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. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management's beliefs and assumptions, and should be read in conjunction with our condensed consolidated financial statements and notes to condensed consolidated financial statements included in this report. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in the forward-looking statements made. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, without limitation, those set forth 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.

Acquisition of Corporate Express

In July 2008, we acquired Corporate Express N.V. ("Corporate Express"), a Dutch office products distributor with operations in North America, Europe and Australia, through a tender offer for all of its outstanding capital stock.

At the time the tender offer was fully settled on July 23, 2008, we had acquired more than 99% of the outstanding capital stock of Corporate Express. We intend by the end of fiscal year 2009 to acquire the remaining capital of Corporate Express by means of a compulsory acquisition procedure in accordance with the Dutch Civil Code. In July 2008, we also acquired, and subsequently paid off, all of the outstanding 8.25% Senior Subordinated Notes due July 1, 2014 and all of the outstanding 7.875% Senior Subordinated Notes due March 1, 2015 of Corporate Express U.S. Finance Inc., a wholly owned subsidiary of Corporate Express. The aggregate cash purchase price for the capital stock of Corporate Express and for the repayment of most of Corporate Express' debt was 2.8 billion Euros (approximately $4.4 billion, net of cash acquired).

The operating results of Corporate Express have been included in our consolidated financial statements since July 2, 2008, the date we declared the terms of the tender offer unconditional. The Corporate Express results are reported in our North American Delivery and International Operations for segment reporting.

We allocated assets of $3.48 billion, $3.47 billion and $283.8 million to the North American Delivery, International Operations and North American Retail segments, respectively. Included in total assets were goodwill and intangible assets totaling $3.55 billion, of which $1.71 billion, $1.55 billion and $283.8 million were allocated to the North American Delivery, International Operations and North American Retail segments, respectively.

Results of Operations

We have provided below an overview of our operating results as well as a summary of our consolidated performance and details of our segment performance. As previously announced in the first quarter of 2009, because of the progress of the integration of the two businesses and the difficulty in accurately isolating the impact of Corporate Express operations on our business, we are no longer providing detailed financial information or any related discussion of our business after removing the impact of the Corporate Express business.

Overview

Our consolidated sales increased 9.0% for the second quarter of 2009, driven by sales derived from our acquisition of Corporate Express. Major contributors to our results for the second quarter of 2009 (compared to the results for the second quarter of 2008) are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:

† On a consolidated basis, we generated $5.53 billion in sales, with sales growth of 9.0%.

† North American Delivery sales grew 18.2%, including the impact of our acquisition of Corporate Express. Business unit income rate declined to 8.0% from 8.8%, primarily as a result of including the lower margin Corporate Express business.

† North American Retail's comparable store sales declined 5%, and business unit income rate decreased slightly to 5.2% from 5.3%, as deleverage in fixed occupancy costs and labor driven by negative comparable store sales were partially offset by increased product margin rates and our ongoing focus on expense control.

† International Operations' sales grew 21.2% and 31.9% in local currency, including the impact of our acquisition of Corporate Express. Business unit income rate decreased to 0.3% from 1.5%.

† We now operate 2,255 stores worldwide, with a net addition of 9 stores during the second quarter of 2009.

† Year to date operating cash flow increased to $698 million from $188 million in 2008.

While maintaining our focus on expense control, we are also continuing to invest in new strategic initiatives to drive our long term success. These strategic initiatives include:

† Continued differentiation through the expansion of our own brand product line;

† Cross-channel initiatives to encourage customers to spend more overall by shopping both Staples' retail and delivery channels;

† "Share of wallet" initiatives to sell a broader array of non-core office products to our customers, including cleaning and break room supplies, copy and print services and promotional products; and

† Retail initiatives to drive sales, including increasing our focus on technology products and services, boosting sales of high margin copy and print services and other key categories such as ink and toner.

We view customer service as a key component of our long-term success. For our customer service programs, our North American and European delivery businesses have focused on the "Perfect Order" program to improve product availability, ensure accuracy of orders, improve warehouse performance and productivity of our delivery trucks, and reduce product returns, resulting in fewer trips per order and higher customer satisfaction and retention. In our North American Retail business, our selling models are designed to train associates to provide solutions for small business customers and drive attachment selling, while also rewarding store associates who provide great customer service.

