Edgar Filing: STAPLES INC

SPLS 10-Q 050314

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended: May 3, 2014

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

For the transition period from to

Commission File Number: 0-17586

STAPLES, INC.

(Exact name of registrant as specified in its charter)



Delaware		04-2896127
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Five Hundred Staples Drive, Framingham, MA 01702

(Address of principal executive offices and zip code)

508-253-5000

(Registrant’s telephone number, including area code)

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

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

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



Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

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

The registrant had 646,619,307 shares of common stock outstanding as of May 16, 2014.

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STAPLES, INC. AND SUBSIDIARIES

FORM 10-Q

May 3, 2014

TABLE OF CONTENTS



	Page
Part I – Financial Information:

Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited)	2
Condensed Consolidated Statements of Comprehensive Income (unaudited)	3
Condensed Consolidated Statements of Cash Flows (unaudited)	5
Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3. Quantitative and Qualitative Disclosures about Market Risk	24

Item 4. Controls and Procedures	24

Part II – Other Information

Item 1. Legal Proceedings	25

Item 1A. Risk Factors	25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3. Defaults Upon Senior Securities	29

Item 4. Mine Safety Disclosures	29

Item 5. Other Information	29

Item 6. Exhibits	29

Signature	30

Exhibit Index	31

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)



	May 3, 2014			February 1, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	792,901		$	492,532
Receivables, net	1,849,060			1,838,714
Merchandise inventories, net	2,336,369			2,328,299
Deferred income tax assets	189,399			179,566
Prepaid expenses and other current assets	362,566			400,447
Total current assets	5,530,295			5,239,558

Property and equipment:
Land and buildings	998,833			990,324
Leasehold improvements	1,331,524			1,306,987
Equipment	2,804,406			2,778,294
Furniture and fixtures	1,084,092			1,078,876
Total property and equipment	6,218,855			6,154,481
Less: Accumulated depreciation	4,393,132			4,283,762
Net property and equipment	1,825,723			1,870,719

Intangible assets, net of accumulated amortization	370,361			382,700
Goodwill	3,253,893			3,233,597
Other assets	463,188			448,302
Total assets	$	11,443,460		$	11,174,876
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,088,482		$	1,997,494
Accrued expenses and other current liabilities	1,294,995			1,266,974
Debt maturing within one year	182,272			103,982
Total current liabilities	3,565,749			3,368,450

Long-term debt, net of current maturities	1,016,897			1,000,205
Other long-term obligations	689,680			665,386

Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued	—			—
Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued and outstanding 938,557,606 and 647,010,562 shares at May 3, 2014 and 938,722,858 shares and 652,860,207 shares at February 1, 2014, respectively	563			563
Additional paid-in capital	4,876,757			4,866,467
Accumulated other comprehensive loss	(435,538		)	(507,154		)
Retained earnings	7,020,914			7,001,755
Less: Treasury stock at cost, 291,547,044 shares at May 3, 2014 and 285,862,651 shares at February 1, 2014	(5,299,857		)	(5,229,368		)
Total Staples, Inc. stockholders’ equity	6,162,839			6,132,263
Noncontrolling interests	8,295			8,572
Total stockholders’ equity	6,171,134			6,140,835
Total liabilities and stockholders’ equity	$	11,443,460		$	11,174,876

See notes to condensed consolidated financial statements.

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STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands, Except Per Share Data)(Unaudited)



	13 Weeks Ended
	May 3, 2014			May 4, 2013
Sales	$	5,654,259		$	5,814,571
Cost of goods sold and occupancy costs	4,243,965			4,303,561
Gross profit	1,410,294			1,511,010
Operating expenses:
Selling, general and administrative	1,223,147			1,212,540
Impairment of long-lived assets	21,808			—
Restructuring charges	13,475			—
Amortization of intangibles	14,889			13,383
Total operating expenses	1,273,319			1,225,923

Gain on sale of businesses, net	21,805			—

Operating income	158,780			285,087

Other income (expense):
Interest income	749			1,735
Interest expense	(12,324		)	(30,972		)
Other income (expense), net	947			(3,375		)
Income from continuing operations before income taxes	148,152			252,475
Income tax expense	51,942			82,054
Income from continuing operations	96,210			170,421
Discontinued Operations:
Loss from discontinued operations, net of income taxes	—			(494		)
Net income	$	96,210		$	169,927

Basic Earnings Per Common Share:
Continuing operations	$	0.15		$	0.26
Discontinued operations	—			—
Net income	$	0.15		$	0.26
Diluted Earnings Per Common Share:
Continuing operations	$	0.15		$	0.26
Discontinued operations	—			—
Net income	$	0.15		$	0.26

Dividends declared per common share	$	0.12		$	0.12

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Condensed Consolidated Statements of Comprehensive Income
	13 Weeks Ended
	May 3, 2014			May 4, 2013
Comprehensive income from consolidated operations	$	167,549		$	75,811
Comprehensive (loss) income attributed to noncontrolling interests	(277		)	96
Comprehensive income attributed to Staples, Inc.	$	167,826		$	75,715

See notes to condensed consolidated financial statements.

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STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

(Unaudited)



	13 Weeks Ended
	May 3, 2014			May 4, 2013
Operating Activities:
Consolidated net income	$	96,210		$	169,927
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	102,323			100,558
Amortization of intangibles	14,889			13,383
Gain on sale of businesses, net	(21,805		)	—
Impairment of long-lived assets	21,808			—
Inventory write-downs related to restructuring activities	10,554			—
Stock-based compensation	20,620			26,367
Excess tax benefits from stock-based compensation arrangements	(76		)	(90		)
Deferred income tax (benefit) expense	(7,233		)	7,636
Other	4,437			(1,621		)
Changes in assets and liabilities:
Decrease in receivables	12,125			43,085
Increase in merchandise inventories	(431		)	(103,531		)
Increase in prepaid expenses and other assets	(21,574		)	(21,085		)
Increase in accounts payable	76,391			173,555
Increase (decrease) in accrued expenses and other liabilities	29,229			(59,880		)
Increase (decrease) in other long-term obligations	22,384			(735		)
Net cash provided by operating activities	359,851			347,569

Investing Activities:
Acquisition of property and equipment	(48,003		)	(41,096		)
Proceeds from sale of businesses, net	50,191			—
Cash paid for termination of joint venture	—			(34,298		)
Net cash provided (used) in investing activities	2,188			(75,394		)

Financing Activities:
Proceeds from issuance of commercial paper, net of repayments	75,000			—
Proceeds from the exercise of stock options	—			4,732
Proceeds from borrowings	7,030			8,171
Payments on borrowings and capital lease obligations	(8,232		)	(25,094		)
Purchase of noncontrolling interest	—			(89		)
Cash dividends paid	(77,051		)	(78,756		)
Excess tax benefits from stock-based compensation arrangements	76			90
Repurchase of common stock	(70,489		)	(66,892		)
Net cash used in financing activities	(73,666		)	(157,838		)
Effect of exchange rate changes on cash and cash equivalents	4,128			(12,011		)
Net increase in cash and cash equivalents	292,501			102,326
Cash and cash equivalents at beginning of period	492,532			1,334,302
Cash and cash equivalents at end of period	785,033			1,436,628
Less: Change in cash and cash equivalents attributed to discontinued operations	—			(1,175		)
Add: Cash and cash equivalents attributed to disposal group held for sale at February 1, 2014	7,868			—
Cash and cash equivalents at the end of the period	$	792,901		$	1,435,453

See notes to condensed consolidated financial statements.

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Note A — Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements include the accounts of Staples, Inc. and its subsidiaries (“Staples” or “the Company”). All intercompany accounts and transactions have been eliminated in consolidation. These financial statements are for the period covering the 13 weeks ended May 3, 2014 (also referred to as the “first quarter of 2014") and the period covering the 13 weeks ended May 4, 2013 (also referred to as the “first quarter of 2013”).

The Company's former European Printing Systems Division business ("PSD") was presented as a discontinued operation in the condensed consolidated statement of comprehensive income during the first quarter of 2013. The Company completed the sale of PSD on October 5, 2013. Unless otherwise stated, any reference to the condensed consolidated statement of comprehensive income in the notes to the condensed consolidated financial statements for that period refers to results from continuing operations.

These financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods. In the opinion of management, these financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. For a more complete discussion of significant accounting policies and certain other information, these financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014 ("Annual Report").

The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. Our business is somewhat seasonal, with sales and profitability historically higher during the second half of our fiscal year due to the back-to-school, holiday and January back-to-business seasons.

Note B — Recent Accounting Pronouncements

In April 2014, a pronouncement was issued that changes the requirements for reporting discontinued operations. The new pronouncement stipulates that the disposal of a component of an entity is to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The pronouncement also removed the conditions that a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. The Company adopted this guidance as of the beginning of its fiscal year 2014. The guidance will apply to components of the Company that are disposed or classified as held for sale after the effective date. The adoption of this guidance had no impact on the Company's condensed consolidated financial statements in the first quarter of 2014.

Note C — Restructuring Charges

2014 Restructuring Plan

The performance of the Company’s North American retail stores has fallen short of management’s expectations over the past few years, and the Company continues to see customer demand shifting to online channels, which has led the Company to increase its focus on growing its online businesses. As a result, in March 2014 the Company announced that its Board of Directors (the “Board”) had approved the closure of up to 225 retail stores in North America by the end of fiscal year 2015 (the “Store Closure Plan”). The Company expects that these closures will improve the overall performance of its retail portfolio. In the first quarter of 2014, the Company approved the closure of 112 specific retail stores, which includes 16 stores that were closed in the first quarter and the planned closure of 80 stores in the second quarter of 2014 and 16 stores in the second half of 2014 and fiscal 2015. The Company expects to close approximately 140 stores in total in 2014.

In addition, as part of the Company’s continuing efforts to transform its business, the Company initiated a cost savings plan to generate annualized pre-tax savings of approximately $500 million by the end of fiscal 2015. The Company expects the savings to come from global supply chain, retail store closures and labor optimization, non-product related costs, IT hardware and services, marketing, sales force, and customer service. The Company plans to reinvest some of the savings in its strategic initiatives. The actions to be taken related to this cost savings plan, together with the actions to be taken related to the Store Closure Plan, are herein referred to as the "2014 Plan". The Company expects to substantially complete the actions required under the 2014 Plan by the end of 2015.

