United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K

x Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

or

o Transition Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

Five Hundred Staples Drive, Framingham,
Massachusetts 01702

(Address of principal executive offices and zip code)

508-253-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Staples Common Stock, par value $0.0006 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.           Yes x  No o

Indicate by  check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.        Yes o   No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of  “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o  No x

The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last sale price of Staples’ common stock on July 29, 2005, as reported by Nasdaq, was approximately $16.6 billion. In determining the market value of non-affiliate voting stock, shares of Staples’ common stock beneficially owned by each executive officer and director have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The registrant had 728,679,683 shares of Staples’ common stock, par value $.0006, outstanding as of February 24, 2006.

Documents Incorporated By Reference

Listed below is the document incorporated by reference and the part of the Form 10-K into which the document is incorporated:

Portions of the Proxy Statement for the 2006 Annual Meeting of Stockholders              Part III

PART I

Item 1.                        Business

Staples

Staples is the world’s leading office products company. We pioneered the office products superstore concept by opening the first office products superstore in Brighton, Massachusetts in 1986 to serve the needs of small businesses. The office products industry has experienced significant growth since 1986 as the industry has expanded to include a variety of retailers, dealers and distributors, including other high-volume office supply chains.

Staples, Inc. and its subsidiaries (“we”, “Staples” or “the Company”) operate three business segments: North American Retail, North American Delivery and International Operations. Additional information regarding our operating segments is presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Annual Report on Form 10-K, and financial information regarding these segments is provided in Note L in the Notes to Consolidated Financial Statements contained in this Annual Report on Form 10-K.

Business Strategy

We view the office products market as a large, diversified market for office supplies and services, business machines and related products, computers and related products and office furniture. Although there are no clear demarcations among customer groups, we target four principal groups: home offices (customers spending over $500 per year on office products excluding computers and furniture; including home-based businesses and teachers); small businesses and organizations with up to 20 office workers; medium-size businesses and organizations with between 20 and 500 office workers; and large businesses and organizations with more than 500 office workers. We effectively reach each sector of the office products market through three sales channels designed to be convenient to the needs of our customers: retail stores, catalog and Internet. Our ability to address all four major customer groups increases and diversifies our available market opportunities; increases awareness of the Staples name among customers in all four groups, who often shop across multiple sales channels; and allows us to benefit from a number of important economies of scale, such as increased buying power, enhanced efficiencies in distribution and advertising, and improved capacity to leverage general and administrative functions.

We strive to provide superior value to our customers through a combination of everyday low prices, a broad selection of products, convenient store locations, easy to use web sites and reliability and speed of order delivery. Our strategy is to maintain our leadership in the office products industry by differentiating ourselves from our competition, delivering industry-best execution and expanding our market share.

To accomplish this we are focused on delivering on Staples’ brand promise, we make buying office products easy, which we launched in 2003 in response to extensive customer research that showed customers place a significant value on an easy shopping experience. Our commitment to making it easy for our customers to shop is reflected both in terms of the shopping experience and product offering. We have implemented initiatives in both retail and delivery to improve the customer experience, infused the new brand personality in all of our marketing vehicles and stores, actively promoted our new advertising tagline, “that was easy”, and increased the quality and value of our Staples brand products. For example, to respond to the importance our customers place on courteous and helpful associates, we rolled out a new customer service model across the chain to ensure a positive customer experience in our retail business. We have also redesigned our web site to make it easier for customers to shop for products and services on-line. In addition, we are growing our copy and print centers through enhanced service and technology, introducing innovative products that customers can buy only at Staples, and helping customers run their offices by offering services such as computer repair and installation of wireless networks performed by mobile technicians.

We are committed to delivering industry-best execution with a focus on improved service and profitability. Our recent initiatives have included a focus on our domestic supply chain program. We have improved our overall end to end order to fulfillment execution, including in-stock, fast checkout and perfect order programs. In addition, over the past several years we have continued to focus on driving profitable sales growth; improving profit margins; and increasing asset productivity. As a result, we have dramatically improved return on net assets, the primary metric we use to measure shareholder value creation, and expect to continue to focus on financial performance improvement. We expect to maintain our disciplined financial strategy, allocating resources between short and long-term investments and business improvement programs.

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We plan to expand our market share by continuing to grow our existing businesses as well as developing new growth ideas and strengthening our global presence. Initiatives to expand our existing businesses include growing the copy and print center business, growing our Contract business and entering major new geographic markets. New growth ideas include selling office products through other retail channels and developing innovative products. To strengthen our global presence, we are investing in our existing businesses in Europe and making targeted investments in emerging markets such as Asia and South America, which we expect to become meaningful contributors to our long-term growth.

North American Retail

Our North American Retail segment, consisting of 1,522 stores throughout the United States and Canada at the end of fiscal 2005, generates the majority of our sales and profits. Our North American retail stores are located in 47 states, the District of Columbia and 11 Canadian provinces in major metropolitan markets and smaller markets. Our retail operations focus on serving the needs of small businesses and home offices.

Our strategy for our North American superstores focuses on several key objectives: offer an easy-to-shop store environment with quality products that are in-stock and easy to find, with fast checkout and courteous, helpful and knowledgeable sales associates. As part of our strategy of delivering on our “Easy” brand promise, we focus on several key categories for which our customers rely on us to be an authority: ink and toner, paper, business machines, and copy and print services. For instance, to make it easier to shop for printer cartridges, we expanded our cartridge offering, made them more accessible to our customers and offered an in stock guarantee. We also offer our retail customers the ability to make purchases on-line through Staples.com Internet access points to acquire products that are not available in our stores. Customers can pay for these purchases at the register or through our Staples.com Internet access points and have the product delivered to their home or business. In 2005, we continued to deliver on our “Easy” brand promise with the rollout of our easy mobile tech service and the continued offering of our “easy rebate” program, which allows on-line submission for rebates, eliminating the need to mail in forms and receipts.

Store associates are critical to our success and are focused on making shopping easy for our customers. Associates in our stores are available to consult on purchases, particularly in our furniture, business machines and technology sections, where customers often need assistance in decision making. In 2005, we rolled out our “Easy” service model which encourages associates to engage with customers more effectively, to provide an enhanced level of assistance in the store.

Many of our stores benefit from the customer-friendly store layout we refer to as the “Dover” format. This design was created to improve the appeal of the store to the customer and to open up the interior of the store to give the customer a better view of our vast array of products.  We continue to improve our Dover store format with on-going refinements in store design, product placement and adjacencies.

Our growth strategy is to expand our store base in a prudent fashion to produce strong sales and yield high returns on our investments. We believe that our network of stores and delivery businesses in various metropolitan markets enhances our profitability by allowing us to leverage marketing, distribution and supervision costs. In determining where to open new retail stores and actively market our catalog, we evaluate the concentration of small and medium-sized businesses and organizations, the number of home offices, household income levels, the availability of quality real estate locations, competition and other factors.

We plan to open approximately 100 new stores in North America in 2006, compared to 99 new stores in 2005 and 77 new stores in 2004. The growth program for fiscal 2006 will continue to focus on filling in existing markets as well as expansion into new markets where we see opportunities. With our successful Chicago market entry in 2005 we feel well positioned to enter other major North American markets where we currently have no presence.

