kingdom, increased investments in our European delivery businesses and lower sales in our delivery business in France and our retail business in the United Kingdom.

 

16



 

Critical Accounting Policies

 

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make significant judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2004 Annual Report on Form 10-K, filed on February 24, 2005, in Note A of the Notes to the Consolidated Financial Statements and the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Liquidity and Capital Resources

 

Cash Flows

 

Cash provided by operations was $753.9 million for year-to-date 2005 compared to $831.6 million for year-to-date 2004.  The decrease in operating cash flow from 2004 to 2005 is primarily due to an increase in working capital partially offset by an increase in net income. 

 

Cash used in investing activities was $433.2 million for year-to-date 2005 compared to cash provided by investing activities of $108.8 million for year-to-date 2004. This change is primarily due to an increase in the amount of treasury and auction rate securities we hold and a decrease in our holdings of cash equivalents, including commercial paper and money market investments.

 

Cash used in financing activities was $543.5 million for year-to-date 2005 compared to $299.4 million for year-to-date 2004.  The change in financing activities is primarily related to the number of shares purchased under our share repurchase program, which was announced in March 2004. In accordance with our share repurchase program, we are authorized to purchase up to $1.0 billion of Staples common stock during fiscal years 2004 and 2005. Under this program, we repurchased 23.1 million shares for $490.9 million in year-to-date 2005 and 18.4 million shares for $335.7 million in year-to-date 2004. During the third quarter of 2005, we announced that we received approval from our Board of Directors to repurchase up to an additional $1.5 billion of Staples common stock through February 2, 2008 following completion of our $1.0 billion repurchase program. Under our new repurchase program, we expect to repurchase approximately an additional $150 million of common stock during 2005 for a total expected repurchase of approximately $650 million during 2005.

 

Sources of Liquidity

 

We utilize cash generated from operations, short-term investments and our main revolving credit facility to cover seasonal fluctuations in cash flows and to support our various growth initiatives.

 

We had $2.13 billion available in total credit, cash and short-term investments at October 29, 2005, which consisted of $805.3 million of available credit and $1.33 billion of cash and cash equivalents and short-term investments.

 

A summary, as of October 29, 2005, of balances available under credit agreements and debt outstanding is presented below (amounts in thousands):

 

 

 

Available
Credit

 

Debt
Outstanding

 

Revolving Credit Facility effective through December 2009

 

$

681,945

 

$

 

Senior Notes due August 2007

 

 

200,000

 

Senior Notes due October 2012

 

 

325,000

 

Uncommitted lines of credit

 

50,000

 

 

Other lines of credit

 

73,385

 

 

Capital leases and other notes payable

 

 

10,276

 

Total

 

$

805,330

 

$

535,276

 

 

17



 

We issue letters of credit under our revolving credit facility in the ordinary course of business.  At October 29, 2005, we had $68.1 million of open letters of credit, thus reducing the available credit under our revolving credit facility from $750.0 million to $681.9 million.

 

We expect that our cash generated from operations, together with our current cash, short-term investments and funds available under our main revolving credit facility, will be sufficient to fund our planned store openings and other recurring operating cash needs for at least the next twelve months.

 

Uses of Capital

 

As a result of our strong financial position, in addition to investing in our existing businesses and pursuing strategic acquisitions, we also expect to continue to return capital to our shareholders through our stock repurchase program and an annual cash dividend.

 

We expect to open approximately 30 new stores during the fourth quarter of 2005.  We estimate that our cash requirements, including pre-opening expenses, net inventory, leasehold improvements and fixtures, will be approximately $1.3 million for each new store. We also plan to continue to make investments in information systems and distribution centers to improve operational efficiencies and customer service.  We currently plan to spend approximately $150 million on capital expenditures during the fourth quarter of 2005.