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (continued)

As a result of actions taken under the 2014 Plan, the Company recorded pre-tax charges of $43.0 million in the first quarter of 2014. These charges primarily relate to the 112 retail store closures approved by management in the first quarter of 2014. The table below provides a summary of the charges recorded in the first quarter of 2014 for each major type of cost associated with the 2014 Plan, as well as the Company's current estimates of the amount of charges expected to be incurred globally during the remainder of 2014 in connection with the 2014 Plan. The table also summarizes the costs incurred and expected to be incurred by reportable segment (in millions).



	2014 Plan
	Actual costs incurred		Estimated Costs to be incurred
	First quarter of 2014		Second quarter of 2014	Second half of 2014
Employee related costs	$	7.8	$10 - $15	$25 - $45
Lease obligations	—		80 - 110	45 - 80
Other associated costs	2.9		5 - 10	5 - 10
Total restructuring charges	10.6		$95 - $135	$75 - $135
Impairment of long-lived assets	21.8		5 - 10	10 - 15
Inventory write-downs related to restructuring activities	10.6		5 - 10	5 - 10
Total charges	$	43.0	$105 - $155	$90 - $160

North American Stores & Online	$	34.5	$90 - $130	$25 - $50
North American Commercial	8.5		10 - 20	35 - 60
International Operations	—		Less than 5	30 - 50
Total charges	$	43.0	$105 - $155	$90 - $160

The Company's estimates of future charges could change as the Company's plans evolve and become finalized. The actual amount of charges recognized during the remainder of 2014 will depend on which specific additional retail stores are approved for closure during the remainder of the fiscal year, as well as the timing of such closures. The actual amount of charges recognized during the remainder of 2014 will also depend on the nature and timing of the specific actions to be taken related to the $500 million costs savings plan. At this time the Company cannot reliably estimate the costs to be incurred in fiscal 2015 related to the 2014 Plan, given the degree of uncertainty related to the timing and nature of the specific actions to be taken next year.

See Note D - Impairment of Long-Lived Assets for additional information related to the $21.8 million of fixed asset impairment charges recorded during the first quarter of 2014. The $10.6 million of inventory write-downs recognized in the first quarter of 2014 primarily relate to the rationalization of certain SKU's pursuant to the Company's efforts to improve efficiencies in its delivery fulfillment operations, as well as the retail store closures in the first and second quarters of 2014. The inventory write-downs recognized in the first quarter of 2014 are included in Cost of goods sold and occupancy costs in the condensed consolidated statement of comprehensive income.

The table below shows the restructuring charges recorded during the first quarter of 2014 and the related liability balances as of May 3, 2014 for each major type of cost associated with the 2014 Plan (in thousands):



	2014 Plan
	Employee Related			Other			Total
Accrued restructuring balance as of February 1, 2014	$	—		$	—		$	—
Charges	7,793			2,855			10,648
Cash payments	(1,204		)	(1,884		)	(3,088		)
Accrued restructuring balance as of May 3, 2014	$	6,589		$	971		$	7,560

Of the $10.6 million of restructuring charges incurred in the first quarter of 2014 related to the 2014 Plan, approximately $8.8 million relates to North American Stores and Online and $1.9 million relates to North American Commercial. All of the

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (continued)

restructuring liabilities related to the 2014 Plan are included within Accrued expenses and other current liabilities in the Company's condensed consolidated balance sheet as of May 3, 2014. The Company expects that the payments related to these liabilities will be substantially completed by the end of 2014.

The $10.6 million of restructuring charges related to the 2014 Plan are presented within Restructuring charges in the Company's condensed consolidated statement of comprehensive income. If the Company had recorded the expenses within the functional departments of the restructured activities, the charges would have been presented in Selling, general and administrative expenses.

2013 Restructuring Plan

In the third quarter of 2013, as part of the Company's continuing efforts to cut costs, the Company initiated a restructuring plan (the "2013 Plan”) to streamline its operations and general and administrative functions. Pursuant to the 2013 Plan, certain distributed general and administrative functions are being centralized, which the Company believes will help drive additional synergies across business units. In addition, certain operational resources are being consolidated, which the Company believes will result in increased efficiencies, without negatively impacting customer service.

As a result of actions initiated under the 2013 Plan, the Company recorded pre-tax restructuring charges of $78.3 million, including $75.5 million for employee severance costs related to the elimination of positions throughout the organization and $2.8 million for other associated costs. Of these amounts, $62.7 million related to the Company's International Operations segment and $15.6 million related to the Company’s corporate headquarters and North American operations. The Company does not expect to incur material costs in future periods related to the 2013 Plan. The Company expects to substantially complete the actions required under the 2013 Plan by the first half of fiscal 2015.

During the first quarter of 2014, the Company recorded adjustments to increase the employee-related liability associated with the 2013 Plan by $5.5 million and to decrease the liability for other associated costs by $1.2 million. The adjustment to the employee-related liability stemmed from changes in estimates regarding the number of headcount reductions and the amount of severance benefits per associate primarily related to the closure of a distribution center in Europe and the Company's restructuring of its European marketing and merchandising organizations. The adjustment to the liability for other associated costs resulted from changes in estimates related to professional fees incurred in connection with the 2013 Plan.

The table below shows a reconciliation of the beginning and ending liability balances related to each major type of cost incurred under the 2013 Plan (in thousands):



	2013 Plan
	Employee Related			Other			Total
Accrued restructuring balance as of February 1, 2014	$	62,489		$	2,532		$	65,021
Cash payments	(3,848		)	(319		)	(4,167		)
Adjustments	5,477			(1,243		)	4,234
Foreign currency translations	1,336			58			1,394
Accrued restructuring balance as of May 3, 2014	$	65,454		$	1,028		$	66,482

For the restructuring liabilities associated with the 2013 Plan, $3.7 million of the employee severance costs are included in Other long-term obligations and the remaining balances are included within Accrued expenses and other current liabilities in the Company's condensed consolidated balance sheet as of May 3, 2014. The Company expects that the payments related to the employee related liabilities will be substantially completed by the middle of fiscal 2015.

2012 Restructuring Plan

In 2012, the Company initiated a strategic plan (the “2012 Plan”) aimed at accelerating growth, particularly in the Company's online businesses. Elements of the 2012 Plan included more fully integrating the Company's retail and online offerings, restructuring its International Operations segment and improving the productivity of its stores in North America. Pursuant to the 2012 Plan, the Company took the following actions:


▪	closed 46 retail stores in Europe and accelerated the closure of 15 retail stores in the United States;


▪	closed and consolidated certain sub-scale delivery businesses in Europe;


▪	disposed of PSD;

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (continued)


▪	reorganized certain general and administrative functions in Europe; and


▪	rebranded its business in Australia from the Corporate Express tradename to the Staples tradename.

As a result of the actions taken under the 2012 Plan, during 2012 the Company recorded pre-tax restructuring charges of $207.0 million related to continuing operations. Of this amount, approximately $177 million related to the Company's International Operations segment and $30 million related to the North American Stores & Online segment. The Company does not expect to incur material costs in the future in connection with the 2012 Plan. The actions required under the 2012 Plan were substantially complete by the end of fiscal 2013.

The table below shows a reconciliation of the beginning and ending liability balances related to each major type of cost incurred under the 2012 Plan (in thousands):



	2012 Plan
	Contractual Obligation			Employee Related			Other			Total
Accrued restructuring balance as of February 1, 2014	$	28,681		$	13,787		$	179		$	42,647
Cash payments	(2,267		)	(2,790		)	—			(5,057		)
Adjustments	(428		)	(800		)	(179		)	(1,407		)
Foreign currency translations	338			983			—			1,321
Accrued restructuring balance as of May 3, 2014	$	26,324		$	11,180		$	—		$	37,504

The Company expects that payments related to employee related liabilities associated with the 2012 Plan will be substantially completed by the middle of fiscal 2014. The Company anticipates that payments related to facility lease obligations will be complete by fiscal year 2024.

For the restructuring liabilities associated with the 2012 Plan, $10.4 million of the contractual obligations are included in Other long-term obligations and the remaining balances are included within Accrued expenses and other current liabilities in the Company's condensed consolidated balance sheet as of May 3, 2014.

Note D — Impairment of Long-Lived Assets

In the first quarter of 2014, the Company approved the closure of 112 retail stores pursuant to its plan to close up to 225 retail stores in North America by the end of 2015 (see Note C - Restructuring Charges). As a result, in the first quarter of 2014 the Company recorded long-lived asset impairment charges of $21.8 million, primarily relating to leasehold improvements, fixtures, equipment and other fixed assets at the store locations. These charges relate to the Company's North American Stores & Online segment.

These charges were based on measurements of the fair value of the impaired assets derived using the income approach, specifically the discounted cash flow method, which incorporated Level 3 inputs as defined in Accounting Standards Codification ("ASC") Topic 820, “Fair Value Measurements and Disclosures.” The Company considered the expected net cash flows to be generated by the use of the assets through the store closure dates, as well as the expected cash proceeds from the disposition of the assets, if any. The Company determined that the fair value of the impaired assets was not material.

Note E — Divestitures

During the fourth quarter of 2013, the Company classified certain assets and liabilities of its Smilemakers, Inc. business unit as a disposal group and accounted for the group as held-for-sale in the consolidated balance sheet as of February 1, 2014. On May 2, 2014, the Company completed the sale of this business unit, recognizing a gain of $23.4 million that is subject to a working capital adjustment which has not been finalized. The results of operations for Smilemakers, Inc. had not been material to the Company's consolidated results of operations nor to its segment reporting, and therefore this business has not been presented as a discontinued operation in the Company's consolidated financial statements. Smilemakers, Inc. was a component of the Company's North American Commercial segment.

The Company also completed the sale of another small business unit in the first quarter of 2014, recognizing a $1.6 million loss on disposal.

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (continued)

On October 5, 2013, the Company completed the sale of PSD, recognizing a preliminary loss on disposal of $80.9 million in the third quarter of 2013 that is subject to the impact of a working capital adjustment to the purchase price. The amount of the working capital adjustment is currently in dispute between the parties to the transaction. The parties are pursuing dispute resolution procedures to attempt to resolve the issue.