Outlook

The global recession has reduced demand for office products While we expect sales and earnings to continue to be negatively impacted in the near term, we have been able to partially offset these declines through our customer service, customer retention and acquisition efforts, expense management and focused integration of Corporate Express. We will endeavor to provide as much transparency as possible; however, as a result of the difficulty in forecasting sales in the current environment, we will not provide specific sales and earnings guidance for fiscal year 2009. To the extent we have clear visibility, we will provide guidance on factors that will influence profitability, such as anticipated synergies from the Corporate Express integration, integration and restructuring expense, depreciation expense, amortization of intangibles and net interest expense. We expect the following:

† Corporate Express integration synergies building to $300 million annually over a three year integration period;

†          Integration and restructuring expense of $90 million to $110 million
for 2009;

†          Depreciation expense of $430 million to $440 million for 2009;

†          Amortization of intangibles of $100 million to $110 million for 2009;
and

†          Net interest expense of $235 million to $245 million for 2009.

Consolidated Performance

Net income attributed to Staples, Inc. for the second quarter of 2009 was $92.4 million or $0.13 per diluted share compared to $150.2 million or $0.21 per diluted share for 2008. Net income for the first half of 2009 was $235.4 million or

$0.33 per diluted share compared to $362.5 million or $0.51 per diluted share for the first half of 2008. Our results for the second quarter and the first half of 2009 include the results of the Corporate Express business, which was acquired on July 2, 2008. Our results for the second quarter and the first half of 2009 also include integration and restructuring costs of $19.4 million, net of taxes ($0.03 per diluted share) and $31.9 million, net of taxes ($0.04 per diluted share), respectively.

Our results reflect our continued focus on our strategy of driving profitable sales growth, improving profit margins and increasing asset productivity. We continue to work to deliver on our "Easy" brand promise to make buying office products easy for our customers in order to differentiate us from our competitors. Our commitment to customer service, customer acquisition and retention efforts, reducing expenses, and managing working capital and capital spending were key contributors to sustaining our performance during the second quarter of 2009, despite the negative impact of a weakened economy on our customers and our organic sales growth.

Sales: Sales for the second quarter of 2009 were $5.53 billion, an increase of 9.0% from the second quarter of 2008. Sales for the first half of 2009 were $11.35 billion, an increase of 14.0% from the first half of 2008. Our sales growth for the second quarter of 2009 and first half of 2009 is mainly attributed to our acquisition of Corporate Express. The sales growth for the second quarter and first half of 2009 was partially offset by the following three factors, in order of magnitude: lower sales to existing customers in our North American Delivery and International Operations businesses; the negative impact of foreign exchange rates of $164.6 million for the second quarter and $394.6 million for the first half of 2009; and a decrease in comparable store sales in our retail businesses driven by lower average order size.

Gross Profit: Gross profit as a percentage of sales was 25.7% for the second quarter of 2009 and 26.0% for the first half of 2009 compared to 26.6% for the second quarter of 2008 and 27.3% for the first half of 2008. The decrease in gross profit rate for the second quarter and first half of 2009 was primarily driven by the inclusion of the results of Corporate Express, whose gross profit rate was lower than our pre-existing businesses and, to a lesser extent, deleverage in fixed occupancy costs in our North American Retail business. These decreases were partially offset by increased buying synergies in all of our businesses. In addition, the first half of 2009 also benefited from improved product margin rates in North American Retail.

Selling, General and Administrative Expenses: Selling, general and administrative expenses were 21.0% of sales for the second quarter and 20.8% for the first half of 2009 compared to 21.5% for both the second quarter and the first half of 2008. The decrease in selling, general and administrative expenses as a percentage of sales for the second quarter and first half of 2009 was primarily driven by the inclusion of the results of Corporate Express, whose selling, general and administrative expense rate was lower than our pre-existing businesses. The decrease also reflects reduced marketing expenses which were partially offset by deleverage in labor in all of our businesses. Our results continue to reflect our ongoing focus on expense control.

Integration and Restructuring Costs: Integration and restructuring costs represent the costs associated with the integration of the acquired Corporate Express business with our pre-existing business and the consolidation of certain operations of the combined company. Integration and restructuring costs were $29.6 million for the second quarter of 2009 and $48.6 million for the first half of 2009 compared to $0.2 million for the second quarter and first half of 2008. Integration and restructuring costs for the second quarter of 2009 included a $20.7 million charge for severance and retention and $8.9 million of consulting and other fees. Integration and restructuring costs for the first half of 2009 include a $22.9 million charge for severance and retention, $14.0 million of consulting and other costs, and an $11.7 million charge related to asset write-downs for assets whose use was expected to be limited as a result of the acquisition. Integration and restructuring costs for the second quarter and first half of 2008 consisted primarily of consulting and other costs.

Amortization of Intangibles:Amortization of intangibles was $26.6 million for the second quarter of 2009 and $48.5 million for the first half of 2009 compared to $14.3 million for the second quarter of 2008 and $18.4 million for the first half of 2008, reflecting the amortization of certain trade names, customer relationships and non-competition agreements. Amortization expense relating to intangibles resulting from our acquisition of Corporate Express was $18.7 million and $32.8 million for the second quarter and first half of 2009, respectively, compared to $8.6 million for the second quarter and first half of 2008.