 

Historically, we have primarily grown organically, and while we do not expect this to change, we may also use capital to engage in strategic acquisitions or joint ventures in markets where we currently have a presence and in new geographic markets that could become significant to our business in future years.  We do not expect to rely on acquisitions to achieve our targeted growth plans.  While we will consider many types of acquisitions on an opportunistic basis, we target acquisitions that are small, aligned with our existing businesses, focused on both strengthening our presence in existing markets and expanding our presence into new geographies that could become long-term meaningful drivers of our business and financed from our operating cash flows. In connection with such targeted acquisitions, we plan to exercise the same discipline as we use for other investments, pursuing those that we believe will earn a return above our internal return on net assets hurdle rate within a two to three year time frame.

 

We believe that we will need to spend approximately $400 million a year on capital expenditures for the next few years to fund organic growth and ongoing operations.  With this level of capital spending and an acquisition strategy that is not projected to require significant amounts of capital, it is likely that the cash we generate from operations will exceed our investing needs, thereby strengthening our credit profile.  To use this excess cash to benefit our stockholders, we implemented in 2004 a $1.0 billion share repurchase program and an annual cash dividend.  Under this repurchase program, we expect to buy back approximately $500 million of common stock during fiscal 2005, of which $490.9 million was repurchased year-to-date. During the third quarter of 2005, we announced that we received approval from our Board of Directors to repurchase up to an additional $1.5 billion of Staples common stock through February 2, 2008 following completion of our $1.0 billion repurchase program. Under our new repurchase program, we expect to repurchase approximately an additional $150 million of common stock during 2005 for a total expected repurchase of approximately $650 million during 2005. We paid our second annual cash dividend of $0.17 per share of common stock (or $0.25 per share prior to adjusting for the three-for-two common stock split distributed in the form of a common stock dividend on April 15, 2005) on April 14, 2005 to shareholders of record on March 28, 2005, resulting in a total dividend payment of $123.4 million. While it is our intention to pay annual cash dividends in years following 2005, any decision to pay future cash dividends will be made by our Board of Directors and will depend upon our earnings, financial condition and other factors.

 

Inflation and Seasonality

 

While neither inflation nor deflation has had, and we do not expect either to have, a material impact upon our operating results, there can be no assurance that our business will not be affected by inflation or deflation in the future.  We believe that our business is somewhat seasonal, with sales and profitability slightly lower during the first and second quarters of our fiscal year.

 

18



 

Cautionary Statements

 

This Quarterly Report on Form 10-Q includes or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the use of the words “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in the forward looking statements made. We have included important factors in the cautionary statements below that we believe could cause actual results to differ materially from the forward-looking statements contained herein. The forward-looking statements do not reflect the potential impact of any future acquisitions, mergers or dispositions. We do not assume any obligation to update any forward-looking statements contained herein.

 

Our market is highly competitive and we may not continue to compete successfully. We compete in a highly competitive marketplace with a variety of retailers, dealers and distributors. In most of our geographic markets, we compete with other high-volume office supply chains such as Office Depot and OfficeMax that are similar in concept to us in terms of pricing strategy and product selections, as well as mass merchants such as Wal-Mart, warehouse clubs, computer and electronic superstores such as Best Buy, and other discount retailers. In addition, both our retail stores and delivery operations compete with numerous mail order firms, contract stationer businesses, electronic commerce distributors, local dealers and direct manufacturers such as Dell. Many of our competitors have increased their presence in our markets in recent years. Some of our current and potential competitors are larger than we are and have substantially greater financial resources. It is possible that increased competition or improved performance by our competitors may reduce our market share, may reduce our profit margin, and may adversely affect our business and financial performance in other ways.

 

We may be unable to continue to open new stores and enter new markets  successfully. An important part of our business plan is to increase our number of stores and enter new geographic markets. We opened 32 stores during the third quarter of 2005 and 75 stores during year-to-date 2005, and currently plan to open approximately 30 new stores in the fourth quarter of 2005. For our growth strategy to be successful, we must identify and lease or buy favorable store sites, hire and train associates and adapt management and operational systems to meet the needs of our expanded operations. These tasks may be difficult to accomplish successfully. If we are unable to open new stores as quickly as planned, our future sales and profits could be materially adversely affected. Even if we succeed in opening new stores, these new stores may not achieve the same sales or profit levels as our existing stores. Also, our expansion strategy includes opening new stores in markets where we already have a presence so we can take advantage of economies of scale in marketing, distribution and supervision costs. However, these new stores may result in the loss of sales in existing stores in nearby areas.