Note F — Income Taxes

During the first quarter of 2014, the Company repatriated $127.3 million of cash held by a foreign subsidiary. As a result, during the first quarter of 2014 the Company recorded income tax expense of $11.2 million related to taxable income generated in the U.S. stemming from this repatriation. For the undistributed earnings remaining in the Company’s foreign subsidiaries after the repatriation that have not been previously taxed in the U.S., the Company’s intention remains to indefinitely reinvest those funds outside of the U.S., and accordingly deferred taxes have not been provided for these funds. The determination of the amounts of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.

The Company’s income tax returns are routinely examined by federal, state and foreign tax authorities. During the next twelve months, it is reasonably possible that unrecognized tax benefits will be reduced by up to $70 million, either because the tax positions are sustained on examination or because the period of examination lapses. The Company is focused on resolving tax audits as expeditiously as possible.

Note G — Fair Value Measurements

ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy

gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement), then priority to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 measurement), then the lowest priority to unobservable inputs (Level 3 measurement).

The fair values of cash and cash equivalents, receivables, accounts payable, accrued expenses, other current liabilities and short-term debt approximate their carrying values because of their short-term nature. The carrying value of the Company's capital lease obligations approximates the fair value.

The following table shows the difference between the financial statement carrying value and fair value of the Company's debt obligations (see Note H - Debt and Credit Agreements) as of May 3, 2014 and February 1, 2014 (in thousands). The fair values of these notes were determined based on quoted market prices and are classified as Level 1 measurements.



	May 3, 2014		February 1, 2014
	Carrying Value	Fair Value	Carrying Value	Fair Value
January 2018 Notes	498,988	503,185	498,919	505,189
January 2023 Notes	499,164	496,012	499,140	486,947

The following table shows the Company’s assets and liabilities as of May 3, 2014 and February 1, 2014 that are measured and recorded in the financial statements at fair value on a recurring basis (in thousands):



	May 3, 2014
	Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Unobservable Inputs
	Level 1		Level 2		Level 3
Assets
Money market funds	$	50,656	$	—	$	—
Derivative assets	—		541		—

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (continued)



	February 1, 2014
	Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs			Unobservable Inputs
	Level 1		Level 2			Level 3
Assets
Money market funds	$	37,288	$	—		$	—
Liabilities
Derivative liabilities	—		(4,688		)	—

The derivative assets and liabilities shown in the tables above include both derivatives which are designated as hedges pursuant to the guidelines of ASC 815, "Derivatives and Hedging" (see Note I - Derivatives Instruments and Hedging Activities) as well as derivatives which are not designated as hedges.

The fair values of the Company’s money market funds are based on quotes received from third-party banks. The fair values of the Company’s derivative assets and liabilities are based on quotes received from third-party banks and represent the estimated amount the Company would receive or pay to terminate the agreements taking into consideration current interest and forward exchange rates as well as the creditworthiness of the counterparty.

Note H — Debt and Credit Agreements

On May 31, 2013, the Company entered into a new credit agreement (the "May 2018 Revolving Credit Facility") with Bank of America, N.A., as Administrative Agent and other lending institutions named therein. The May 2018 Revolving Credit Facility provides for a maximum borrowing of $1.0 billion, which pursuant to an accordion feature may be increased to $1.5 billion upon our request and the agreement of the lenders participating in the increase. Borrowings may be syndicated loans, swing line loans, multicurrency loans, or letters of credit, the combined sum of which may not exceed the maximum borrowing amount. Amounts borrowed may be repaid and reborrowed from time to time until May 31, 2018. Borrowings will bear interest at various interest rates depending on the type of borrowing, and will reflect a percentage spread based on the Company's credit rating and fixed charge coverage ratio. The Company will pay a facility fee at rates that range from 0.08% to 0.225% per annum depending on our credit rating and fixed charge coverage ratio. The May 2018 Revolving Credit Facility is unsecured and ranks pari passu with the Company's public notes and other indebtedness and contains customary affirmative and negative covenants for credit facilities of this type. The May 2018 Revolving Credit Facility also contains financial covenants that require the Company to maintain a minimum fixed charge coverage ratio and a maximum adjusted funded debt to total capitalization ratio.

The Company has a commercial paper program ("Commercial Paper Program") that allows it to issue up to $1.0 billion of unsecured commercial paper notes ("Commercial Paper Notes") from time to time. The May 2018 Revolving Credit Facility serves as a back-up to the Commercial Paper Program. The Company typically uses proceeds from the Commercial Paper Notes for general purposes, including working capital, capital expenditures, acquisitions and share repurchases. Maturities of the Commercial Paper Notes vary, but may not exceed 397 days from the date of issue. During the first quarter of 2014, the Company borrowed under the Commercial Paper Program to support its seasonal working capital requirements. As of May 3, 2014, $75.0 million of Commercial Paper Notes were outstanding, with a weighted average remaining maturity of three days and a weighted average interest rate of 0.3%. The maximum amount outstanding under the Commercial Paper Program during the first quarter of 2014 was $150 million.

The Company has various other lines of credit under which it may borrow a maximum of $160.5 million. At May 3, 2014, the Company had outstanding borrowings of $100.2 million and outstanding letters of credit of $0.2 million related to these lines of credit, leaving $60.1 million of available credit at that date.

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The major components of the Company’s outstanding debt as of May 3, 2014 and February 1, 2014 are as follows (in thousands):



	May 3, 2014			February 1, 2014
January 2018 Notes	498,988			498,919
January 2023 Notes	499,164			499,140
Commercial Paper	75,000			—
Other lines of credit	100,239			100,100
Capital lease obligations and other notes payable	25,778			6,028
	1,199,169			1,104,187
Less: current portion	(182,272		)	(103,982		)
Net long-term debt	$	1,016,897		$	1,000,205

The Company entered into $21.8 million of new capital lease obligations in the first quarter of 2014.

Note I — Derivatives Instruments and Hedging Activities

From time to time, Staples uses interest rate swaps, foreign currency swaps and foreign currency forward agreements to offset certain operational and balance sheet exposures related to changes in interest or foreign exchange rates. These agreements are entered into to support transactions made in the normal course of business and accordingly are not speculative in nature. The derivatives qualify for hedge accounting treatment if they are highly effective in offsetting the underlying exposures related to the hedged items.

All derivatives are recorded at fair value and the changes in fair value are immediately included in earnings if the derivatives do not qualify as effective hedges. If a derivative is designated as a fair value hedge, then changes in the fair value of the derivative are offset against the changes in the fair value of the underlying hedged item in earnings. If a derivative is designated as a cash flow hedge, then the effective portion of the changes in the fair value of the derivative is recognized as a component of accumulated other comprehensive income (loss) until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable of occurring. If a derivative or a non-derivative financial instrument is designated as a hedge of the Company’s net investment in a foreign subsidiary, then changes in the fair value of the financial instrument are recognized as a component of accumulated other comprehensive income (loss) to offset a portion of the change in the translated value of the net investment being hedged, until the investment is sold or liquidated. The Company formally documents all hedging relationships for all derivatives, non-derivative hedges and the underlying hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. There are no amounts excluded from the assessment of hedge effectiveness.

The Company classifies the fair value of all derivative contracts and the fair value of its hedged firm commitments as either current or long-term depending on whether the maturity date of the derivative contract is within or beyond one year from the balance sheet date. The cash flows from derivatives are classified in the Company's condensed consolidated statement of cash flows in the same category as the item being hedged.

There were no net investment or cash flow hedges outstanding during the first quarter of 2013 or 2014.

Foreign Currency Forwards and Swaps:

In December 2011, the Company entered into foreign currency forwards designed to convert a series of intercompany loans denominated in Canadian dollars into a fixed U.S. dollar amount. The loans totaled 750 million Canadian dollars in the aggregate and matured at various dates between October 2012 and October 2013. Staples, upon full maturity of the agreements in October 2013, had collected $720 million and paid 750 million Canadian dollars per the terms of the contracts. The forward agreements were accounted for as a fair value hedge. In 2012, the Company settled 500 million Canadian dollars of the notional amount relating to this forward, realizing a loss of $24.2 million, which was recorded within Other income (expense), net. In 2013, the Company settled the remaining 250 million Canadian dollars of notional amount relating to this forward, realizing a loss of $4.2 million which was recorded within Other income (expense), net. During the first quarter of 2013, a gain of $2.0 million was recognized in Other expense related to the outstanding portions of this fair value hedge. No amounts were included in the condensed consolidated statement of comprehensive income related to ineffectiveness associated with this fair value hedge.

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Note J — Pension and Other Post-Retirement Benefit Plans

The Company sponsors pension plans that cover certain employees in Europe and the U.S. The benefits due to U.S. plan participants are frozen. A number of the defined benefit plans outside the U.S. are funded with plan assets that have been segregated in trusts. Contributions are made to these trusts, as necessary, to meet legal and other requirements.

The Company also sponsors an unfunded post-retirement life insurance benefit plan, which provides benefits to eligible U.S. executives based on earnings, years of service and age at termination of employment.

The total net cost recognized for the first quarter of 2014 associated with the pension and other post-retirement benefit plans is based on unaudited actuarial estimates of such costs. The following table presents a summary of the total net periodic cost recorded in the condensed consolidated statement of comprehensive income for the first quarter of 2014 and 2013 related to the plans (in thousands):



	13 Weeks Ended May 3, 2014
	Pension Plans									Other Post-Retirement Benefit Plan Total
	U.S. Plans			International Plans			Total			Other Post-Retirement Benefit Plan Total
Service cost	$	—		$	3,451		$	3,451		$	445
Interest cost	454			9,933			10,387			447
Expected return on plan assets	(484		)	(16,508		)	(16,992		)	—
Amortization of unrecognized losses and prior service costs	4			3,631			3,635			608
Total (cost) benefit	$	(26	)	$	507		$	481		$	1,500



	13 Weeks Ended May 4, 2013
	Pension Plans									Other Post-Retirement Benefit Plan Total
	U.S. Plans			International Plans			Total			Other Post-Retirement Benefit Plan Total
Service cost	$	—		$	3,927		$	3,927		$	798
Interest cost	410			7,749			8,159			633
Expected return on plan assets	(468		)	(15,100		)	(15,568		)	—
Amortization of unrecognized losses and prior service costs	155			3,304			3,459			534
Total cost (benefit)	$	97		$	(120	)	$	(23	)	$	1,965

Note K — Stockholders' Equity

The changes in the amounts of stockholders' equity attributable to noncontrolling interests during the first quarter of 2014 and 2013 related solely to foreign currency translation adjustments.