We also believe that there is an opportunity to sell office products through other retail channels and are testing this approach with certain grocery store chains, where we feature a high percentage of Staples brand products. This initiative is designed to capture incremental sales and strengthen our brand.

North American Delivery

Our North American Delivery segment is comprised of three business units: “Staples Business Delivery”, “Quill Corporation,” and our Contract business, operating under the names “Staples National Advantage” and “Staples Business Advantage.”

Staples Business Delivery:   Our Staples Business Delivery operations combine the efforts of our direct mail catalog business, operating since 1990, and our Staples.com web site and Canadian Internet sites. Staples Business Delivery is

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primarily designed to reach small businesses and home offices, offering next business day delivery for most office supply orders in major metropolitan areas. Our Internet sites provide complete transaction processing for the purchase of over 50,000 office products and services. We market Staples Business Delivery through direct mail catalogs, a telesales group generating new accounts and penetrating existing accounts and Internet and other broad-based media advertising.

Quill Corporation:   Founded in 1956 and acquired by Staples in May 1998, Quill is a direct mail catalog and Internet business with a targeted approach to servicing the business product needs of approximately one million small and medium-sized businesses in the United States. To attract and retain its customers, Quill offers outstanding customer service, Quill brand products and special services.

Staples National Advantage and Staples Business Advantage:   Our Contract operations focus primarily on serving the needs of medium-sized to large businesses that often require more service than is provided by a traditional retail or mail order business. Through our Contract sales force, we offer customized pricing, payment terms, usage reporting, the stocking of certain proprietary items and full service account management. Our Contract operations are divided into two businesses. Staples National Advantage is a nationwide Contract business selling to large multi-regional businesses. Staples Business Advantage primarily sells to medium-sized and large regional companies. We initially established the Contract business through acquisitions, and since that time have entered certain metropolitan markets through the expanded sales and distribution capabilities of Staples Business Advantage. StaplesLink.com, which offers the highest level of procurement functionality available on our web sites, meets the online procurement needs of our Contract customers.

Our strategies for North American Delivery focus on customer service and customer acquisition and retention to grow our delivery business and increase its profitability. We continue to focus on improving our perfect order metric, which measures the number of orders that we fulfill on time and without error. We have established customer service standards to improve recovery of service failures and to make it easy for customers to resolve any issues with their orders. We are also working to enhance our distribution capabilities by increasing the number of multi-business fulfillment centers and reducing the number of single business facilities, and these strategies are expected to enhance our ability to provide next business day delivery to more markets. We intend to further improve our infrastructure in 2006 to enable us to minimize the number of extra deliveries required. This should increase the number of orders that we ship complete, next day and in one delivery to increase customer satisfaction and make the process easy for our customers. We continue to expand our sales force as we increase our market share and drive penetration of existing customers. We also plan to continue to enter new geographic markets, add new products and services and consider acquisitions opportunistically to drive sales growth in this segment of our business. In addition, we continue to drive profitability by increasing our customers’ average order size and the percentage of orders placed electronically.

International Operations

Our International Operations consist of retail stores, catalog and Internet businesses operating under various names in 19 countries in Europe, South America and Asia. As of January 28, 2006, we operated retail stores in Belgium, Germany, The Netherlands, Portugal and the United Kingdom. In addition, we operate catalog and Internet businesses in Argentina, Austria, Belgium, Brazil, China, Czech Republic, Denmark, France, Germany, Hungary, Italy, Luxembourg, The Netherlands, Poland, Spain, Sweden, Switzerland, and the United Kingdom.

Europe represents an important opportunity for us. We expect that over time we will achieve the level of profitability we have attained in North America with a strong multi-channel offering, improving execution and capitalizing on additional synergies.  In our retail business, we are implementing strategies that were successful in North America, which focus on developing relationships with small business customers and home offices by driving steady sales of consumable office supplies. We plan to open approximately 10 new stores in Europe in 2006, compared to 8 new stores in 2005 and 11 new stores in 2004. In 2004, we acquired 59 Office World stores (of which 13 stores were subsequently closed) and transformed the remaining 46 stores into the Staples format during 2004 and 2005. We believe our delivery business in Europe is one of our best growth opportunities. With our acquisitions over the past several years in the delivery channel combined with our Staples branded delivery business, we believe that we are well positioned for success as a multi-channel distributor of office products in Europe. We plan to implement supply chain improvements as well as focus on better integrating our businesses to drive synergies and improve their profitability. Delivery represents a larger portion of the market opportunity in Europe than retail due to factors such as shopping behavior, gas prices and road networks. We plan to continue to grow our delivery business rapidly, as well as expand our multi-channel offerings. Our goal is to focus on one private brand, Quill, to give us a stronger offering across Europe where we have doubled the number of private brand products we offer since 2004.

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South America represents an emerging market that is expected to become important to Staples’ long-term growth. We believe there is significant potential in the South American office products market, and in 2004, we acquired Officenet S.A. to gain access to Brazil and Argentina through a delivery business with operations in Sao Paulo, Brasilia and Buenos Aires that shares Staples’ commitment to best-in-class customer service and operational excellence.

In 2004, we also entered Asia through a joint venture in China, which operates a delivery business based in Shanghai. This investment gives us the opportunity to access the large, fast growing Chinese office products market. In 2005, we expanded our presence in China, launching operations in Beijing. We have begun to roll out the Staples brand in China and have infused the “Easy” brand promise into our marketing campaigns.

Merchandising

We sell a wide variety of office supplies and services, business machines and related products, computers and related products, and office furniture. While our buying and merchandising staff uses integrated computer systems to perform centrally the vast majority of our merchandise planning and product purchasing, some of our business units, particularly Quill, our Canadian operations and our multiple International businesses, leverage our global buying and merchandising staff along with their own staff to meet their more localized buying and merchandising needs.

We have approximately 8,000 stock keeping units (SKUs) stocked in each of our typical North American retail stores and approximately 15,000 SKUs stocked in our North American Delivery fulfillment centers. We offer approximately 50,000 SKUs to our customers through the Internet, including Staples.com Internet access points in our North American retail stores. In order to minimize unit costs and selling prices, we sell many products in multi-unit packages. Our merchandising team constantly reviews and updates our product assortment to respond to changing customer needs and to maximize the performance of our key categories: ink and toner, paper, business machines and copy and print services.

Our product offering includes Staples, Quill and other proprietary branded products which represented approximately 18% of our total sales in 2005. Staples brand products offer great value to our customers with prices that are on average 10% - 15% lower than the national brand. These products also generate higher gross margins on average than national brands. In 2004, we began to redesign our packaging to make it clear and impactful with a focus on making shopping easier for our customers and standing out from other brands. We have brought to market hundreds of new Staples brand products, many of which are innovative and exclusive to Staples. Several new products launched are a result of our Invention Quest™ program, a contest which solicits new product ideas from our customers to make work life easier.

We also offer an array of services, including high-speed, color and self-service copying, other printing services, faxing and pack and ship services. The multi-billion dollar copy and print market is highly fragmented, and we believe we have a significant opportunity to gain share in this market. In 2004, to capitalize on this opportunity, we rolled out a new copy and print center model which builds customer awareness of our offerings in this area, improves the training and service capabilities of our copy and print center associates, offers a quality guarantee in our copy and print centers and upgrades our technological capabilities. In 2005, we added to our array of services, allowing for electronic submission, and turned our attention to marketing our copy and print centers to increase customer awareness of our expanded capabilities. These efforts have resulted in increased sales and average order size as well as improved gross margins as our copy and print business has much higher than average margins.