 

Our growth may continue to strain operations, which could adversely affect our business and financial results. Our business has grown and continues to grow through organic growth and acquisitions.  Accordingly, sales, number of stores, number of countries in which we conduct business and number of associates have grown and will likely continue to grow.  This growth places significant demands on management and operational systems.  If we are not successful in continuing to support our operational and financial systems, expanding our management team and increasing and effectively managing our associate base, this growth is likely to result in operational inefficiencies and ineffective management of the business and associates, which will in turn adversely affect our business and financial performance. In addition, as we grow, our business is subject to a wider array of complex state and federal regulations, and may be increasingly the target of private actions alleging violations of such regulations, thereby increasing the cost of doing business and the risk that our business practices could unknowingly result in liabilities that could adversely affect our business and financial performance.

 

Our operating results may be impacted by changes in the economy. Our operating results are directly impacted by the health of the North American, European, South American and Asian economies.  Current economic conditions may adversely affect our business and our results of operations.

 

Our stock price may fluctuate based on market expectations. The public trading of our stock is based in large part on market expectations that our business will continue to grow and that we will achieve certain levels of net income. If the securities analysts that regularly follow our stock lower their ratings or lower their projections for future growth and financial performance, the market price of our stock is likely to drop significantly. In addition, if our quarterly financial performance does not meet the expectations of securities analysts, our stock price would likely decline. The decrease in the stock price may be disproportionate to the shortfall in our financial performance.

 

19



 

Our quarterly operating results are subject to significant fluctuation. Our operating results have fluctuated from quarter to quarter in the past, and we expect that they will continue to do so in the future. Our earnings may not continue to grow at rates similar to the growth rates achieved in recent years and may fall short of either a prior fiscal period or investors’ expectations. Factors that could cause these quarterly fluctuations include the following: the extent to which sales in new stores result in the loss of sales in existing stores; the mix of products sold; pricing actions of competitors; the level of advertising and promotional expenses; and seasonality, primarily because the sales and profitability of our stores are typically slightly lower in the first and second quarters of the fiscal year than in other quarters. Most of our operating expenses, such as rent expense, advertising expense and employee salaries, do not vary directly with the amount of sales and are difficult to adjust in the short term. As a result, if sales in a particular quarter are below expectations for that quarter, we may not proportionately reduce operating expenses for that quarter, and therefore this sales shortfall would have a disproportionately negative effect on our net income for the quarter.

 

Our expanding international operations expose us to the unique risks inherent in foreign operations. In addition to our recently expanding operations in Europe and our new operations in South America and Asia, we have a significant presence in Canada through The Business Depot Ltd. As evidenced by our recent entry into the South American and Asian markets, we may also seek to expand further into other international markets. Our foreign operations encounter risks similar to those faced by our U.S. operations, as well as risks inherent in foreign operations, such as local customs, competitive conditions and foreign currency fluctuations. Our recent acquisitions in Europe, South America and Asia have increased our exposure to these foreign operating risks, which could have an adverse impact on our International Operations income and worldwide profitability.

 

Our debt level and operating lease commitments could impact our ability to obtain future financing and continue our growth strategy.  Our consolidated outstanding debt at October 29, 2005 was $535.3 million. Our consolidated debt, along with our operating lease obligations, may have the effect generally of restricting our flexibility in responding to changing market conditions and could make us more vulnerable in the event of a downturn in our business. In addition, our level of indebtedness may have other important consequences, including: restricting our growth; making it more difficult for us to satisfy our obligations; limiting our ability to borrow additional amounts for working capital, capital expenditures, debt service requirements, future acquisitions or other corporate purposes; and limiting our ability to use operating cash flow in other areas of our business. In such a situation, additional funds may not be available on satisfactory terms when needed, or at all, whether in the next twelve months or thereafter.