Interest Income: Interest income decreased to $1.3 million in the second quarter of 2009 and $3.0 million for the first half of 2009 from $6.3 million for the second quarter of 2008 and $17.8 million for the first half of 2008. The decrease in interest income for the second quarter and first half of 2009 is primarily due to a decrease in our average cash balance resulting from the use of cash to acquire Corporate Express.

Interest Expense: Interest expense increased to $60.9 million for the second quarter of 2009 and $121.4 million for the first half of 2009 from $21.2 million for the second quarter of 2008 and $28.4 million for the first half of 2008. The increase in interest expense for 2009 is primarily due to borrowings under our January 2009 Notes, our March 2009 Notes, our commercial paper program, our Revolving Credit Facility and our 2008 Agreement (each as defined in "Sources of Liquidity") relating to our acquisition of Corporate Express. We use interest rate swap agreements to convert a portion of our fixed rate debt obligations into variable rate obligations and a portion of our variable rate obligations into fixed rate obligations. Excluding the impact of our interest rate swap agreements, interest expense would have been $62.9 million for the second quarter of 2009 and $124.4 million for the first half of 2009 compared to $22.4 million for the second quarter of 2008 and $29.7 million for the first half of 2008.

Miscellaneous Income (Expense): Miscellaneous income was $1.4 million for the second quarter of 2009 and miscellaneous expense was $2.3 million for the first half of 2009. Miscellaneous expense was $0.6 million for the second quarter of 2008 and $0.4 million for the first half of 2008. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.

Income Taxes: Our effective tax rate was 34.5% for the second quarter and first half of 2009 compared to 33.8% for the second quarter of 2008 and 34.5% for the first half of 2008. The lower effective tax rate for the second quarter of 2008 was the result of the acquisition of Corporate Express and changes in the geographical mix of earnings, which caused our annual effective tax rate to decrease from the 35.0% reported in the first quarter of 2008 to 34.5%. We expect our effective tax rate for 2009 to be consistent with the 34.5% reported for the full year 2008.

Segment Performance

Our business is comprised of three segments: North American Delivery, North American Retail and International Operations. Our North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Contract (including Corporate Express), Staples Business Delivery and Quill. The North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The International Operations segment consists of business units that operate office products stores and that sell and deliver office products and services directly to customers and businesses in 25 countries in Europe, Asia, Australia and South America.

The following tables provide a summary of our sales and business unit income by reportable segment. Business unit income excludes integration and restructuring costs, stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles (see reconciliation of total segment income to consolidated income before taxes in Note K in the Notes to the Condensed Consolidated Financial Statements):

                                                                           August 1, 2009    August 2, 2008
                                                                              Increase          Increase
                                          (Amounts in thousands)             (Decrease)        (Decrease)
                                              13 Weeks Ended                 From Prior        From Prior
                                    August 1, 2009      August 2, 2008          Year              Year
Sales:
North American Delivery            $      2,322,850    $      1,965,801              18.2 %            24.7 %
North American Retail                     1,973,268           2,087,863              (5.5 )%           (1.1 )%
International Operations                  1,237,661           1,021,056              21.2 %            69.5 %
Total Segment Sales                $      5,533,779    $      5,074,720               9.0 %            18.3 %




                                          (Amounts in thousands)
                                              13 Weeks Ended               August 1, 2009    August 2, 2008
                                    August 1, 2009      August 2, 2008       % of Sales        % of Sales
Business Unit Income:
North American Delivery            $        184,922    $        173,555               8.0 %             8.8 %
North American Retail                       102,771             110,542               5.2 %             5.3 %
International Operations                      3,741              14,917               0.3 %             1.5 %
Business Unit Income                        291,434             299,014               5.3 %             5.9 %
Stock-based compensation                    (55,221 )           (53,435 )            (1.0 )%           (1.1 )%
Segment Income                     $        236,213    $        245,579               4.3 %             4.8 %




                                                                           August 1, 2009    August 2, 2008
                                                                              Increase          Increase
                                          (Amounts in thousands)             (Decrease)        (Decrease)
                                              26 Weeks Ended                    From              From
                                    August 1, 2009      August 2, 2008       Prior Year        Prior Year
Sales:
North American Delivery            $      4,741,208    $      3,686,292              28.6 %            16.3 %
North American Retail                     4,161,603           4,496,364              (7.4 )%            0.5 %
International Operations                  2,448,527           1,776,618              37.8 %            43.8 %
Total Segment Sales                $     11,351,338    $      9,959,274              14.0 %            12.2 %