The following table shows our sales by each major product line as a percentage of total sales for the periods indicated:

 

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We select our vendors based upon quality, price, delivery reliability and, where appropriate, customer brand recognition for all of our sales channels. As a result of the volume we purchase and our centralized distribution facilities, we are able to obtain favorable pricing from our vendors. We purchase products from several hundred vendors worldwide, and we believe that competitive sources of supply are available to us for substantially all of the products we carry.

The foundation of our merchandising strategy is based on a portfolio approach to managing our product categories. Merchandising management principles are utilized to establish category roles and growth objectives based on historical performance, customer loyalty and need and changing market dynamics. We allocate resources based on the category roles and growth objectives and monitor the performance of our product categories against established targets.

Supply Chain

In fiscal 2003, we began to implement a comprehensive three-year program to improve our domestic retail supply chain performance as we looked to develop integrated systems and improve our processes across all functions. The main objectives of the plan included improving our sales demand and inventory management processes and optimizing our distribution network. As a result of this program, we have made significant progress in improving supply chain reliability and inventory in-stock levels. At the same time, we have reduced our overall investment in inventory. We expect to reap further benefits in 2006 and beyond in our North American Retail business and to continue to apply some of these learnings to our North American Delivery business. These improvements benefit sales, inventory turns and operating margins. We have increased sales through higher levels of merchandise in-stock, better store execution and improved attachment selling. We have reduced inventory and increased inventory turns by improving product ordering, strengthening collaboration with our vendors and increasing the amount of merchandise that flows, or is “cross docked”, through our supply chain without being stored in our distribution centers. We have also expanded operating margins by decreasing total product costs and improving sell-through on promotional goods. We have evolved to taking an all encompassing view of our supply chain performance, focusing on the best “total delivered cost.”  We believe that our management approach allows us to make better tradeoffs to deliver improvements in overall costs and inventory productivity.

We operate centrally located retail distribution centers and delivery fulfillment centers across North America to service the majority of the replenishment and delivery requirements for North America. Most products are shipped from our suppliers to the distribution and fulfillment centers for reshipment to our stores and delivery to our customers through our delivery hubs. As of January 28, 2006, four distribution centers, located in California, Connecticut, Indiana and Maryland, supported our U.S. retail operations and 30 fulfillment centers supported our North American delivery operations. Of our 30 North American delivery fulfillment centers, 11 locations service more than one of our delivery businesses and four of the 11 locations support all of our delivery businesses. We plan to expand our multi-business capabilities by adding two delivery fulfillment centers in fiscal 2006.

We believe our distribution centers provide us with significant labor and merchandise cost savings by centralizing receiving and handling functions and by enabling us to purchase in full truckloads and other economically efficient quantities from suppliers. We also believe that the reduction in the number of purchase orders and invoices processed results in significant administrative cost savings. Our centralized purchasing and distribution systems also permit our store associates to spend more time on customer service and store presentation. Since our distribution centers maintain backup inventory, our in-store inventory requirements are reduced, and we operate smaller gross square footage stores than would otherwise be required. A smaller store size reduces our rental costs and provides us with greater opportunity to locate stores more closely to our target customers.

We continually work with our vendors to improve vendor reliability. We offer a web site for our vendors, StaplesPartners.com, which provides suppliers with access to important supplier information, including supplier metrics, purchase order data, sales and inventory data, EDI information and transportation routing information. This web site improves the speed and accuracy of information, reduces our communication costs and improves our suppliers’ understanding of doing business with us.

Marketing

We pursue a variety of marketing strategies to maintain high brand awareness and attract and retain our target customers. These strategies include broad-based media advertising such as television, radio, newspaper circulars, print and Internet advertising, as well as catalogs, e-mail marketing, a loyalty program and a sophisticated direct marketing system. In addition, we market to larger companies through a combination of direct mail catalogs, customized catalogs

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and a field sales force. We change our level of marketing spend as well as the mix of media employed depending upon market, customer value, season, competition and cost factors. This flexible approach allows us to optimize the effectiveness and efficiency of our marketing expenditures.

Our retail, catalog and Staples.com marketing efforts focus on small businesses and home offices. Our marketing strategies emphasize our strong brand and leverage all of our retail and delivery vehicles to send a consistent message to our core customers. In addition, we continue to focus more on targeted direct marketing and on our customer loyalty program. We have upgraded our systems and capabilities to enable us to have a deeper understanding of our customers’ multi-channel purchasing behaviors.

In 2005, we continued to communicate our marketing message to reflect our brand promise: we make buying office products easy. We have redesigned the look and feel of our advertising vehicles to reflect our “Easy” brand promise and are consistently communicating the brand across all channels and customer touch points, including our signage, television commercials, catalogs, web sites, circulars, direct marketing and store uniforms.

Associates and Training

We have a strong corporate culture that values high performance, entrepreneurship and teamwork. We place great importance on recruiting, training, retaining and providing the proper incentives for high quality associates. Offering attractive career opportunities and a commitment to a diverse and safe work environment, we pride ourselves on being a workplace of choice. We recruit actively on college campuses, hire talented individuals with experience in successful retail operations and reward current associates for referring new associates.

We consider customer relations and our associates’ knowledge of office products and related capital goods to be significant to our marketing approach and our ability to deliver customer satisfaction. Associates are trained in a number of areas, including, where appropriate, sales techniques, management skills and product knowledge. We have continued to make an investment in computer-based, multi-media training programs to upgrade associates’ selling skills and improve customer service at our retail stores and delivery operations. Store management trainees advance through the store management structure by taking on assignments in different areas as they are promoted. Store and call center associates prepare for new assignments through Staples and third party designed training modules, written manuals, video instruction and self-testing.

As of January 28, 2006, Staples employed 36,071 full-time and 32,462 part-time associates.

Corporate Values

We believe that adhering to sound corporate values is good for our business. To this end, we strive to make a positive impact on our associates, customers and the world by acting responsibly and with integrity, conducting our global business as a great employer, corporate citizen and neighbor. We are focused on sound business ethics, our environmental conscience, the fair treatment of our diverse and talented associates and giving back to our communities.

Ethics–We maintain ethical business practices by encouraging open and honest communication and providing associates with practical tools to make sound business decisions. In doing this we ensure that Staples associates act in the best interest of our shareholders and protect our brand reputation.

Environment–Our business can succeed over the long term only if we work to sustain the natural environment upon which we all depend. We are committed to offering environmentally preferable products and recycling services to our customers, investing in renewable energy and energy conservation and supporting environmental education efforts. These initiatives help preserve natural resources for future generations and can help meet customer needs, create operational efficiencies, spark new business opportunities, reduce future risks to our environment and enhance our brand.

Diversity–We strive to offer a diverse and inclusive work environment where associates are given the support they need to learn, grow and reach their potential. Our employees represent a wide variety of life experiences and ethnic backgrounds. We believe our workforce reflects the communities in which we operate. This strategy makes our workforce better able to relate to our customers.

Community–The health and well-being of the communities in which we operate is important to our success. Through Staples Foundation for Learning, national charitable partnerships and in-kind donations, we support communities worldwide by providing resources to non-profit organizations that provide educational opportunities for all people, with a special emphasis on disadvantaged youth.