During the first quarter of 2014, the Company issued 26,909 shares upon the vesting of restricted stock units and had 219,803 restricted shares released from restrictions upon the satisfaction of vesting conditions. There were no shares issued pursuant to the exercise of stock options during the first quarter of 2014.

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (continued)

Note L — Accumulated Other Comprehensive Loss

The following table details the changes in accumulated other comprehensive loss ("AOCL") for the first quarter of 2014 (in thousands):



	Foreign Currency Translation Adjustment			Deferred Benefit Costs			Accumulated Other Comprehensive Loss
Balance at February 1, 2014	$	(255,404	)	$	(251,750	)	$	(507,154	)
Foreign currency translation adjustment	69,769			—			69,769
Reclassification adjustments:
Release of cumulative translation adjustments to earnings upon disposal of foreign businesses	(1,335		)	—			(1,335		)
Amortization of deferred benefit costs (net of taxes of $1.1 million)	—			3,182			3,182
Balance at May 3, 2014	$	(186,970	)	$	(248,568	)	$	(435,538	)

The following table details the line items in the condensed consolidated statements of comprehensive income affected by reclassification adjustments during the first quarter of 2014 and 2013 (in thousands):



	Amount reclassified from AOCL
	13 Weeks Ended
	May 3, 2014			May 4, 2013
Selling, general and administrative	$	4,243		$	3,993
Gain on sale of businesses, net	(1,335		)	—
Income before tax	(2,908		)	(3,993		)
Income tax benefit	(1,061		)	(1,298		)
Net income	$	(1,847	)	$	(2,695	)

Note M — Computation of Earnings per Common Share

The computation of basic and diluted earnings per share for the first quarter of 2014 and 2013 is as follows (in thousands, except per share data):



	13 Weeks Ended
	May 3, 2014		May 4, 2013
Numerator:
Income from continuing operations	$	96,210	$	170,421
Loss from discontinued operations	—		(494		)
Net income	96,210		169,927

Denominator:
Weighted-average common shares outstanding	643,492		655,970
Effect of dilutive securities:
Employee stock options and restricted shares	5,700		8,114
Weighted-average common shares outstanding assuming dilution	649,192		664,084

Basic Earnings Per Common Share:
Continuing operations	$	0.15	$	0.26
Discontinued operations	—		—
Net income	$	0.15	$	0.26

Diluted Earnings Per Common Share:
Continuing operations	$	0.15	$	0.26
Discontinued operations	—		—
Net income	$	0.15	$	0.26

For the first quarter of 2014 and 2013, approximately 33.4 million and 39.1 million equity instruments, respectively, were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.

Note N — Segment Reporting

Staples has three reportable segments: North American Stores & Online, North American Commercial and International Operations. North American Stores and Online sells products and services to customers in the United States and Canada. North American Commercial consists of the U.S. and Canadian businesses that sell and deliver products and services directly to businesses and includes Staples Advantage and Quill.com. The International Operations segment consists of businesses that sell and deliver products and services directly to consumers and businesses in 23 countries in Europe, Australia, South America and Asia.

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (continued)

Staples' North American Stores & Online and North American Commercial segments are managed separately because the way they sell and market products is different and the classes of customers they service are different. The International Operations are considered a separate reportable segment because of the significant differences in the operating environment from the North American operations.

Staples evaluates performance and allocates resources based on profit or loss from operations before goodwill and long-lived asset impairment charges, restructuring costs, stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles ("business unit income"). Intersegment sales and transfers are recorded at Staples' cost; therefore, there is no intercompany profit or loss recognized on these transactions.

Beginning in the first quarter of 2014, business unit income also excludes accelerated depreciation and amortization and inventory write-downs associated with exit or disposal activities, including restructurings. In the first quarter of 2014, business unit income for North America Stores & Online and North American Commercial excludes $3.9 million and $6.6 million, respectively, of inventory write-downs related to restructuring activities. The Company did not recognize any accelerated depreciation or amortization related to an exit or disposal activity in the first quarter of 2014. In the first quarter of 2013, the Company did not recognize any inventory write-downs nor any accelerated depreciation or amortization related to exit and disposal activities.

The following is a summary of sales and business unit income by reportable segment and a reconciliation of business unit income to income from continuing operations before income taxes for the first quarter of 2014 and 2013 (in thousands):



	13 Weeks Ended
	May 3, 2014			May 4, 2013
	Sales
North American Stores & Online	$	2,633,823		$	2,768,377
North American Commercial	2,056,329			2,043,018
International Operations	964,107			1,003,176
Total segment sales	$	5,654,259		$	5,814,571

	Business Unit Income (Loss)
North American Stores & Online	$	92,699		$	172,319
North American Commercial	135,705			149,892
International Operations	(24,972		)	(10,757		)
Business unit income	203,432			311,454
Stock-based compensation	(20,620		)	(26,367		)
Impairment of long-lived assets	(21,808		)	—
Restructuring charges	(13,475		)	—
Inventory write-downs related to restructuring activities	(10,554		)	—
Gain on sale of businesses, net	21,805			—
Interest and other expense, net	(10,628		)	(32,612		)
Income from continuing operations before income taxes	$	148,152		$	252,475

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STAPLES, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

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

Forward Looking Statements

This Quarterly Report on Form 10-Q and, in particular, this management’s discussion and analysis contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). 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 statements by the use of the words “believes”, “expects”, “anticipates”, “plans”, “may”, “will”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative, although not all forward-looking statements include such words. Forward-looking statements are based on a series of expectations, estimates and projections about the industry and markets in which we operate and management’s beliefs and assumptions, and should be read in conjunction with our condensed consolidated financial statements and notes to condensed consolidated financial statements included in this report. Staples, Inc. and its subsidiaries ("we", "our" or "us") 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 under the heading “Risk Factors” of this Quarterly Report on Form 10-Q. 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

Major contributors to our first quarter of 2014 results, as compared to the results for the first quarter of 2013, are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:


•	We generated $5.65 billion in sales, a decrease of 2.8%;


•	North American Stores & Online sales decreased 4.9% and business unit income rate decreased to 3.5% from 6.2%;


•	North American Commercial sales increased 0.7% and business unit income rate decreased to 6.6% from 7.3%;


•	International Operations sales decreased 3.9% and business unit loss rate was (2.6)% compared to (1.1)%;


•	Income from continuing operations for the first quarter of 2014 was $96.2 million compared with $170.4 million for the first quarter of 2013. Non-GAAP income from continuing operations was $114.5 million for the first quarter of 2014; and


•	Earnings per diluted share from continuing operations was $0.15 in the first quarter of 2014 compared to $0.26 in the first quarter of 2013. Non-GAAP earnings per diluted share from continuing operations was $0.18 in the first quarter of 2014.

See the non-GAAP reconciliations in the "Non-GAAP Measures" section further below.

Outlook

For the second quarter of 2014, we expect sales to decrease versus the second quarter of 2013. We expect to achieve fully diluted non-GAAP earnings per share in the range of $0.09 to $0.14 for the second quarter of 2014. This guidance excludes any potential impact on earnings per share related to 2014 global restructuring and other related activities.

We expect to record pre-tax charges in the range of $105 million to $155 million in the second quarter of 2014 for restructuring and other related activities (see 2014 Restructuring Plan below). For the full year, we expect total pre-tax restructuring and other related charges in the range of approximately $240 million to $360 million.

For the full year, we expect to generate more than $600 million of free cash flow, which assumes a modest increase in capital spending compared with 2013. Our free cash flow guidance reflects a use of cash in 2014 in the range of $60 million to $100 million associated with our 2014 restructuring and other related activities.

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2014 Restructuring Plan

In March 2014, we announced that our Board of Directors (the “Board”) had approved the closure of up to 225 retail stores in North America by the end of fiscal year 2015. We expect that these closures will improve the overall performance of our retail portfolio. In the first quarter of 2014, management approved the closure of 112 specific retail stores, which includes 16 stores that were closed in the first quarter and the planned closure of 80 stores in the second quarter of 2014 and 16 stores in the second half of 2014 and fiscal 2015. We expect to close approximately 140 stores in total in 2014.

In addition, as part of our continuing efforts to transform our business, in March 2014 we announced a cost savings plan to generate annualized pre-tax savings of approximately $500 million by the end of fiscal 2015. We expect the savings to come from global supply chain, retail store closures and labor optimization, non-product related costs, IT hardware and services, marketing, sales force, and customer service. We plan to reinvest some of the savings in our strategic initiatives. The actions to be taken related to this cost savings plan, together with the actions to be taken related to the store closure plan, are collectively referred to as the "2014 Restructuring Plan."

The table below provides a summary of the charges recorded in the first quarter of 2014 for each major type of cost associated with the 2014 Restructuring Plan, as well as the Company's current estimates of the amount of charges expected to be incurred during the remainder of 2014 in connection with these initiatives. The table also summarizes the costs incurred and expected to be incurred by reportable segment. We expect to complete the actions related to these plans by the end of 2015.



	2014 Restructuring Plan (amounts in millions)
	Actual costs incurred		Estimated Costs to be incurred
	First quarter of 2014		Second quarter of 2014	Second half of 2014
Employee related costs	$	7.8	$10 - $15	$25 - $45
Lease obligations	—		80 - 110	45 - 80
Other associated costs	2.9		5 - 10	5 - 10
Total restructuring charges	$	10.6	$95 - $135	$75 - $135

Impairment of long-lived assets	21.8		5 - 10	10 - 15
Inventory write-downs related to restructuring activities	10.6		5 - 10	5 - 10
Total charges	$	43.0	$105 - $155	$90 - $160

North American Stores & Online	$	34.5	$90 - $130	$25 - $50
North American Commercial	8.5		10 - 20	35 - 60
International Operations	—		Less than 5	30 - 50
Total charges	$	43.0	$105 - $155	$90 - $160

Our estimates of future charges could change as our plans evolve and become finalized. The actual amount of charges recognized during the remainder of 2014 will depend on which specific additional retail stores are approved for closure during the remainder of the fiscal year, as well as the timing of such closures. The actual amount of charges recognized during the remainder of 2014 will also depend on the nature and timing of the specific actions to be taken related to the $500 million cost savings plan. At this time we cannot reliably estimate the costs to be incurred in fiscal 2015 related to the 2014 Plan, given the degree of uncertainty related to the timing and nature of the specific actions to be taken next year.