                                     (Amounts in thousands)
                                         26 Weeks Ended               August 1, 2009    August 2, 2008
                               August 1, 2009      August 2, 2008       % of Sales        % of Sales
Business Unit Income:
North American Delivery       $        345,551    $        336,817               7.3 %             9.1 %
North American Retail                  263,222             278,784               6.3 %             6.2 %
International Operations                23,859              38,740               1.0 %             2.2 %
Business Unit Income                   632,632             654,341               5.6 %             6.6 %
Stock-based compensation               (90,558 )           (86,797 )            (0.8 )%           (0.9 )%
Segment Income                $        542,074    $        567,544               4.8 %             5.7 %

North American Delivery: Sales increased 18.2% for the second quarter of 2009 and 28.6% for the first half of 2009 compared to the second quarter and first half of 2008. The increase in sales for the second quarter and first half of 2009 was the result of non-comparable sales from our acquisition of Corporate Express and, to a much lesser extent, the impact of our customer acquisition and retention efforts, which was more than offset by lower spend from existing customers.

Business unit income as a percentage of sales was 8.0% for the second quarter of 2009 and 7.3% for the first half of 2009 compared to 8.8% for the second quarter and 9.1% for the first half of 2008. The decrease in business unit income as a percentage of sales for the second quarter and first half of 2009 was primarily due to the inclusion of the results of Corporate Express, whose business unit income rate was lower than our pre-existing business. The decrease also reflects an unfavorable product mix as customers purchased fewer discretionary products with higher margins and, to a lesser extent, deleverage in fixed expenses. The decrease in business unit income was partially offset by improvements in supply chain productivity, buying synergies and, to a lesser extent, reduced marketing expense.

North American Retail: Sales decreased 5.5% for the second quarter of 2009 and 7.4% for the first half of 2009. The decrease in sales for the second quarter and first half of 2009 was driven by a 5% and 7% decrease, respectively, in comparable stores sales, primarily reflecting lower average order size for the second quarter and first half of 2009 and the negative impact of foreign exchange rates of $47.8 million and $147.7 million for the second quarter and first half of 2009, respectively. These declines were partially offset by non-comparable sales for new stores opened in the past twelve months. Our comparable store sales decrease for the second quarter of and first half of 2009 reflects a significant decline in the sales of non-consumable products, including business machines, furniture and software. This decrease in comparable store sales also reflects a modest decline in consumables, which was driven by core office supplies, slightly offset by positive performance in technology services and ink and toner.

Business unit income as a percentage of sales decreased to 5.2% for the second quarter of 2009 from 5.3% for the second quarter of 2008 and increased to 6.3% for the first half of 2009 from 6.2% for the first half of 2008. The slight decrease in business unit income as a percentage of sales for the second quarter of 2009 primarily reflects deleverage in fixed occupancy costs and, to a lesser extent, labor offset by increased product margin rates and our focus on expense control. The slight increase in business unit income as a percentage of sales for the first half of 2009 primarily reflects increased product margin rates and, to a lesser extent, reduced marketing spend and our focus on expense control, partially offset by fixed occupancy costs and, to a lesser extent, labor.

International Operations: Sales increased 21.2% for the second quarter of 2009 and 37.8% for the first half of 2009. The increase for the second quarter and first half of 2009 was the result of non-comparable sales from our acquisition of Corporate Express. This increase was partially offset by lower sales in our pre-existing delivery businesses, the negative impact of foreign exchange rates of $109.4 million for the second quarter and $225.7 million for the first half of 2009 and, to a much lesser extent, a decrease in comparable store sales in Europe of 3% for the second quarter and 9% for the first half of 2009.

Business unit income as a percentage of sales decreased to 0.3% for the second quarter of 2009 and to 1.0% for the first half of 2009 from 1.5% for the second quarter of 2008 and 2.2% for the first half of 2008. The decrease in business unit income for the second quarter and first half of 2009 reflects deleverage of fixed expenses on lower sales volume, increased losses in our China operations, amortization expense associated with the acquisition of Corporate Express and a decrease in product margin rates in our European Catalog businesses. This decrease was partially offset by the inclusion of Corporate Express whose business unit income is higher than our pre-existing businesses and, to a lesser extent, reduced marketing expense and our focus on expense control.

Stock-Based Compensation: Stock-based compensation increased to $55.2 million for the second quarter of 2009 and $90.6 million for the first half of 2009 from $53.4 million for the second quarter of 2008 and $86.8 million for the first half of 2008. Stock-based compensation includes expenses associated with our employee stock purchase plans and the issuance of stock options, restricted shares and performance share awards.

Critical Accounting Policies and Significant Estimates

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make significant judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2008 Annual Report on Form 10-K, filed on March 11, 2009, in Note A of the Notes to the Consolidated Financial Statements and in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no material . . .