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Competition

We compete with a variety of retailers, dealers and distributors in the highly competitive office products market. We compete in most of our geographic markets with other high-volume office supply chains, including Office Depot and OfficeMax, that are similar in concept to us in terms of pricing strategy and product selection, as well as mass merchants such as Wal-Mart, warehouse clubs such as Costco, computer and electronics 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.

We believe we are able to compete favorably against other high-volume office supply chains, mass merchandisers and other retailers, dealers and distributors because of several factors: our focus on the business customer and home office; our ability to respond to the dynamic markets in which we operate and the changing needs of our customers; courteous, helpful and knowledgeable associates serving customers; a wide assortment of office supplies that are in-stock and easy to find; fast checkout; easy to use web sites; reliability and speed of order shipment; convenient store locations; hassle-free returns and fair prices.

Trademarks

In connection with our North American Retail business, we have registered the marks “Staples”, “Staples the Office Superstore” and “that was easy” in the Principal Register of the United States Patent and Trademark Office, and the marks “Staples the Office Superstore”, “Staples” and “that was easy” in Canada. In connection with our North American Delivery businesses, we have registered the marks “Staples.com”, “Staples National Advantage”, “Staples Business Advantage”, “Staples Business Delivery”, “StaplesLink.com”, “Quill”, “Quill.com”, “Medical Arts Press”, “HMI”, and “SmileMakers” on the Principal Register of the United States Patent and Trademark Office. In connection with our International Operations, we have registered the mark “Staples” in many foreign jurisdictions, including, but not limited to, the United Kingdom, Germany, the Netherlands, Poland, Portugal, Belgium and China; the mark “Office Centre” in many foreign jurisdictions, including, but not limited to, the Netherlands, Portugal and Belgium; the mark “Bernard” in multiple foreign jurisdictions, including, but not limited to, France and Belgium; the mark “JPG” in many foreign jurisdictions, including, but not limited to, France and Belgium; the mark “Neat Ideas” in many foreign jurisdictions, including, but not limited to, the United Kingdom; the mark “Sistemas Kalamazoo” in Spain; the mark “MondOffice” in Italy; the mark “Quill Kontorslagret” in Sweden; the mark “Pressel” in Austria, Germany, Switzerland, Poland and the Czech Republic; the mark “Malling Beck” in Denmark; and the mark “Officenet” in Argentina and Brazil. Our joint venture in China owns the mark “OA365”.  Although we consider that our trademarks in the aggregate constitute a valuable asset, we do not regard our business as being materially dependent upon any single trademark.

We maintain a web site with the address www.staples.com. We are not including the information contained on our web site as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our web site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission.

We were organized in 1985 and are incorporated in Delaware.

EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers, their respective ages and positions as of February 28, 2006 and a description of their business experience is set forth below. There are no family relationships among any of the executive officers named below.

Basil L. Anderson,   age 60

Mr.  Anderson has served as a Vice Chairman since September 2001 and as a Director since 1997. Prior to joining Staples, Mr. Anderson served as Executive Vice President—Finance and Chief Financial Officer of Campbell Soup Company from April 1996 to April 2001. Mr. Anderson will retire as Vice Chairman on March 1, 2006 and continue as a Director.

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Joseph G. Doody,   age 53

Mr.  Doody has served as President-Staples North American Delivery since March 2002. Prior to that, he served as President-Staples Contract & Commercial from November 1998 to March 2002.

Christine T. Komola,   age 38

Ms.  Komola has served as Senior Vice President, Corporate Controller since July 2004. Prior to that, she served as the Senior Vice President, General Merchandise Manager for furniture from January 2002 to July 2004. She has also held other roles within Staples since joining in 1997.

John J. Mahoney,   age 54

Mr.  Mahoney has served as Vice Chairman and Chief Financial Officer since January 30, 2006. Prior to that, he served as Executive Vice President, Chief Administrative Officer and Chief Financial Officer since October 1997, and as Executive Vice President and Chief Financial Officer from September 1996 to October 1997.

Michael A. Miles,   age 44

Mr.  Miles has served as President and Chief Operating Officer since January 30, 2006. Prior to that, he served as Chief Operating Officer since September 2003. Prior to joining Staples, Mr. Miles was Chief Operating Officer, Pizza Hut for Yum! Brands, Inc. from January 2000 to August 2003.

Demos Parneros,   age 43

Mr.  Parneros has served as President—U.S. Stores since April 2002. Prior to that, he served in various capacities since joining Staples in October 1987, including Senior Vice President of Operations from March 1999 to March 2002 and Vice President of Operations from September 1996 to February 1999.

Ronald L. Sargent,   age 50

Mr.  Sargent has served as Chairman since March 2005, as Chief Executive Officer since February 2002 and as a Director since 1999. Prior to that, he served in various capacities since joining Staples in March 1989, including President from November 1998 to January 2006, Chief Operating Officer from November 1998 to February 2002, President-North American Operations from October 1997 to November 1998, and President-Staples Contract & Commercial from June 1994 to October 1997.

Jack A. VanWoerkom,   age 52

Mr.  VanWoerkom has served as Executive Vice President, General Counsel and Secretary since March 2003. Prior to that, he was Senior Vice President, General Counsel and Secretary from March 1999 to March 2003.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and, in particular, the description of our Business set forth in Item 1 and our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Appendix B 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, including statements regarding:

·       projected future sales growth, earnings and earnings per share;

·       expected future revenues, operations, expenditures and cash needs;

·       payment of annual cash dividends;

·       the projected number, timing and cost of new store openings;

·       estimates of the potential markets for our products and services, including the anticipated drivers for future growth;

·       sales and marketing plans;

·       the potential growth and levels of profitability of our European operations;

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·       our assessment of the outcome and financial impact of litigation, including the class action lawsuits that have been brought against us for alleged violations of what is known as California’s “wage and hour” law, and other governmental proceedings and the potential impact of unasserted claims;

·       projected improvements to our infrastructure and impact of such improvements on our business and operations;

·       assessment of competitors and potential competitors;

·       potential mergers or acquisitions; and

·       assessment of the impact of recent tax legislation and accounting pronouncements, including SFAS No. 123R.

In addition, any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements. You can identify these forward-looking statement by use of the words “believes,” “expects,” “anticipates,” “plans,”  “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. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, without limitation, those set forth below under the heading “Risk Factors.” We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Item 1A.                Risk Factors

Our market is highly competitive and we may not continue to compete successfully.

The office products market is highly competitive. We compete with a variety of local, regional, national and international retailers, dealers and distributors for customers, employees, locations, products, services and other important aspects of our business. 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 selection, as well as mass merchants such as Wal-Mart, warehouse clubs such as Costco, computer and electronics 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 that may be devoted to sourcing, promoting and selling their products. It is possible that increased competition or improved performance by our competitors may reduce our market share, profit margin and projected operating results, 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 99 new stores during fiscal 2005 and currently plan to open approximately 110 new stores in fiscal 2006. For our growth strategy to be successful, we must identify and lease 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 may be 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, which could adversely affect our business and financial performance.

Our growth may continue to strain operations, which could adversely affect our business and financial performance.