Non-GAAP Measures

In our analysis of the results of operations and in our outlook, we have referred to certain non-GAAP financial measures for gross profit rate, income from continuing operations, earnings per share, effective tax rate, and free cash flow (which we define as net cash provided by operating activities less capital expenditures). The presentation of these results should be considered in addition to, and should not be considered superior to, or as a substitute for, the presentation of results determined in accordance with GAAP. We believe that these non-GAAP financial measures better enable management and investors to understand and analyze our performance by providing meaningful information that facilitates the comparability of underlying business results from period to period. We use these non-GAAP financial measures to evaluate the operating results of our business against prior

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year results and our operating plan, and to forecast and analyze future periods. We recognize there are limitations associated with the use of non-GAAP financial measures as they may reduce comparability with other companies that use different methods to calculate similar non-GAAP measures. We generally compensate for these limitations by considering GAAP as well as non-GAAP results. In addition, management provides a reconciliation to the most comparable GAAP financial measure. With respect to forward looking information, we have not provided guidance on a GAAP basis given that our current estimates for charges to be incurred related to our restructuring initiatives and the potential related impact on cash flow represent a broad range which is based on our preliminary analysis and is subject to change as our plans become finalized.

For the non-GAAP measures related to results of operations, reconciliations to the most directly comparable GAAP measures are shown below for the first quarter of 2014 (amounts in thousands, except per share data):



	13 Weeks Ended
	May 3, 2014
	GAAP			Inventory write-downs	Restructuring charges	Impairment of long lived assets	Gain on sale of businesses, net		Non-GAAP
Sales	$	5,654,259							$	5,654,259
Gross profit	1,410,294			10,554	—	—	—		1,420,848
Gross profit rate	24.9		%						25.1		%

Operating income	158,780			10,554	13,475	21,808	(21,805	)	182,812
Interest and other expense, net	10,628								10,628
Income from continuing operations before income taxes	148,152								172,184

Income tax expense	51,942								51,942
Adjustments	—								5,740
Adjusted income tax expense	51,942								57,682

Net income	$	96,210							$	114,502

Effective tax rate	35.1		%						33.5		%

Diluted earnings per common share	$	0.15							$	0.18

Consolidated Performance

First Quarter of 2014 Compared to the First Quarter of 2013

Sales: Sales for the first quarter of 2014 were $5.65 billion, a $160.3 million or 2.8% decrease from the first quarter of 2013. The sales decline was driven by a 4% decline in comparable store sales (which exclude online sales) in North American Stores & Online, a $61.8 million unfavorable impact from changes in foreign exchange rates, weakness in our European delivery businesses, and the impact of store closures in North America. These declines were partly offset by a 0.7% sales increase in North American Commercial. Declines in ink and toner, business machines and technology accessories, core office supplies and paper were partly offset by growth in facilities and breakroom supplies.

Gross Profit: Gross profit as a percentage of sales was 24.9% for the first quarter of 2014 compared to 26.0% for the first quarter of 2013. Our gross profit rate in the first quarter of 2014 reflects $10.6 million of inventory write-downs primarily related to the rationalization of our SKU assortment pursuant to our efforts aimed at improving efficiencies in our delivery fulfillment operations, as well as the North American retail store closures in the first and second quarters of 2014 (see 2014 Restructuring Plan above). Excluding these write-downs, our gross profit rate in the first quarter of 2014 was 25.1%, representing a decline of 86 basis points compared with the prior year quarter. This decline was primarily driven by lower product margins in our North American Stores and Online segment and by the negative impact of fixed costs on lower sales.

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Selling, General and Administrative Expenses: Selling, general and administrative expenses increased by $10.6 million or 0.9% from the first quarter of 2013 to the first quarter of 2014. The increase was primarily driven by investments to grow our online businesses and increased marketing expense to drive awareness of categories beyond office supplies, partly offset by lower compensation expense due to lower headcount. As a percentage of sales, selling, general and administrative expenses were 21.6% in the first quarter of 2014 compared with 20.9% in the first quarter of 2013.

Amortization of Intangibles: Amortization of intangibles was $14.9 million for the first quarter of 2014 compared to $13.4 million for the first quarter of 2013, primarily reflecting the amortization of customer relationships and technology assets.

Impairment on Long-Lived Assets: In the first quarter of 2014, we approved the closure of 112 specific retail stores in North America in conjunction with our plan to close up to 225 stores in North America by the end of 2015 (see the 2014 Restructuring Plan section above). As a result, we recognized long-lived asset impairment charges of $21.8 million in the first quarter of 2014. The charges primarily relate to leasehold improvements, fixtures, equipment and other fixed assets at the store locations. These charges relate to our North American Stores & Online segment. There were no impairment charges recognized in the first quarter of 2013.

Restructuring Charges: Restructuring charges incurred in the first quarter of 2014 were $13.5 million, which includes $7.8 million of severance costs primarily related to the North American retail store closures approved by management in the first quarter of 2014, $2.9 million of consulting fees associated with the store closure plan and the $500 million North American cost savings plan (see the 2014 Restructuring Plan section above), and a $2.8 million adjustment to increase the liability related to our 2013 restructuring plan due to changes in previous estimates for severance and other associated costs. Of these amounts, $8.8 million relates to our North American Stores & Online segment, $1.9 million relates to North American Commercial and $2.8 million relates to International Operations.

Gain on Sale of Businesses, net: On May 2, 2014, we completed the sale of our Smilemakers, Inc. business unit resulting in a gain of $23.4 million, which is subject to a working capital adjustment that has not yet been finalized. We also completed the sale of another small business unit recognizing a $1.6 million loss in the first quarter of 2014.

Interest Income: Interest income decreased to $0.7 million for the first quarter of 2014 from $1.7 million for the first quarter of 2013, primarily reflecting the impact of lower cash balances.

Interest Expense: Interest expense decreased to $12.3 million for the first quarter of 2014 from $31.0 million for the first quarter of 2013. The decrease in interest expense was primarily the result of the repayment of the remaining $866.9 million principal balance of our 9.75% notes upon their maturity in January 2014. Our interest rate swap agreements related to these notes had reduced interest expense by $3.2 million for the first quarter of 2013.

Other Income (Expense), Net: Other income (expense), net was income of $0.9 million for the first quarter of 2014 compared to an expense of $3.4 million for the first quarter of 2013. The improvement was primarily due to foreign exchange gains recognized in the first quarter of 2014 compared with foreign exchange losses in the first quarter of 2013.

Income Taxes: Our effective tax rate was 35.1% in the first quarter of 2014 compared with 32.5% in the first quarter of 2013. The tax rate for the first quarter of 2014 reflects $11.2 million of incremental tax expense stemming from taxable income generated in the US as a result of the planned repatriation of $127.3 million of cash from a foreign subsidiary. The tax rate for the first quarter of 2014 also reflects the impact of permanent differences between income tax expense for book and tax purposes related to the sale of two businesses in the first quarter, as well as the impact of certain restructuring charges recognized in the first quarter of 2014 for which we did not recognize a tax benefit. Excluding the impact of these items, our effective tax rate in the first quarter of 2014 was 33.5%.

Our effective tax rate in any year is impacted by the geographic mix of earnings. Additionally, certain foreign operations are subject to both U.S. and foreign income tax regulations, and as a result, income before tax by location and the components of income tax expense by taxing jurisdiction are not directly related. The earnings generated primarily by our entities in Canada, Hong Kong and the Netherlands contributed to the foreign tax rate differential impacting the effective tax rate.

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Segment Performance

Staples evaluates performance and allocates resources based on business unit income, which represents profit or loss from operations before goodwill and long-lived asset impairment charges, restructuring charges, stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles.

Beginning in the first quarter of 2014, business unit income also excludes accelerated depreciation and amortization and inventory write-downs associated with exit or disposal activities, including restructurings. In the first quarter of 2014, business unit income for North America Stores & Online and North American Commercial excludes $3.9 million and $6.6 million, respectively, of inventory write-downs related to restructuring activities. We did not recognize any accelerated depreciation or amortization related to an exit or disposal activity in the first quarter of 2014. In the first quarter of 2013, we did not recognize any inventory write-downs nor any accelerated depreciation or amortization related to exit and disposal activities.

See a reconciliation of total business unit income to income from continuing operations before income taxes in Note N - Segment Reporting in the Notes to the Condensed Consolidated Financial Statements.

First Quarter of 2014 Compared to the First Quarter of 2013

The following tables provide a summary of our sales and business unit income by reportable segment for the first quarter of 2014 and 2013:



	(Amounts in thousands) 13 Weeks Ended				May 3, 2014		May 4, 2013
	(Amounts in thousands) 13 Weeks Ended				(Decrease)Increase From Prior Year		(Decrease) Increase From Prior Year
	May 3, 2014		May 4, 2013		(Decrease)Increase From Prior Year		(Decrease) Increase From Prior Year
Sales:
North American Stores & Online	$	2,633,823	$	2,768,377	(4.9	)%	(3.5	)%
North American Commercial	2,056,329		2,043,018		0.7	%	1.7	%
International Operations	964,107		1,003,176		(3.9	)%	(12.5	)%
Total segment sales	$	5,654,259	$	5,814,571	(2.8	)%	(3.5	)%



	(Amounts in thousands) 13 Weeks Ended						May 3, 2014		May 4, 2013
	May 3, 2014			May 4, 2013			% of Sales		% of Sales
Business Unit Income (Loss):
North American Stores & Online	$	92,699		$	172,319		3.5	%	6.2	%
North American Commercial	135,705			149,892			6.6	%	7.3	%
International Operations	(24,972		)	(10,757		)	(2.6	)%	(1.1	)%
Business unit income	$	203,432		$	311,454		3.6	%	5.4	%

North American Stores & Online: Sales decreased by $134.6 million or 4.9% for the first quarter of 2014. This decrease was driven by a 4% decline in comparable store sales, resulting from lower traffic, and a $47.1 million negative impact from changes in foreign exchange rates. The decline was also attributable to the closure of stores during the twelve months preceding the first quarter of 2014, which negatively impacted sales growth by 1%. Sales declines in retail were partially offset by an increase in Staples.com. Declines in business machines and technology accessories, core office supplies, ink and toner, and computers were partially offset by increased sales of facilities and breakroom supplies and copy and print services.

