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SPLS > SEC Filings for SPLS > Form 10-Q on 15-Nov-2011All Recent SEC Filings

Show all filings for STAPLES INC

Form 10-Q for STAPLES INC


15-Nov-2011

Quarterly Report


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.

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. Net income is presented in our Consolidated Performance, in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and as adjusted for certain items as noted in the reconciliation tables below. Management uses non-GAAP adjusted net income, among other standards, to measure operating performance. We have added this information because we believe it helps in understanding the results of our operations on a comparative basis. This adjusted information supplements and is not intended to replace performance measures required by U.S. GAAP disclosure.

Overview

Major contributors to our third quarter of 2011 results, as compared to the results for the third quarter of 2010, are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:

On a consolidated basis, we generated $6.6 billion in sales, with sales growth of 0.5%;

North American Delivery's sales increased 1.8%, and business unit income rate increased to 9.5% from 8.9%;

North American Retail's sales increased 0.5%, comparable store sales decreased 1% and business unit income rate increased to 10.7% from 10.6%;

International Operations' sales decreased 1.9%, including the favorable impact of foreign exchange rates, and business unit income rate decreased to 3.0% from 4.3%; and

Our quarterly income tax rate was 33.5% compared to 37.5%.

We continue to invest in strategic initiatives to drive our long-term success, including technology products and services, copy and print services and facility and breakroom supplies, while maintaining our focus on customer service and expense control. Our results for the third quarter of 2011 reflect our investments in these initiatives.

Outlook

For the fourth quarter of 2011, we expect to achieve flat to low single-digit sales growth compared to the same period of 2010, resulting in expected diluted earnings per share on a U.S. GAAP basis in the range of $0.39 to $0.43. For the full year 2011, we expect sales to increase in the low single-digits compared to 2010, resulting in expected diluted earnings per share on a U.S. GAAP basis in the range of $1.38 to $1.42. Excluding the tax refund recorded in the second quarter of 2011 of approximately


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$21 million, or $0.03 per share, we expect to achieve adjusted diluted earnings per share for the full year in the range of $1.35 to $1.39. Staples anticipates its effective tax rate for the full year will be 34%, excluding the second quarter tax refund.

Consolidated Performance

Net income attributed to Staples, Inc. for the third quarter of 2011 was $326.4 million or $0.47 per diluted share compared to $288.7 million or $0.40 per diluted share for the third quarter of 2010. Net income attributed to Staples, Inc. for year-to-date 2011 was $701.1 million or $0.99 per diluted share compared to $607.2 million or $0.83 per diluted share for year-to-date 2010. Our results for year-to-date 2011 include the receipt of a second quarter refund from the Italian government related to an overpayment of income taxes in previous years. Our results for the third quarter of 2010 and year-to-date 2010 include integration and restructuring costs. A reconciliation of net income adjusted to remove the integration and restructuring costs, net of taxes and the 2011 tax refund, is shown below (amounts in thousands, except for per share data):

                                                   13 Weeks Ended                                                        39 Weeks Ended
                                October 29, 2011                    October 30, 2010                  October 29, 2011                  October 30, 2010
                                           Per  Diluted                        Per  Diluted                     Per  Diluted                       Per  Diluted
                          Net income          Share           Net income          Share          Net income        Share          Net income          Share
Net income as reported  $    326,380     $         0.47     $    288,680     $         0.40     $  701,063     $      0.99      $    607,206     $         0.83
Adjustments, net of
taxes:
Integration and
restructuring costs
(1)(2)                             -                  -            5,637               0.01              -               -            32,216               0.05
Tax refund                         -                  -                -                  -        (20,800 )         (0.03 )               -                  -
Non-GAAP adjusted net
income                  $    326,380     $         0.47     $    294,317     $         0.41     $  680,263     $      0.96      $    639,422     $         0.88


__________________________________________


(1) The tax effect of the 2010 adjustment is based on an effective tax rate of 37.5%.