Our business has grown dramatically over the past several years and continues to grow through organic growth and strategic acquisitions. Accordingly, sales, number of stores, number of countries in which we conduct business and number of associates have grown and likely will 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

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of complex state and federal regulations, and may be increasingly the target of private actions alleging violations of such regulations. This increases the cost of doing business and the risk that our business practices could unknowingly result in liabilities that may 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 operating results are directly impacted by the health of the North American, European, South American and Asian economies. Our business and financial performance may be adversely affected by current and future economic conditions, including unemployment levels, energy costs, interest rates, recession, inflation, the impact of natural disasters and terrorist activities, and other matters that influence business and consumer spending.

Our business and financial performance is dependent upon our ability to attract and retain qualified associates.

Our performance is dependent on attracting and retaining a large and growing number of quality associates. We face intense competition for qualified associates, and many of our associates are in entry-level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs generally while controlling our labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force, unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation. If we are unable to attract and retain qualified associates or our labor costs increase significantly, our business and financial performance may be adversely affected.

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 rating 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.

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; extreme weather-related disruptions; and seasonality, primarily because the sales and profitability of our stores are typically slightly lower in the first and second quarter 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 such a sales shortfall would have a disproportionate effect on our net income for the quarter.

Our expanding international operations expose us to the unique risks inherent in foreign operations.

As of January 28, 2006, we had operations in 19 countries in Europe, South America and Asia and a significant presence in Canada. 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 and regulatory constraints, foreign trade policies, competitive conditions, foreign currency fluctuations and unstable political and economic conditions. Further, our recent acquisitions in Europe and South America and our investments in Asia have increased our exposure to these foreign operating risks, which could have an adverse impact on our international income and worldwide profitability.

Our business may be adversely affected by the actions of and risks associated with our third-party vendors.

The products we sell are sourced from a wide variety of third-party vendors. We cannot control the supply, design, function or cost of many of the products that we offer for sale and are dependent on the availability and pricing of key products, including without limitation paper, ink, toner and technology products. Disruptions in the availability of raw materials used in production of these products may adversely affect our sales and result in customer dissatisfaction. In addition, global sourcing of many of the products we sell is an important factor in our financial performance. Our ability

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to find qualified vendors and access products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced outside the United States. Political instability, the financial instability of suppliers, merchandise quality issues, trade restrictions, tariffs, currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control. These and other issues affecting our vendors could adversely affect our business and financial performance.

Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims.

Our product offering includes Staples, Quill and other proprietary branded products which represented approximately 18% of our total sales in fiscal 2005. While we have focused on the quality of our proprietary branded products, we rely on third-party manufacturers for these products. Such third party manufacturers may prove to be unreliable, or the quality of our globally sourced products may not meet our expectations. Furthermore, economic and political conditions in areas of the world where we source such products may adversely affect the availability and cost of such products. In addition, our proprietary branded products compete with other manufacturers’ branded items that we offer. As we continue to increase the number and types of proprietary branded products that we sell, we may adversely affect our relationships with our vendors, who may decide to reduce their product offerings through Staples and increase their product offerings through our competitors. Finally, if any of our customers are harmed by our proprietary branded products, they may bring product liability and other claims against us.  Any of these circumstances could have an adverse effect on our business and financial performance.

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 January 28, 2006 was $538.0 million. Our future minimum lease commitments due for retail store and support facilities and equipment leases under non-cancelable operating leases were $5.25 billion at January 28, 2006. Our consolidated debt and 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.

The California wage and hour class action lawsuit may adversely affect our business and financial performance.

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 court has granted class certification to the plaintiffs. The court’s ruling is procedural only and does not address the merits of the plaintiffs’ allegations. We believe that the class was improperly certified and intend to appeal the decision. If the case goes to trial, we believe we have meritorious defenses in the litigation and expect to prevail. If, however, there is an adverse judgment from which there is no successful appeal, damages could range from $10 million to $150 million, excluding interest and attorneys’ fees.

Item 1B.               Unresolved Staff Comments

None.

Item 2.                        Properties

As of January 28, 2006, we operated a total of 1,780 superstores in 47 states and the District of Columbia in the United States, 11 provinces in Canada, 11 regions in the United Kingdom, 8 regions in Germany and in The Netherlands, Portugal and Belgium. As of that same date, we also operated 52 distribution and fulfillment centers in 19 states of the United States, 4 provinces in Canada, 2 regions in the United Kingdom, 2 regions in France, and in Austria, Belgium, Denmark, Germany, Italy, The Netherlands, Spain, Sweden, Brazil, Argentina and China. The following table sets forth the locations of our facilities as of January 28, 2006.

12

RETAIL STORES

 

DISTRIBUTION AND FULFILLMENT CENTERS

 

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Most of the existing facilities are leased by us with initial lease terms expiring on dates between 2006 and 2025. In most instances, we have renewal options at increased rents. Leases for 164 of the existing stores provide for contingent rent based upon sales.

Our Framingham, Massachusetts corporate office is owned by us and consists of approximately 650,000 square feet.

Item 3.                        Legal Proceedings

From time to time, we may be subject to routine litigation incidental to our business.

As previously disclosed, various class action lawsuits have been brought against us for alleged violations of what is known as California’s “wage and hour” law. The first of these lawsuits was filed on October 21, 1999. These cases were subsequently consolidated as the “Staples Overtime Cases,” Superior Court for the State of California, County of Orange, Civil Complex Center (Judicial Council Coordination Proceeding No. 4235, Lead Case No. 816121). 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 court has granted class certification to the plaintiffs. The court’s ruling is procedural only and does not address the merits of the plaintiffs’ allegations. We believe that the class was improperly certified and intend to appeal the decision. If the case goes to trial, we believe we have meritorious defenses in the litigation and expect to prevail. If, however, there is an adverse judgment from which there is no successful appeal, damages could range from $10 million to $150 million, excluding interest and attorney’s fees.

Item 4.                        Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of our security holders during the fourth quarter of fiscal 2005.

PART II

Item 5.                        Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ National Market under the symbol “SPLS”.

At February 24, 2006, the number of holders of record of our common stock was 7,283.

The following table sets forth for the periods indicated the high and low sales prices per share of our common stock on the NASDAQ National Market, as reported by NASDAQ and reflecting the three-for-two common stock split that was effected in the form of a common stock dividend distributed on April 15, 2005.

		High			Low
Fiscal Year Ended January 28, 2006
First Quarter		$	22.02		$	18.64
Second Quarter		23.84			18.87
Third Quarter		23.24			20.36
Fourth Quarter		24.14			21.90

 

 

 

 

 

 

 

		High			Low
Fiscal Year Ended January 29, 2005
First Quarter		$	18.49		$	15.79
Second Quarter		20.33			15.83
Third Quarter		20.43			17.25
Fourth Quarter		22.59			18.53

 

 

 

 

 

 

While we will continue to retain earnings for use in the operation and expansion of our business, in 2004 we decided to return cash to our stockholders by initiating an annual cash dividend. The first cash dividend of $0.13 per outstanding share of our common stock was paid on May 17, 2004 to all shareholders of record on April 26, 2004. In 2005, we paid a cash dividend of $0.17 per share of our outstanding common stock on April 14, 2005 to shareholders of record on March 28, 2005. On February 28, 2006, we announced that we would pay a cash dividend of $0.22 per share on April 20, 2006, to shareholders of record on March 31, 2006. Our payment of annual dividends is permitted under our revolving credit agreement, which only restricts the payment of dividends in the event we are in default under the agreement or such payout would cause a default under the agreement. While it is our current intention to pay annual cash dividends in years following 2006, 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.