 

California wage and hour class action lawsuit. Various class action lawsuits have been brought against us for alleged violations of what is known as California’s “wage and hour” law.  The plaintiffs have alleged that we improperly classified both general and assistant store managers as exempt under the California wage and hour law, making such managers ineligible for overtime wages.  The plaintiffs are seeking to require us to pay overtime wages to the putative class for the period from October 21, 1995 to the present. The motion for class certification was heard by the court on July 15, 2005, and the matter was taken under advisement. We believe we have meritorious defenses in the litigation. Accordingly, we believe the litigation will not have a material adverse effect on us.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

At October 29, 2005, there had not been a material change in any of the market risk information disclosed by us in our Annual Report on Form 10-K for the year ended January 29, 2005.  More detailed information concerning market risk can be found under the sub-caption “Quantitative and Qualitative Disclosures about Market Risks” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page B-13 of our Annual Report on Form 10-K for the year ended January 29, 2005.

 

20



 

Item 4. Controls and Procedures

 

The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of October 29, 2005.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Security and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of the Company’s disclosure controls and procedures as of October 29, 2005, the Company’s chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

 

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 29, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

21



 

STAPLES, INC. AND SUBSIDIARIES

 

PART II  —  OTHER INFORMATION

 

Item 1 – Not Applicable

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

 

  (c) The table below presents the total number of shares repurchased during the third quarter of fiscal 2005.

 

Fiscal Period

 

Total Number
of Shares
Purchased

 

Average
Price Paid
per Share
(1)

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)

 

Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs (2)

 

July 31, 2005 – August 27, 2005

 

1,946,318

 

$

22.36

 

1,946,318

 

$

127,368,000

 

August 28, 2005 – October 1, 2005

 

3,037,326

 

$

21.37

 

3,037,326

 

$

62,463,000

 

October 2, 2005 – October 29, 2005

 

2,618,000

 

$

21.40

 

2,618,000

 

$

1,506,428,000

 

Total Third Quarter of Fiscal 2005

 

7,601,644

 

$

21.63

 

7,601,644

 

$

1,506,428,000

 

 


(1)

Average price paid per share includes commissions and is rounded to the nearest two decimal places.

 

 

(2)

On March 4, 2004, we announced that our Board of Directors approved the repurchase of up to $1.0 billion of common stock through January 28, 2006. On October 7, 2005, we announced that our Board of Directors approved the repurchase of up to an additional $1.5 billion of common stock through February 2, 2008 following completion of our $1.0 billion repurchase program.

 

Item 3 – Not Applicable

 

Item 4 – Not Applicable

 

Item 5 – Not Applicable

 

Item 6 – Exhibits

 

The exhibits listed on the Exhibit Index immediately preceding such exhibits are filed as part of this Quarterly Report on Form 10-Q.

 

22



 

SIGNATURES

 

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

 

 

 

 

 

STAPLES, INC.

 

 

 

 

 

 

Date:

November 15, 2005

 

 

 

By:

/s/ JOHN J. MAHONEY

 

 

 

 

John J. Mahoney

 

 

 

Executive Vice President,

 

 

 

   Chief Administrative Officer

 

 

 

   and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

 

 

 

 

 

 

 

 

By:

/s/ CHRISTINE T. KOMOLA

 

 

 

 

Christine T. Komola

 

 

 

Senior Vice President, Corporate Controller

 

 

 

(Principal Accounting Officer)

 

23



 

EXHIBIT INDEX

 

Exhibit
Number

 

Description of Exhibit

 

 

 

10.1 +

 

Amended and Restated 2004 Stock Incentive Plan, as amended.

10.2 +

 

Non-Management Director Compensation Summary, as amended.

31.1 +

 

Principal Executive Officer – Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 +

 

Principal Financial Officer – Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 +

 

Principal Executive Officer – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 +

 

Principal Financial Officer – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 


+      Filed herewith.

 

24