(2) See Note A in the Notes to the Condensed Consolidated Financial Statements.

Third Quarter of 2011 Compared to the Third Quarter of 2010

Sales: Sales for the third quarter of 2011 were $6.6 billion, an increase of 0.5% from the third quarter of 2010. Our sales growth for the third quarter of 2011 reflects the positive impact of foreign exchange rates of $95.2 million and, to a lesser extent, growth in our North American Delivery business, partially offset by a decrease in comparable store sales in our International and North American retail businesses.

Gross Profit: Gross profit as a percentage of sales was 27.9% for the third quarter of 2011 compared to 27.6% for the third quarter of 2010. The increase in gross profit rate for 2011 was primarily the result of improved product margins, offset by deleverage in supply chain costs, driven by higher fuel costs.

Selling, General and Administrative Expenses: Selling, general and administrative expenses were 19.5% of sales for the third quarter of 2011 compared to 19.3% of sales for the third quarter of 2010. This increase reflects investments in labor to support growth initiatives and deleverage of international fixed costs, partially offset by lower depreciation.

Amortization of Intangibles: Amortization of intangibles was $16.0 million for the third quarter of 2011 compared to $15.6 million for the third quarter of 2010, primarily reflecting the amortization of Corporate Express related tradenames, customer relationships and noncompetition agreements. Amortization of intangibles resulting from our acquisition of Corporate Express was $13.0 million for the third quarter of 2011 and $12.6 million for the third quarter of 2010.

Interest Income: Interest income was $1.8 million for the third quarter of 2011 compared to $2.0 million for the third quarter of 2010. The decrease in interest income for the third quarter of 2011 was primarily due to a decrease in our worldwide weighted average cash balances, partially offset by an increase in foreign interest rates.

Interest Expense: Interest expense decreased to $41.0 million for the third quarter of 2011 from $52.8 million for the third quarter of 2010. This decrease was primarily due to a reduction in debt balances resulting from the repayment of the $500 million, 7.75% Notes (the "April 2011 Notes") on April 1, 2011 and the paydown and refinancing of foreign debt and liquidity facilities. Our interest rate swap agreements that were terminated in September 2011 reduced interest expense by $6.2 million for the third


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quarter of 2011 compared to $6.9 million for the third quarter of 2010.

Other Expense: Other expense was $3.7 million for the third quarter of 2011 compared to $1.8 million for the third quarter of 2010. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.

Income Taxes: Our tax rate was 33.5% for the third quarter of 2011 compared to 37.5% for the third quarter of 2010. The decrease in the tax rate from the third quarter of 2010 to the third quarter of 2011 was primarily due to the enactment of The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act in the fourth quarter of fiscal 2010, which extended certain provisions in the Internal Revenue Code allowing for the deferral of United States income tax on certain unremitted foreign earnings.

Our effective tax rate in any year is impacted by the geographic mix of earnings. The earnings generated primarily by our entities in Australia, Canada, Hong Kong and the Netherlands contributed to the foreign tax rate differential impacting the effective tax rate. As a result, our estimated effective tax rate applicable to results from continuing operations decreased from 34.5% to 34% for fiscal 2011.

Year-to-date 2011 Compared to Year-to-date 2010

Sales: Sales for year-to-date 2011 were $18.6 billion, an increase of 2.4% from year-to-date 2010. Our sales growth for year-to-date 2011 reflects the positive impact of foreign exchange rates of $436.6 million and, to a lesser extent, growth in our North American Delivery business, partially offset by a decrease in comparable store sales in our International and North American retail businesses.

Gross Profit: Gross profit as a percentage of sales was 27.0% for year-to-date 2011 compared to 26.9% for year-to-date 2010. The increase in gross profit rate for 2011 was primarily the result of improvements in North American Retail product margins, partially offset by deleverage in supply chain costs, driven by higher fuel costs.