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The following table provides information about our purchases during the fourth quarter of fiscal 2005 of equity securities that are registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934.

Issuer Purchases of Equity Securities

(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 by us of up to $1 billion of our common stock. That stock repurchase program was completed before its original expiration date of January 28, 2006. On October 7, 2005, we announced that our Board of Directors approved the repurchase of an additional $1.5 billion of our common stock through February 2, 2008 following the completion of our $1.0 billion repurchase program.

Item 6. Selected Financial Data

The information required by this Item is attached as Appendix A.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information required by this Item is attached as part of Appendix B.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The information required by this Item is attached as part of Appendix B.

Item 8. Financial Statements and Supplementary Data

The information required by this Item is attached as Appendix C.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

1.   Disclosure Controls and Procedures

The Company’s management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of January 28, 2006. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of January 28, 2006, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

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2.   Internal Control over Financial Reporting

(a)   Management’s Annual Report on Internal Control Over Financial Reporting

The management of Staples is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

·        Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

·        Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

·        Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Staples’ internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Staples’ management assessed the effectiveness of the Company’s internal controls over financial reporting as of January 28, 2006. In making this assessment, it used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we believe that, as of January 28, 2006, the Company’s internal control over financial reporting is effective based on those criteria.

Staples’ Independent Registered Public Accounting Firm has issued a report on our assessment of the Company’s internal control over financial reporting. This report appears below.

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(b)          Attestation Report of the Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Staples, Inc.

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that Staples, Inc. maintained effective internal control over financial reporting as of January 28, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Staples, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Staples, Inc. maintained effective internal control over financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Staples, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Staples, Inc. as of January 28, 2006 and January 29, 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended January 28, 2006, and our report dated February 27, 2006 expressed an unqualified opinion thereon.

	/s/ Ernst & Young LLP
	Ernst & Young LLP
Boston, Massachusetts
February 27, 2006

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(c)           Changes in Internal Control Over Financial Reporting

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter ended January 28, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Certain information required by Part III is omitted from this Annual Report on Form 10-K and incorporated herein by reference to the definitive proxy statement with respect to our 2006 Annual Meeting of Stockholders (the “Proxy Statement”), which we will file with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Report.

Item 10. Directors and Executive Officers of the Registrant

Certain information required by this Item is contained under the heading “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K. Other information required by this Item will appear under the headings “Proposal 1—Election of Directors” and “Corporate Governance” in our Proxy Statement, which sections are incorporated herein by reference.

The information required by this Item pursuant to Item 405 of Regulation S-K will appear under the heading “Executive Compensation—Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement, which section is incorporated herein by reference.

We have adopted a written code of ethics that applies to our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our code of ethics, which also applies to our directors and all of our officers and employees, can be found on our web site, which is located at www.staples.com, and is also an exhibit to this report. We intend to make all required disclosures concerning any amendments to, or waivers from, our code of ethics on our web site.

Item 11. Executive Compensation

The information required by this Item will appear under the heading “Executive Compensation” and “Corporate Governance—Director Compensation” in our Proxy Statement, which sections are incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item will appear under the headings “Beneficial Ownership of Common Stock” and “Executive Compensation—Securities Authorized for Issuance Under Equity Compensation Plans” in our Proxy Statement, which sections are incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information required by this Item will appear under the heading “Corporate Governance—Certain Relationships and Related Transactions” in our Proxy Statement, which section is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information required by this Item will appear under the heading “Corporate Governance—Independent Registered Public Accounting Firm’s Fees” in our Proxy Statement, which section is incorporated herein by reference.

Item 15. Exhibits and Financial Statement Schedules

(a)           Index to Consolidated Financial Statements.

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1.                 Financial Statements.   The following financial statements and schedules of Staples, Inc. are included as Appendix C of this Report:

·       Consolidated Balance Sheets—January 28, 2006 and January 29, 2005.

·       Consolidated Statements of Income—Fiscal years ended January 28, 2006, January 29, 2005, and January 31, 2004.

·       Consolidated Statements of Stockholders’ Equity—Fiscal years ended January 28, 2006, January 29, 2005, and January 31, 2004.

·       Consolidated Statements of Cash Flows—Fiscal years ended January 28, 2006, January 29, 2005, and January 31, 2004.

·       Notes to Consolidated Financial Statements.

2.                 Financial Statement Schedules.

·       Schedule II—Valuation and Qualifying Accounts

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission other than the one listed above are not required under the related instructions or are not applicable, and, therefore, have been omitted.

3.                 Exhibits.   The exhibits which are filed with this report or which are incorporated herein by reference are set forth in the Exhibit Index on page D-1, which is incorporated herein by reference.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) 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, on February 27, 2006.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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21

APPENDIX A

STAPLES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollar Amounts in Thousands, Except Per Share Data)

(1)    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.

(2)    Results of operations for this period include the acquired businesses since the relevant acquisition date and Staples China since becoming a majority-owned subsidiary of the Company during the first quarter of 2005. See Note C to the Consolidated Financial Statements.

(3)    Results of operations for this period include the results of acquired businesses since the relevant acquisition date. The Company acquired Globus Office World plc on August 4, 2004, Malling Beck A/S on September 2, 2004, Pressel Versand International GmbH on September 7, 2004 and Officenet SA on November 29, 2004 (see Note C to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, “MD&A”).

(4)    Results of operations for this period have been reclassified to conform with EITF Issue No. 03-10, “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers”, which requires that vendor consideration received in the form of sales incentives be recorded as a reduction of cost of goods sold when recognized, rather than as a component of sales. As a result of this reclassification and a reclassification of certain other coupons, sales, gross profit and operating and selling expenses decreased, but there was no impact on net income (see Note B to the Consolidated Financial Statements).

(5)    Results of operations for this period reflect a $98.0 million ($61.7 million net of taxes) non-cash adjustment for the inclusion of cooperative advertising and other performance based rebates in inventory as required by EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (see Note B to the Consolidated Financial Statements).

(6)    Results of operations for this period include a tax benefit of $29.0 million related to Staples Communications. In fiscal 2000, the Company recognized an impairment loss related to the goodwill and fixed assets of Staples Communications, which was not recorded as a deduction for tax purposes. In fiscal 2002, the Company received approval from the Internal Revenue Service to take an ordinary deduction for the Company’s investment in, and advances to, Staples Communications.

(7)    Results of operations for this period include the results of acquired businesses since the relevant acquisition date. The Company acquired Medical Arts Press, Inc. on July 17, 2002 and the European mail order businesses on October 18, 2002.

(8)    Results of operations for this period include a store closure charge of $50.1 million ($30.8 million after taxes) related to the closure of 31 underperforming stores, a $7.4 million ($4.6 million after taxes) charge to cost of goods sold related to inventory write-downs to net realizable value for the closed stores and $10.7 million ($6.6 million after taxes) in other charges related to workforce reductions and fulfillment and call center closures.