Business unit income as a percentage of sales decreased to 3.5% for the first quarter of 2014 from 6.2% for the first quarter of 2013. The decrease was driven by lower product margins, particularly in Staples.com, increased marketing expenses to launch our new brand and drive awareness of new product offerings, investments in website development and deleverage of fixed expenses on lower sales. These declines were partially offset by reduced retail labor expense.

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North American Commercial: Sales increased by $13.3 million or 0.7% for the first quarter of 2014. The increase was primarily due to increased sales of facilities and breakroom supplies, furniture and promotional products. This was partially offset by decreased sales of ink and toner, paper and core office supplies as well as an $11.4 million unfavorable impact from foreign exchange rates.

Business unit income as a percentage of sales decreased to 6.6% for the first quarter of 2014 from 7.3% for the first quarter of 2013. The decline was primarily driven by reduced product margins and investments in sales force, partially offset by reduced marketing expense.

International Operations: Sales decreased by $39.1 million or 3.9% for the first quarter of 2014. The decrease was primarily driven by weakness in our European delivery businesses. Comparable store sales in Europe were flat, reflecting an approximate 2% increase in average order size offset by an approximate 1% decrease in traffic versus the prior year. The decrease was also driven by a $3.3 million unfavorable impact from foreign exchange rates as unfavorability in Australian and South American currencies were partially offset by a favorable impact from exchange rates in Europe.

Business unit loss as a percentage of sales was 2.6% for the first quarter of 2014 compared to 1.1% for the first quarter of 2013. This decrease primarily reflects the negative impact of fixed costs on lower sales in Europe, lower product margins in Australia, and increased marketing spend as a percentage of sales, partially offset by improved product margins in Europe.

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Critical Accounting Policies and Significant Estimates

Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. Preparation of these statements requires management to make significant judgments and estimates. Some of our accounting policies require estimates which may have a significant impact on amounts reported in these financial statements. A summary of our critical accounting policies and significant estimates may be found in our Annual Report in the Critical Accounting Policies and Significant Estimates section of Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no material changes to our critical accounting policies as disclosed in that report.

Liquidity and Capital Resources

Cash Flows

Cash provided by operations was $359.9 million for first quarter of 2014 compared to $347.6 million for first quarter of 2013, an increase of $12.3 million. The increase was driven by favorable changes in working capital, partly offset by lower net income adjusted for non-cash expenses.

Cash provided by investing activities was $2.2 million for first quarter of 2014 compared to cash used of $75.4 million for first quarter of 2013. In the first quarter of 2014, we received proceeds of $50.2 million related to the sale of our Smilemakers, Inc. business and another small business unit. In the prior year quarter, we spent $34.3 million in connection with the termination of our joint venture in India. Capital spending increased by $6.9 million year-over-year primarily due to timing of expenditures.

Cash used in financing activities was $73.7 million for first quarter of 2014 compared to $157.8 million for first quarter of 2013, a decrease of $84.2 million. The decrease is attributable to $75 million of net borrowings under our Commercial Paper Program (see further below) in the first quarter of 2014, versus no such borrowings in the prior year quarter. Total cash used for share repurchases and dividends increased slightly year-over-year. We spent $70.1 million in the first quarter of 2014 to repurchase 5.7 million shares under our share repurchase plan compared with $64.9 million spent in first quarter of 2013 to buy 4.9 million shares, an increase of $5.2 million. In the first quarter of 2014, the Company paid shareholders cash dividends of $0.12 per share for a total of $77.1 million, which compares with dividends of $0.12 per share for a total of $78.8 million paid in the first quarter of 2013, a decline of $1.7 million.

Sources of Liquidity

To cover seasonal fluctuations in cash flows and to support our various initiatives, we utilize cash generated from operations and borrowings available under various credit facilities and a commercial paper program. At May 3, 2014, we had approximately $1.78 billion in total cash and funds available through credit agreements, which consisted of $985.1 million of available credit and $792.9 million of cash and cash equivalents. Of the $792.9 million in cash and cash equivalents, approximately $391.1 million is held in jurisdictions outside the United States. During the first quarter of 2014, we repatriated $127.3 million of cash held by one of our foreign subsidiaries. As a result, during the first quarter of 2014 we recorded income tax expense of $11.2 million related to taxable income generated in the U.S. stemming from this repatriation. For the undistributed earnings that remain in our foreign subsidiaries after this repatriation that have not been previously taxed in the U.S., our intention remains to indefinitely reinvest those funds outside of the U.S., and accordingly deferred taxes have not been provided for these funds. The determination of the amount of the unrecognized deferred tax liability related to the remaining undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.

On May 31, 2013, we entered into a new credit agreement (the "May 2018 Revolving Credit Facility") with Bank of America, N.A., as Administrative Agent and other lending institutions named therein. The May 2018 Revolving Credit Facility provides for a maximum borrowing of $1.0 billion, which pursuant to an accordion feature may be increased to $1.5 billion upon our request and the agreement of the lenders participating in the increase. Borrowings may be syndicated loans, swing line loans, multicurrency loans, or letters of credit, the combined sum of which may not exceed the maximum borrowing amount. Amounts borrowed may be repaid and reborrowed from time to time until May 31, 2018. Borrowings will bear interest at various interest rates depending on the type of borrowing, and will reflect a percentage spread based on our credit rating and fixed charge coverage ratio. We will pay a facility fee at rates that range from 0.08% to 0.225% per annum depending on our credit rating and fixed charge coverage ratio. The May 2018 Revolving Credit Facility is unsecured and ranks pari passu with our public notes and other indebtedness and contains customary affirmative and negative covenants for credit facilities of this type. The May 2018 Revolving Credit Facility also contains financial covenants that require us to maintain a minimum fixed charge coverage ratio and a maximum adjusted funded debt to total capitalization ratio.

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We have a commercial paper program ("Commercial Paper Program") that allows us to issue up to $1.0 billion of unsecured commercial paper notes ("Commercial Paper Notes") from time to time. The May 2018 Revolving Credit Facility serves as a back-up to the Commercial Paper Program. We typically use proceeds from the Commercial Paper Notes for general purposes, including working capital, capital expenditures, acquisitions and share repurchases. Maturities of the Commercial Paper Notes vary, but may not exceed 397 days from the date of issue. During the first quarter of 2014, we borrowed under the Commercial Paper Program to support our seasonal working capital requirements. As of May 3, 2014, $75 million of Commercial Paper Notes were outstanding, with a weighted average remaining maturity of 3 days and a weighted average interest rate of 0.3%. The maximum amount outstanding under the Commercial Paper Program during the first quarter of 2014 was $150 million. If we were to experience a credit rating downgrade in future periods, we may incur higher interest costs on future financings and it may limit our ability to participate in the commercial paper market.

We also have various other lines of credit under which we may borrow a maximum of $160.5 million. At May 3, 2014, we had outstanding borrowings of $100.2 million and outstanding letters of credit of $0.2 million, leaving $60.1 million of available credit at that date.

During the first quarter of 2014, we entered into $21.8 million of new capital lease obligations.

A summary, as of May 3, 2014, of balances available under our credit agreements and debt outstanding is presented below (in thousands):



	May 3, 2014
	Available Credit		Debt Outstanding
January 2018 Notes	—		498,988
January 2023 Notes	—		499,164
May 2018 Revolving Credit Facility	925,000		—
Commercial Paper Program	—		75,000
Other lines of credit	60,059		100,239
Capital lease obligations and other notes payable	—		25,778
Total	$	985,059	$	1,199,169

At May 3, 2014, there had not been a material change to the amounts and maturity of contractual obligations disclosed in the subsection entitled “Contractual Obligations and Commercial Commitments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations on page B-14 of our 2013 Annual Report on Form 10-K. We do not have any off-balance sheet financing arrangements as of May 3, 2014, nor did we utilize any during the first quarter of 2014.

We expect that our cash generated from operations, together with our current cash, funds available under our existing credit agreements and other alternative sources of financing, will be sufficient to fund our planned capital expenditures, obligations associated with our restructuring and transformation initiatives, and other operating cash needs for at least the next twelve months.

Uses of Capital

We expect a modest increase in capital spending in 2014 compared with 2013, driven by investments in our online businesses and other strategic initiatives, as well as investments aimed at improving the productivity of existing stores. We expect the source of funds for our capital expenditures to come from operating cash flows. Capital expenditures were $48.0 million in the first quarter of 2014 compared to $41.1 million in the first quarter of 2013, an increase of $6.9 million.

While we have primarily grown organically, we may use capital to engage in strategic acquisitions or joint ventures. We consider many types of acquisitions for their strategic and other benefits. On May 5, 2014, we announced that we had reached an agreement to acquire PNI Digital Media ("PNI"). PNI provides a software platform that enables retailers to sell personalized products such as photo prints, photo books, calendars, business cards, documents, wedding invitations, stationery and more. We plan to invest in PNI so that we can leverage its platform to grow our copy and print businesses, as well as to help PNI grow its existing customer base. We expect this transaction to close in the second quarter of 2014.

In addition to investing in our existing businesses and pursuing strategic acquisitions and partnerships, we also expect to continue to return capital to our shareholders through a cash dividend program and our share repurchase program. We paid a first quarter of 2014 cash dividend of $0.12 per share on April 17, 2014 to stockholders of record on March 28, 2014. We expect the total value of quarterly cash dividend payments for fiscal 2014 to be $0.48 per share. While it is our intention to continue to

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pay quarterly cash dividends for the remainder of 2014 and beyond, 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.

On September 13, 2011, we announced a repurchase program had been approved by the Board of Directors (the "2011 Repurchase Plan"). Under this plan, we are authorized to repurchase up to $1.5 billion of common stock in both open market and privately negotiated transactions. The 2011 Repurchase Plan has no expiration date and may be suspended or discontinued at any time. In the first quarter of 2014, we spent $70.1 million to repurchase 5.7 million shares under the 2011 Repurchase Plan. As of May 3, 2014, we have spent a total of $1.01 billion to repurchase 73.7 million shares under the 2011 Repurchase Plan, and therefore, the remaining repurchase authorization was $492.4 million as of that date. We consider several factors in determining whether and when to execute share repurchases, including our current and projected operating results, capital expenditure requirements, acquisitions or other strategic initiatives, our capacity for leverage, cost of borrowings and the market price of our common stock.