Selling, General and Administrative Expenses: Selling, general and administrative expenses were 20.5% of sales for year-to-date 2011 compared to 20.1% of sales for year-to-date 2010. This increase reflects investments in labor and marketing to support growth initiatives and strengthen brand awareness and deleverage of international fixed costs, partially offset by lower depreciation.

Amortization of Intangibles: Amortization of intangibles was $49.4 million for year-to-date 2011 compared to $45.9 million for year-to-date 2010, primarily reflecting the amortization of Corporate Express related tradenames, customer relationships and noncompetition agreements. Amortization of intangibles resulting from our acquisition of Corporate Express was $40.5 million for year-to-date 2011 and $37.5 million for year-to-date 2010.

Interest Income: Interest income was $5.8 million for year-to-date 2011 compared to $5.7 million for year-to-date 2010. The increase in interest income for year-to-date 2011 was primarily due to an increase in foreign interest rates, offset by a decrease in worldwide weighted average cash balances and a slight decrease in U.S. interest rates.

Interest Expense: Interest expense decreased to $131.6 million for year-to-date 2011 from $161.4 million for year-to-date 2010. This decrease was primarily due to a reduction in debt balances resulting from the repayment of the April 2011 Notes, the paydown and refinancing of certain debt and liquidity facilities and the positive impact of our interest rate swap agreements. Our interest rate swap agreements reduced interest expense by $20.4 million for year-to-date 2011 compared to $18.1 million for year-to-date 2010.

Other Expense: Other expense was $4.2 million for year-to-date 2011 compared to $7.1 million for year-to-date 2010. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.

Income Taxes: Our tax rate was 32.0% for year-to-date 2011 compared to 37.5% for year-to-date 2010. The decrease in the tax rate from year-to-date 2010 to year-to-date 2011 was primarily due to the enactment of The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act in the fourth quarter of fiscal 2010, which extended certain provisions in the Internal Revenue Code allowing for the deferral of United States income tax on certain unremitted foreign earnings. Year-to-date 2011 also included a tax benefit of $20.8 million related to a refund due to Corporate Express from the Italian government that was previously deemed uncollectible, which was recorded as a discrete item. Our effective tax rate applicable to results from continuing operations for year-to-date 2011, excluding the impact of discrete items, is 34%.

Our effective tax rate in any year is impacted by the geographic mix of earnings. The earnings generated primarily by our


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entities in Australia, Canada, Hong Kong and the Netherlands contributed to the foreign tax rate differential impacting the effective tax rate.

Segment Performance

We have three reportable segments: North American Delivery, North American Retail and International Operations. Our North American Delivery segment consists of the U.S. and Canadian businesses that sell and deliver office products and services directly to customers and businesses and includes Staples Advantage, Staples.com and Quill.com. Our North American Retail segment consists of the U.S. and Canadian businesses that operate stores that sell office products and services. Our International Operations segment consists of businesses that operate stores and that sell and deliver office products and services directly to customers and businesses in 24 countries in Europe, Australia, South America and Asia.

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 business unit income to consolidated income before taxes in Note K in the Notes to the Condensed Consolidated Financial Statements).

Third Quarter of 2011 Compared to the Third Quarter of 2010

The following tables provide a summary of our sales and business unit income by
reportable segment for the third quarter of 2011 and 2010:

                                                                              October 29, 2011      October 30, 2010

                                            (Amounts in thousands)
                                                                                  Increase
                                                13 Weeks Ended                   (Decrease)       Increase (Decrease)
                                                             October 30,            From                  From
                                       October 29, 2011          2010            Prior Year            Prior Year
Sales:
North American Delivery              $        2,582,729     $  2,537,094             1.8  %                 2.5  %
North American Retail                         2,656,612        2,644,347             0.5  %                 0.6  %
International Operations                      1,330,586        1,356,235            (1.9 )%                (4.1 )%
Total segment sales                  $        6,569,927     $  6,537,676             0.5  %                 0.3  %