(9)    From the first quarter of fiscal year beginning February 4, 2001 through the second quarter of fiscal year ending February 2, 2002, earnings per share is omitted for Staples Inc. as a result of the approval of the Tracking Stock Proposal which changed Staples’ capital structure by creating Staples.com Stock and reclassifying Staples, Inc. common stock (“Staples, Inc. Stock”) as Staples RD Stock. Staples.com’s net loss per share has also been retroactively restated to reflect the effect of a recapitalization through a one-for-two reverse stock split approved by the Board of Directors on March 7, 2000 and effected on April 5, 2000.

The Company’s fiscal year is the 52 or 53 weeks ending the Saturday closest to January 31.

A-1

APPENDIX B

STAPLES, INC. AND SUBSIDIARIES
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. Our fiscal years ended January 28, 2006 (“fiscal 2005” or “2005”), January 29, 2005 (“fiscal 2004” or “2004”) and January 31, 2004 (“fiscal 2003” or “2003”) each contained 52 weeks. 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.

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”), strengthening our retail presence in the United Kingdom. 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, expanding our delivery business into eastern Europe and Denmark and strengthening our business in western Europe through access to new customers and product categories. 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. We paid an aggregate of $111.7 million, net of cash acquired, to acquire these businesses. The results of the acquired businesses 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. Additionally, in 2004, we entered the Asian market by investing in a mail order and internet company in the People’s Republic of China, Staples Commerce and Trade (“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.

In November 2002, the Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“Issue 02-16”). Issue 02-16 addresses the accounting for vendor consideration received by a customer and is effective for new arrangements, or modifications of existing arrangements, entered into after December 31, 2002. Under this consensus, there is a presumption that amounts received from vendors should be considered a reduction of inventory cost unless certain restrictive conditions are met. Under previous accounting guidance, we accounted for all non-performance based volume rebates as a reduction of inventory cost and all cooperative advertising and other performance based rebates as a reduction of marketing expense or cost of goods sold, as appropriate, in the period the expense was incurred. Beginning with contracts entered into in January 2003, we adopted a policy to treat all vendor consideration as a reduction of inventory cost rather than as an offset to the related expense because the administrative cost of tracking the actual related expenses, to determine whether we meet the restrictive conditions required by Issue 02-16, would exceed the benefit. To record the impact of including cooperative advertising and other performance based rebates in inventory at the end of the first quarter of 2003, we recorded an aggregate, non-cash adjustment of $98.0 million ($61.7 million net of taxes) as an increase to cost of goods sold and occupancy costs, or $0.09 per diluted share. This adjustment reflected all of our outstanding vendor contracts, as substantially all contracts were either entered into or amended in the first quarter of 2003. In addition, the new accounting method resulted in reporting $246.6 million of our cooperative advertising rebates earned in 2003 as cost of goods sold and occupancy costs, whereas these amounts would have been reported as a reduction of operating and selling expenses under previous accounting guidance. In accordance with this consensus, prior periods have not been restated to reclassify amounts recorded as a reduction of operating and selling expenses to cost of goods sold and occupancy costs.

In November 2003, the EITF reached consensus on Issue No. 03-10 “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers” (“Issue 03-10”), which addresses the accounting for consideration received by a reseller from a vendor that is a reimbursement by the vendor for honoring the vendor’s sales

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STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

incentives offered directly to consumers (e.g., coupons). Beginning with the first quarter of fiscal 2004, vendor consideration received in the form of sales incentives is now recorded as a reduction of cost of goods sold when recognized, rather than as a component of sales. In addition, we have reclassified certain other coupons previously classified as operating and selling expenses to a reduction of sales. In accordance with Issue No. 03-10, our fiscal 2003 results have been reclassified; however no change has been made to the fiscal 2002 results reported. These reclassifications had no impact on net income.

Forward Looking Statements

This Annual Report on Form 10-K 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. 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 included in this Annual Report on Form 10-K in Item 1A—Risk Factors. 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 discussion includes our results presented on the basis required by accounting principles generally accepted in the United States (“GAAP”) and a pro forma basis reflecting the retroactive application of Issue 02-16 as of February 3, 2001 and Issue 03-10 (see Note B to the Consolidated Financial Statements). We have incorporated this information into the discussion below because we believe it is a meaningful measure of our normalized operating performance and will assist you in understanding our results of operations on a comparative basis and in recognizing underlying trends. This adjusted information supplements, and is not intended to represent a measure of performance in accordance with, disclosures required by GAAP.

Consolidated Performance and Outlook:

Net income for 2005 was $834.4 million or $1.12 per diluted share compared to $708.4 million or $0.93 per diluted share for 2004 and $490.2 million or $0.66 per diluted share in 2003. Our fiscal 2003 results include a $61.7 million adjustment, net of taxes, related to the change in accounting for vendor consideration required by Issue 02-16. On a pro forma basis to reflect the retroactive application of Issue 02-16, net income for 2003 was $551.9 million or $0.75 per diluted share. Net income increased 18% for fiscal 2005 and, on a pro forma basis for 2003, net income increased 28% for fiscal 2004.

Our positive performance in 2005 reflects the continued execution of 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 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, the continued success of our customer acquisition and retention efforts, solid execution and expense management were key drivers of our 2005 results. This performance was slightly offset by lower sales in our retail business in the United Kingdom and our delivery business in France and investments in our European delivery businesses, as well as planned investments for long-term growth including labor and marketing to grow our copy and print business and investments for our Chicago market entry.

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STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

We strive to maintain a balance between investing for our long-term growth and delivering strong current earnings growth. For each of the past three years, we have chosen to make significant investments to drive sustainable earnings growth by investing in productivity improvements and better processes in such areas as store labor, supply chain, marketing and Staples brand products. We are expanding our market share by continuing to grow our existing businesses as well as developing new growth ideas and strengthening our global presence. Initiatives to expand our existing businesses include growing the copy and print center business, growing our Contract business and entering major new geographic markets. New growth ideas include selling office products through other retail channels and developing innovative products. To strengthen our global presence, we are investing in our existing businesses in Europe and making targeted investments in emerging markets such as Asia and South America.

We expect additional operating income improvement to continue in fiscal 2006. As of the date of this filing, we anticipate sales growth in fiscal 2006 to be in the low double digits, reflecting low single digit North American retail comparable store sales. As of January 29, 2006, we adopted Financial Accounting Standards Board Statement No. 123 (revised 2004), “Share Based Payment” using the modified retrospective method, which will result in our restating our fiscal 2005 net income to $1.05 per diluted share. After adjusting fiscal 2005 net income to $1.05 per diluted share, we expect earnings per share growth of approximately 15% to 20% for fiscal 2006. As with all forward looking statements made in this Annual Report on Form 10-K, we do not intend to update publicly any of the forward-looking statements in this paragraph.

Sales:   Sales increased 11.3% in fiscal 2005 and 11.4% in fiscal 2004. Excluding non-comparable sales from our 2004 acquisitions of $212 million in 2005 and $113 million in 2004 sales increased 9.8% in 2005 and 10.6% in 2004. Comparable sales for our North American retail locations, which include stores open for more than one year, increased 3% in 2005 and 4% in 2004 and comparable sales for our International retail locations were flat in 2005 and decreased 1% in 2004. We had a net addition of 100 stores in 2005, a net addition of 121 stores in 2004, including the 59 Office World stores that were acquired in August 2004 (of which 10 stores were subsequently closed during 2004 and 3 stores were closed during 2005), and a net addition of 71 stores in 2003. North American Delivery sales increased 17.8% in 2005 and 13.4% in 2004. The increase in total sales also reflects the positive impact of foreign currency rates of $104 million in 2005 and $265 million in 2004.