Inflation and Seasonality

While neither inflation nor deflation has had, nor do we expect them to have, a material impact upon our consolidated operating results, we may see price increases in certain categories from time to time. Our business is somewhat seasonal, with sales and profitability historically higher during the second half of our fiscal year due to the back-to-school, holiday and January back-to-business seasons.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

At May 3, 2014, there had not been a material change in the interest rate and foreign exchange risk information disclosed in the “Quantitative and Qualitative Disclosures about Market Risks” subsection of Management’s Discussion and Analysis of Financial Condition and Results of Operations on page B-16 of our 2013 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated, as of May 3, 2014, the effectiveness of the Company’s disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of May 3, 2014, management, the chief executive officer and the chief financial officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level at that date.

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 Exchange Act) occurred during the fiscal quarter ended May 3, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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STAPLES, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in litigation arising from the operation of our business that is considered routine and incidental to our business. We do not believe the results of such litigation will have a material adverse effect on our business, results of operations or financial condition.

Item 1A. Risk Factors

If we fail to meet the changing needs of our customers our business and financial performance will be adversely affected.

We are currently engaged in a multi-year effort to evolve our business to meet the changing needs of our customers. One of our top priorities is to significantly expand our product and service offerings beyond traditional core office supplies, a category that is declining. Over the past few years we have had success driving growth in adjacent product categories, such as facilities and breakroom supplies and service offerings, such as our copy and print services. We are also enhancing our ecommerce platforms to provide easy-to-shop websites and increasing coordination between our online business with our retail stores. Our success is dependent on providing our customers the selection of products, as well as services, at competitive prices that meet customers' changing needs and purchasing habits. If we misjudge either the demand for products and services we sell or our customers' purchasing habits and tastes, we may be faced with excess inventories of some products or missed opportunities for products and services we do not offer. Failure to provide the products and services preferred by our customers could have a material adverse affect on our revenue, results of operations and ability to attract and retain customers.

We face uncertainties transforming our business, and our inability to successfully implement our strategies could adversely affect our business and financial performance.

As part of our continuing efforts to transform our business, we recently announced a plan to reduce costs by $500 million on an annualized basis by the end of fiscal year 2015. We also announced a plan to close up to 225 of our retail stores in North America by the end of 2015. The success of our plans is subject to both the risks affecting our business generally and the inherent difficulty associated with implementing our new strategies, and is also dependent on the skills, experience, and efforts of our management and other associates and our success with third parties. These plans are expected to result in material charges related to severance costs, lease obligations, asset impairments, and other associated costs. Additional charges may be required if we are unable to successfully implement our plans or if we adopt new strategies for the future. To the extent we pursue acquisitions or other operational and strategic opportunities, our success will depend on selecting the appropriate targets or partners, completing integration efforts quickly and effectively and realizing any expected synergies and cost savings. There is no assurance that we will be able to successfully implement these strategic initiatives or that the implementation of changes will result in the benefits or costs savings at the levels that we anticipate or at all, which may result in an adverse impact on our business and financial results.

We have recognized substantial goodwill impairment charges in the past and may be required to recognize additional goodwill impairment charges in the future.

At May 3, 2014, we had $3.3 billion of goodwill on our balance sheet. Certain factors, including consumer and business spending levels, industry and macroeconomic conditions, the price of our stock and the future profitability of our businesses might have a negative impact on the carrying value of our goodwill. We have recorded substantial goodwill impairment charges in the past and we are closely monitoring the goodwill balances related to our China and Australia reporting units. These reporting units have experienced challenging economic, industry and operating pressures, and if these pressures were to continue for a sustained period of time, this would increase the risk associated with their significant goodwill balances. Additionally, if our stock price were to experience a sustained and significant decline, we could incur impairment charges. The process of testing goodwill for impairment involves numerous judgments, assumptions and estimates made by management which inherently reflect a high degree of uncertainty. If the business climate deteriorates, if our plans change or if we fail to manage our restructuring activities successfully, then actual results may not be consistent with these judgments, assumptions and estimates, and our goodwill may become impaired in future periods. This could have an adverse impact on our financial position and results of operations.

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We operate in a highly competitive market and we may not be able to continue to compete successfully.

We compete with a variety of local, regional, national and international retailers and online and traditional retailers, dealers and distributors for customers, associates, locations, products, services, and other important aspects of our business. In most of our geographic markets, we compete with other high-volume office supply providers such as Office Depot and Lyreco, as well as mass merchants such as Wal-Mart, Target and Tesco, warehouse clubs such as Costco, computer and electronics retail stores such as Best Buy, specialty technology stores such as Apple, copy and print businesses such as FedEx Office, online retailers such as Amazon.com, and other discount retailers. We also compete with numerous mail order firms, contract stationer businesses, electronic commerce distributors, regional and local dealers and direct manufacturers. Some of our current and potential competitors are larger than we are, may have more experience in selling certain products or delivering services or may have substantially greater financial resources. Also, many of our competitors have increased their presence in our markets in recent years by expanding their assortment of office products and services, opening new stores near our existing stores, and offering direct delivery of office products. Intense competitive pressures from one or more of our competitors could affect prices or demand for our products and services. If we are unable to appropriately respond to these competitive pressures, or offer the appropriate mix of products and services at competitive prices, our financial performance and market share could be adversely affected.

Global economic conditions could adversely affect our business and financial performance.

As a world-class provider of products and services that serve the needs of business customers and consumers in 25 countries, our operating results and performance depend significantly on worldwide economic conditions and their impact on business and consumer spending. Increases in the levels of unemployment, particularly white collar unemployment, energy and commodity costs, health care costs, higher interest rates and taxes, a return to tighter credit markets, reduced consumer credit availability, fluctuation in the financial markets, lower consumer confidence, lack of small business formation and other factors could result in a decline in business and consumer spending. Our business and financial performance may continue to be adversely affected, and our ability to generate cash flow may be negatively impacted, by current and future economic conditions if there is a renewed decline in business and consumer spending or if such spending remains stagnant.

Our international operations expose us to risks inherent in foreign operations.

We currently operate in 24 countries outside the United States. In certain international market segments, we may not benefit from any first-to-market advantages or otherwise succeed. Cultural differences abroad and local practices of conducting business may conflict with our own business practices and ethics standards. Ensuring compliance with foreign and U.S. laws and our own policies may require that we implement new operational systems and financial controls, conduct audits or internal investigations, train our associates and third parties on our existing compliance methods, and take other actions, all of which may be expensive, divert management's time and impact our operations. There are also different employee/employer relationships and in some cases the existence of workers' councils that may delay or impact the implementation of some of these operational systems. In addition, differences in business practices in our international markets may cause customers to be less receptive to our business model than we expect.

Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences and greater difficulty in enforcing intellectual property rights. Other factors that may also have an adverse impact on our international operations include limitations on the repatriation and investment of funds, foreign currency exchange restrictions, complex import and export schemes, increased local competition, our lack of familiarity with local customer preferences, unfavorable foreign trade policies, unstable political or economic conditions, and geopolitical events, including war and terrorism.

Compromises of our information systems or unauthorized access to confidential information or personal information may materially harm our business or damage our reputation.

Through our sales and marketing activities and our business operations, we collect and store confidential information and certain personal information from our customers, vendors and associates. For example, we handle, collect and store personal information in connection with our customers purchasing products or services, enrolling in our promotional or rewards programs, registering on our web site or otherwise communicating or interacting with us. We also accept payments using a variety of methods, including debit and credit cards, gift cards, electronic transfer of funds, and others. We rely on third parties to provide payment processing services or make certain payments on our behalf. In addition, in the normal course of business, we gather and retain personal information about our associates and generate and have access to confidential business information. We may share confidential and personal information with vendors or other third parties in connection with processing of transactions, operating certain aspects of our business or for marketing purposes. Although we have taken steps designed to safeguard such information,

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there can be no assurance that such information will be protected against unauthorized access, use or disclosure. Computer hackers may penetrate our or our vendors' network security and, if successful, misappropriate such information. A Staples associate, contractor or other third-party with whom we do business may misuse confidential or personal information to which they have access; attempt to circumvent our security measures; or inadvertently cause a breach involving such information. Additionally, methods to obtain unauthorized access to confidential information change frequently and may be difficult to detect, which can impact our ability to respond appropriately. We could be subject to liability for failure to comply with privacy and information security laws, for failing to protect personal information, for failing to respond appropriately, or for misusing personal information, such as use of such information for an unauthorized marketing purpose. Loss, unauthorized access to, or misuse of confidential or personal information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on our business, financial condition and results of operations.

Our effective tax rate may fluctuate.

We are a multi-national, multi-channel provider of products and services. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. Our effective tax rate may be lower or higher than our tax rates have been in the past due to numerous factors, including the sources of our income, any agreements we may have with taxing authorities in various jurisdictions, changes in the laws and the tax filing positions we take in various jurisdictions. In addition, our effective tax rate may fluctuate quarterly, and the resulting tax rate may be negative or unusually high as a result of significant charges in a quarter that are not tax deductible, such as goodwill and long-lived asset impairment. We base our estimate of an effective tax rate at any given point in time upon a calculated mix of the tax rates applicable to our company and to estimates of the amount of business likely to be done in any given jurisdiction. The loss of one or more agreements with taxing jurisdictions, a change in the mix of our business from year to year and from country to country, changes in rules related to accounting for income taxes, adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, or changes in tax laws in any of the multiple jurisdictions in which we operate could result in an unfavorable change in our effective tax rate which could have an adverse effect on our business and results of our operations.

Fluctuations in foreign exchange rates could lead to lower earnings.

Sales from our delivery operations and stores outside the U.S. are denominated in the currency of the country in which these operations or stores are located and changes in foreign exchange rates affect the translation of the sales and earnings of these businesses into U.S. dollars for financial reporting purposes. Additionally, merchandising agreements may also be denominated in the currency of the country where the vendor resides. Although we attempt to mitigate such risks by sometimes entering into foreign exchange hedges or utilizing risk management strategies, such hedges and strategies themselves present some risk and thus may not be entirely successful in mitigating the risk.

We may be unable to attract, train, engage and retain qualified associates.