                                              (Amounts in thousands)
                                                  13 Weeks Ended                  October 29, 2011     October 30, 2010
                                      October 29, 2011      October 30, 2010         % of Sales           % of Sales
Business Unit Income:
North American Delivery              $     244,997         $         224,613               9.5 %                8.9 %
North American Retail                      284,204                   279,640              10.7 %               10.6 %
International Operations                    39,589                    58,771               3.0 %                4.3 %
Business unit income                 $     568,790         $         563,024               8.7 %                8.6 %

North American Delivery: Sales increased 1.8% for the third quarter of 2011. This increase was driven by organic sales growth, our fourth quarter 2010 Print South acquisition and, to a lesser extent, the positive impact of foreign exchange rates of $6.1 million. Our sales growth was favorably impacted by an increase in facilities and breakroom supplies, promotional products, tablets, laptops and computer accessories. This growth was partially offset by softness in paper.

Business unit income as a percentage of sales increased to 9.5% for the third quarter of 2011 from 8.9% for the third quarter of 2010, driven by improved profitability in our Canadian delivery businesses and in our facilities and breakroom and promotional products businesses in the U.S. These improvements were partially offset by investments in website development and other information systems, higher fuel costs and investments in labor to support growth initiatives.

North American Retail: Sales increased 0.5% for the third quarter of 2011.
This increase was the result of the positive impact of foreign exchange rates of $20.4 million and, to a lesser extent, non-comparable sales for new stores opened in the last twelve months. These increases were offset by a 1% decline in comparable store sales, reflecting a 1% decrease in customer traffic and flat average order size. Comparable store sales reflect a softness in desktop computers, software and computer media, partially offset by positive performance in laptops and tablets.


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Business unit income as a percentage of sales increased to 10.7% for the third quarter of 2011 from 10.6% for the third quarter of 2010, primarily reflecting improved product margins. These increases were partially offset by increased labor expense, investments in new initiatives and increased marketing expenses.

International Operations: Sales decreased 1.9% for the third quarter of 2011. This decrease was the result of a 12% decrease in comparable store sales in Europe and, to a lesser extent, decreased sales in Australia and in our European Printing Systems businesses, partially offset by the positive impact of foreign exchange rates of $68.7 million.

Business unit income as a percentage of sales decreased to 3.0% for the third quarter of 2011 from 4.3% for the third quarter of 2010. This reflects deleverage of fixed costs in Australia and in our European retail businesses. Business unit income was positively impacted by a gain on the sale of a building in our European Printing Systems business and overall reduced marketing expense in our European businesses.

Year-to-date 2011 Compared to Year-to-date2010

The following tables provide a summary of our sales and business unit income by
reportable segment for year-to-date 2011 and 2010:

                                                                                   October 29, 2011      October 30, 2010
                                               (Amounts in thousands)                  Increase        Increase (Decrease)
                                                   39 Weeks Ended                        From                  From
                                       October 29, 2011       October 30, 2010        Prior Year            Prior Year
Sales:
North American Delivery              $        7,527,592     $        7,359,175              2.3 %                2.0  %
North American Retail                         7,029,840              6,967,106              0.9 %                2.6  %
International Operations                      4,005,045              3,803,430              5.3 %               (1.5 )%
Total segment sales                  $       18,562,477     $       18,129,711              2.4 %                1.5  %



                                            (Amounts in thousands)
                                                39 Weeks Ended               October 29, 2011    October 30, 2010
                                                             October 30,
                                       October 29, 2011          2010           % of Sales          % of Sales
Business Unit Income:
North American Delivery              $          646,612     $    634,550              8.6 %               8.6 %
North American Retail                           564,425          561,883              8.0 %               8.1 %
International Operations                         65,689          109,205              1.6 %               2.9 %
Business unit income                 $        1,276,726     $  1,305,638              6.9 %               7.2 %

North American Delivery: Sales increased 2.3% for year-to-date 2011. This increase was driven by organic sales growth, our fourth quarter 2010 Print South acquisition and, to a lesser extent, the positive impact of foreign exchange rates of $32.1 million. Our sales growth was favorably impacted by an increase in facilities and breakroom supplies, promotional products and computer accessories. This growth was partially offset by softness in copier and fax cartridges and paper.