Our strong sales growth in both 2005 and 2004 reflects our performance in ink and toner, paper, computer peripherals, portable computers, office machines, our copy and print center business and digital cameras. These increases reflect our continued focus on customer service, strong execution, increased productivity of our expanded Contract sales force, more efficient targeted marketing spend among our catalogs, web sites and retail stores as well as the continued success of our customer acquisition and retention efforts resulting from improved service levels in our North American delivery businesses.

Gross Profit:   Gross profit as a percentage of sales was 28.5% for fiscal 2005, 28.4% for fiscal 2004 and 27.0% for fiscal 2003. On a pro forma basis to reflect the retroactive application of Issue 02-16, gross profit was 27.7% for fiscal 2003. The increase in the gross profit rate for 2005 from the gross profit rate for 2004 and the increase in the gross profit rate for 2004 from the pro forma gross profit rate for 2003 reflects the continued positive impact of targeting our product mix and marketing at more profitable small businesses and home offices, our continued focus on higher margin Staples brand products, strong results in our copy and print center business and supply chain initiatives which lower the cost of moving product from our vendors to our customers. The improvements in our North American businesses in 2005 were primarily offset by weakness in our International Operations segment.

Operating and Selling Expenses:   Operating and selling expenses, which consist of payroll, advertising and other operating expenses, were 16.3% of sales for fiscal 2005 and fiscal 2004 and 16.7% of sales for fiscal 2003. The flat performance in 2005 and decrease in operating and selling expenses in fiscal 2004 reflects our continued focus on expense management and leveraging of fixed expenses on higher sales. Our 2005 results were offset by declining productivity and investments in our International Operations segment as well as planned investments for long-term growth including labor and marketing to grow our copy and print center business and investments for our Chicago market entry. In addition, the decrease in operating and selling expenses in 2004 reflects more efficient investments in marketing partially offset by increased investments in our Contract sales force.

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STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

General and Administrative:   General and administrative expenses as a percentage of sales were 4.0% for fiscal 2005, 4.2% for fiscal 2004, and 4.0% for fiscal 2003. The decrease in general and administrative expenses as a percentage of sales in 2005 reflects strong expense control as well as lower investments in our supply chain program compared to 2004. The increase in general and administrative expenses as a percentage of sales in 2004 reflects an increase in management’s variable compensation as well as our continued investment in supply chain initiatives, partially offset by our ability to increase sales without proportionately increasing overhead expenses.

Amortization of Intangibles:   Amortization of intangibles was $13.0 million in fiscal 2005, $8.7 million in fiscal 2004 and $8.0 million in fiscal 2003, reflecting the amortization of certain trade names, customer-related intangible assets and non-competition agreements associated with acquisitions.

Interest income:   Interest income increased to $59.9 million in fiscal 2005 from $31.0 million in fiscal 2004 and $10.1 million in fiscal 2003. The increase in interest income in fiscal 2005 is primarily due to a sustained increase in interest rates. The increase in interest income in fiscal 2004 is primarily due to a sustained increase in cash and short-term investments, as well as an increase in interest rates.

Interest expense:   Interest expense increased to $56.8 million in fiscal 2005 from $39.9 million in fiscal 2004 and $31.6 million in fiscal 2003. The increase in interest expense in 2005 and 2004 is primarily due to an increase in interest rates, partially offset by a reduction in outstanding borrowings. Interest expense in 2004 was also impacted by our November 2004 repayment of 150 million of Euro Notes. 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 years presented. Excluding the impact of our interest rate swap agreements, interest expense would have been $63.7 million for fiscal 2005, $61.0 million for fiscal 2004 and $56.0 million for fiscal 2003.

Miscellaneous income (expense):   Miscellaneous income (expense) was $(1.9) million for fiscal 2005, $(1.5) million for fiscal 2004, and $1.3 million for fiscal 2003. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.

Income Taxes:   Our effective tax rate was 36.5% for fiscal 2005 and fiscal 2004 and 37.0% for fiscal 2003. The decrease in our effective tax rate from 2003 to 2004 is primarily due to changes in the mix of our earnings. The American Jobs Creation Act of 2004, which was signed into law on October 22, 2004, did not have a material impact on our effective tax rate for fiscal 2004.

Segment Performance:

The following tables provide a summary of our sales and business unit income by reportable segment and store activity for the last three fiscal years (see reconciliation of business unit income to income before income taxes and minority interest in Note L to the Consolidated Financial Statements):

 

 

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STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

 

 

North American Retail:   Sales increased 8.6% in fiscal 2005 and fiscal 2004. Comparable store sales in North America increased 3% in 2005 and 4% in 2004. Our growth in fiscal 2005 primarily reflects non-comparable store sales for the net stores opened during 2005 as well as our comparable store sales. Our growth for 2004 primarily reflects our comparable store sales growth and non-comparable store sales for the net stores opened during 2004. The increase in sales also includes the positive impact of the Canadian exchange rate to the U.S. dollar of $120 million in 2005 and $98 million in 2004. Our strong comparable sales growth in both 2005 and 2004 reflects positive performance in computer peripherals, portable computers, our copy and print center business, office machines and digital cameras. Our total sales growth in North American Retail in both 2005 and 2004 was also positively impacted by sales growth in ink and toner.

Business unit income as a percentage of sales increased to 9.0% in 2005 from 8.2% in 2004 and 6.8% in 2003. The increase in business unit income for both 2005 and 2004 reflects the continued positive impact of targeting our product mix and marketing at more profitable small businesses and home offices, strong results in our copy and print center business, our continued focus on higher margin Staples brand products and supply chain initiatives which lower the cost of moving product from our vendors to our customers. The increase for both years also reflects continued improvements in expense management, leveraging of fixed expenses on higher sales and our focus on customer service. We also benefited from the positive impact of foreign exchange rates in both 2005 and 2004. Our 2005 results were partially offset by planned investments for long-term growth including labor and marketing to grow our copy and print center business and investments in our Chicago market entry. Going forward, we will continue to focus on our “Easy” brand promise, customer service and our Staples brand products, as we believe that these are key to our success. We expect that we will continue to expand our copy and print center business and enter new major markets as well as explore new growth ideas including selling office products through other retail channels and developing innovative products.

North American Delivery:   Sales increased 17.8% in fiscal 2005 and 13.4% in fiscal 2004. The sales growth in both years reflects the increased productivity of our expanded Contract sales force, more efficient and targeted marketing spend among our catalogs, web sites and retail stores and the continued success of our customer acquisition and retention efforts resulting from improved service levels as well as increased penetration of existing customers.

Business unit income as a percentage of sales increased to 9.8% in 2005 from 9.0% in 2004 and 8.3% for 2003. The increase for both years reflects our continued focus on higher margin Staples brand products, supply chain efforts focused on improving our perfect order metric and lowering our reliance on wholesalers, continued increases in the number of orders placed electronically, leveraging of fixed expenses on higher sales as well as more efficient and effective marketing spend. Our 2004 results were partially offset by the increased investment in our Contract sales force. During 2006, we will focus on growing sales in all of our delivery businesses and continuing to improve profits through our supply chain programs, penetration of existing customers and driving service improvements.

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