Our customers value courteous and knowledgeable associates to support customers across all channels. Accordingly, our performance depends on attracting, training, engaging and retaining a large number of qualified associates. We face intense competition for qualified associates, particularly in tight labor markets in emerging markets or in specialized areas of technical expertise. Many of our associates, particularly in retail stores, are in entry-level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling our labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the workforce, unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs and the cost of compliance with labor and wage laws and regulations. If we are unable to attract, train, engage and retain a sufficient number of qualified associates, our business and financial performance may be adversely affected.

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. Historically, sales and profitability are generally stronger in the second half of our fiscal year than the first half of our fiscal year due in part to back-to-school, holiday and back-to-business seasons. Factors that could also cause these quarterly fluctuations include: the mix of products sold; pricing actions of competitors; the level of advertising and promotional expenses; the expense and outcome of legal proceedings; severe weather; consumer confidence; and the other risk factors described in this section. Most of our operating expenses, such as occupancy costs and associate 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, we may not proportionately reduce operating expenses for that quarter, and therefore such a sales shortfall may have a disproportionate effect on our net income for the quarter.

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Our indebtedness could adversely affect us by reducing our flexibility to respond to changing business and economic conditions.

As of May 3, 2014, our consolidated outstanding debt was $1.2 billion and we also had $985.1 million of additional borrowing capacity under our commercial paper program, revolving credit facility and other lines of credit. We are not restricted from incurring substantial additional indebtedness in the future. Incurring substantial indebtedness in the future could reduce our ability to obtain additional financing for working capital, capital expenditures, acquisitions, and other general corporate purposes and could make us more vulnerable to economic downturns and economic pressures. Our level of indebtedness may also place us at a competitive disadvantage against less leveraged competitors. If we default or breach our obligations, we could be required to pay a higher rate of interest or lenders could require us to accelerate our repayment obligations. If we were to experience a credit rating downgrade in future periods, we may incur higher interest costs on future financings and it may limit our ability to participate in the commercial paper market.

Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to intellectual property liability, product liability, import/export liability, government investigations and claims, and other risks associated with global sourcing.

Our product offering includes Staples, Quill and other proprietary branded products and services, which represented approximately 28% of our sales in fiscal 2013 and which typically generate higher margins than national brand products and services. Our proprietary branded products compete with other manufacturers' branded items that we offer. An increase in our proprietary branded products and services also exposes us to added risks that could increase the cost of doing business, such as third party intellectual property infringement, false advertising, and product liability claims against us with respect to such products and services; and import and export compliance issues. Furthermore, although we have implemented policies and procedures designed to facilitate compliance with laws and regulations relating to importing merchandise from abroad, there can be no assurance that contractors, agents, vendors, manufacturers or other third parties with whom we do business will not violate such laws and regulations or our policies, which could subject us to liability and could adversely affect our operations or operating results. We also have greater exposure and responsibility to the consumer for replacements as a result of product defects. If any of our customers are harmed by our proprietary branded products or services, they may bring product liability and other claims against us or we may have to issue voluntary or mandatory recalls.

The more proprietary branded products and services we offer, the more these risks increase. A loss of consumer acceptance of these products could also adversely affect our sales and gross margin rates. Any of these circumstances could damage our reputation and have an adverse effect on our business and financial performance.

Problems in our information systems and technologies may disrupt our operations.

We rely heavily on various information systems and technology to sell and deliver our products and services and operate our business, including systems to track inventory, to process and record transactions, to generate financial reports and to communicate with our associates, vendors and customers. As we continue to accelerate our growth online, our ability to attract and retain customers, compete and operate effectively is dependent on a consistent, secure and easy to use technology infrastructure with reliable back-up systems. Any disruption to the internet or our technology infrastructure, including a disruption affecting our web sites and information systems, may cause a decline in our customer satisfaction, jeopardize accurate financial reporting, impact our sales volumes or result in increased costs. Hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly disrupt our operations or compromise our information security. Although we continue to invest in our technology, if we are unable to continually add software and hardware, effectively manage or upgrade our systems and network infrastructure, and develop effective system availability, disaster recovery plans and protection solutions, our business could be disrupted thus subjecting us to liability and potentially harming our reputation.

In addition, we periodically make modifications and upgrades to our information systems and technology. Some of our information systems are outsourced to third parties. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. Although we make a diligent effort to ensure that all providers of outsourced services observe proper internal control practices and procedures, we cannot assure that failures will not occur. We are aware of inherent risks associated with replacing our systems, including accurately capturing data, system disruptions and outsourcing to third parties. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.

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

The products we sell are sourced from a wide variety of third-party vendors and as we expand our assortment we rely on third parties to fulfill our customer orders and deliver products directly to our customers. In general, we do not have long-term contracts with our vendors or third parties committing them to provide products to us on acceptable terms. For example, we derive benefits from vendor allowances and promotional incentives which may not be offered in the future. We also cannot control the supply, design, function or cost of many of the products that we offer for sale. Some of the products we offer are supplied to us on an exclusive basis and may be difficult to replace in a timely manner. Additionally, third parties may not live up to the delivery promises they have made to our customers. Disruptions in the availability of products or services purchased through third parties, or quality issues that cause us to initiate voluntary or mandatory recalls for proprietary products we sell, may result in customer dissatisfaction, damage our reputation and adversely affect our sales.

Global sourcing of many of the products we sell is an important factor in our financial performance. Our ability 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, trade restrictions, tariffs, foreign currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control. We also rely upon many independent service providers for services that are important to many aspects of our business. If our service providers fail or are unable to perform as expected and we are unable to replace them quickly, our business could be harmed at least temporarily until we are able to do so and potentially, in some cases, permanently. These and other issues could adversely affect our reputation, business and financial performance.

Various legal proceedings may adversely affect our business and financial performance.

We are involved in various private legal proceedings, which include consumer, employment, intellectual property, commercial, tort and other litigation. We are subject to potentially increasing challenges by private litigants regarding compliance with local, state and national labor regulations, whether meritorious or not. In addition, companies have increasingly been subject to employment related class action litigation, and we have experienced “wage and hour” class action lawsuits. We expect that these trends will continue to affect us. We are also subject to claims that the technology we use or the products we sell infringe intellectual property rights of third parties. Such claims, whether meritorious or not, involve significant managerial resources and can become costly. Generally, we have indemnification protections in our agreements which our vendors or licensors often have honored; however, there are no assurances that such vendors or licensors will continue to do so in the future. We estimate exposure and establish reserves for our estimated significant liabilities, however, litigation is inherently unpredictable and the outcome of legal proceedings and other contingencies could be unexpected. Some verdicts or decisions may not be reasonable or based on law or prior precedent, in which case we will vigorously contest and appeal such decisions. Other outcomes may require us to pay substantial amounts of money or take actions that adversely affect our operations. In addition, defending against these claims may involve significant time and expense. Given the large size of our operations and workforce, the visibility of our brand and our position as an industry leader, we may regularly be involved in legal proceedings that could adversely affect our business and financial performance.

Failure to comply with laws, rules and regulations could negatively affect our business operations and financial performance.

Our business is subject to federal, state, local and international laws, rules and regulations, such as state and local wage and hour laws, the U.S. Foreign Corrupt Practices Act, the False Claims Act, the Employee Retirement Income Security Act (“ERISA”), securities laws, import and export laws (including customs regulations), privacy and information security regulations, unclaimed property laws, and many others. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to legal and regulatory requirements, increased enforcement and our ongoing expansion into new markets and new channels. In addition, as a result of operating in multiple countries, we must comply with multiple foreign laws and regulations that may differ substantially from country to country and may conflict with corresponding U.S. laws and regulations. We may also be subject to investigations or audits by governmental authorities and regulatory agencies, which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an industry, country or practice. If we fail to comply with laws, rules and regulations or the manner in which they are interpreted or applied, we may be subject to government enforcement action, class action litigation or other litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of regulatory compliance, any of which could adversely affect our results of operations and financial performance.

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

The following table provides information about our purchases of our common stock during the first quarter of fiscal 2014:



Fiscal Period	Total Number of Shares Purchased(1)	Average Price Paid per Share (2)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (3)
February 2, 2014 - March 1, 2014	2,420,457	$	13.19	2,420,457	$	530,555,000
March 2, 2014 - April 5, 2014	2,964,411	11.76		2,931,959	496,066,000
April 6, 2014 - May 3, 2014	299,525	12.20		299,525	492,412,000
Total for the first quarter of 2014	5,684,393	$	12.40	5,651,941	$	492,412,000

____________________________________________


(1)	Includes a total of 32,452 shares of our common stock withheld during the first quarter of our 2014 fiscal year to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards granted pursuant to our equity incentive plans.


(2)	Average price paid per share includes commissions paid in connection with our publicly announced share repurchase program and is rounded to the nearest two decimal places.


(3)	On September 13, 2011, we announced that our Board of Directors approved the repurchase of up to $1.5 billion of common stock in both open market and privately negotiated transactions. Our repurchase program has no expiration date and may be suspended or discontinued at any time.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

The exhibits listed on the Exhibit Index immediately preceding such exhibits, which is incorporated herein by reference, are filed or furnished as part of this Quarterly Report on Form 10-Q.

Table of Contents

SIGNATURE

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



			STAPLES, INC.


Date:	May 20, 2014	By:	/s/ STEPHEN BACICA
			Stephen Bacica
			Senior Vice President and Corporate Controller
			(Principal Accounting Officer)

		By:	/s/ CHRISTINE T. KOMOLA
			Christine T. Komola
			Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)

Table of Contents

EXHIBIT INDEX



Exhibit No.		Description
31.1+		Principal Executive Officer – Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+		Principal Financial Officer – Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1++		Principal Executive Officer – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2++		Principal Financial Officer – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS+		XBRL Instance Document.
101.SCH+		XBRL Taxonomy Extension Schema Document.
101.CAL+		XBRL Taxonomy Calculation Linkbase Document.
101.DEF+		XBRL Taxonomy Definition Linkbase Document.
101.LAB+		XBRL Taxonomy Label Linkbase Document.
101.PRE+		XBRL Taxonomy Presentation Linkbase Document.

____________________________________________



+	Filed herewith.

+ +	Furnished herewith.

Attached as Exhibits 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended May 3, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes to these financial statements tagged in detail.