Business unit income as a percentage of sales remained flat at 8.6% for year-to-date 2011 compared to year-to-date 2010, driven by investments in labor to support growth initiatives, investments in website development and other information systems and higher fuel costs. These expenses were offset by improved profitability in our Canadian delivery businesses and in our facilities and breakroom and promotional products businesses in the U.S., as well as reduced marketing expenses.

North American Retail: Sales increased 0.9% for year-to-date 2011. This increase was the result of the positive impact of foreign exchange rates of $79.8 million and, to a lesser extent, an increase in non-comparable sales for new stores opened in the past twelve months. These increases were partially offset by a 1% decrease in comparable store sales, which reflects a decrease in customer traffic and flat average order size. Comparable store sales reflect a softness in computer media, software and computer accessories, partially offset by positive performance in tablets, laptops, e-readers, and copy and print services.

Business unit income as a percentage of sales decreased to 8.0% for year-to-date 2011 from 8.1% for year-to-date 2010, primarily reflecting investments in marketing and increased labor expense, as well as investments in new initiatives, offset by improved product margins and reduced rent and occupancy costs.


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International Operations: Sales increased 5.3% for year-to-date 2011. This increase was the result of the positive impact of foreign exchange rates of $324.8 million and, to a lesser extent, our second quarter 2010 acquisition of Oy Lindell AB and sales growth in our European delivery business, partially offset by a 10% decrease in comparable store sales in Europe and decreased sales in our European Printing Systems and Australian businesses.

Business unit income as a percentage of sales decreased to 1.6% for year-to-date 2011 from 2.9% for year-to-date 2010. The decrease in business unit income for year-to-date 2011 reflects deleverage of fixed costs and investments in systems in our Australian business and deleverage of fixed costs in our European retail businesses.

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 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 2010 Annual Report on Form 10-K, filed on March 2, 2011, 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 changes to the Accounting Policies or our application of the Accounting Policies, as disclosed in our 2010 Annual Report on Form 10-K filed on March 2, 2011.

Liquidity and Capital Resources

Cash Flows

Cash provided by operations was $1.10 billion for year-to-date2011 compared to $1.00 billion for year-to-date 2010. The increase in operating cash flow from 2010 to 2011 was primarily due to an increase in net income adjusted for non-cash expenses and the tax refund received from the Italian government in 2011, partially offset by changes in working capital.

Cash used in investing activities was $243.7 million for year-to-date 2011 compared to $284.9 million for year-to-date 2010. The decrease in cash used in investing activities from 2010 to 2011 was due to the 2010 acquisition of Oy Lindell AB ("Lindell"), a Finnish office products distributor, combined with a small decrease in capital expenditures during year-to-date 2011, driven by a reduction in spending on facility and system integration activities and store remodel activities.

Cash used in financing activities was $1.27 billion for year-to-date 2011 compared to $773.3 million for year-to-date 2010. The increase in cash used in financing activities from 2010 to 2011 is primarily related to the $500 million repayment of the April 2011 Notes and increased purchases under our share repurchase program, offset by the prior year purchase of additional shares of Corporate Express Australia. During year-to-date 2011, we repurchased 29.5 million shares for $490.0 million, compared to 13.1 million shares for $257.8 million during year-to-date 2010.

Sources of Liquidity

To cover seasonal fluctuations in cash flows and to support our various growth initiatives, we utilize cash generated from operations, short-term investments . . .

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