Staples, Inc. Announces Third Quarter 2012 Performance

Today's Conference Call

The company will host a conference call today at 8:00 a.m. (ET) to review these results and its outlook. Investors may listen to the call at http://investor.staples.com.

About Staples

Staples is the world’s largest office products company and a trusted source for office solutions. The company provides products, services and expertise in office supplies, copy & print, technology, facilities and breakroom, and furniture. Staples invented the office superstore concept in 1986 and now has annual sales of $25 billion, ranking second in the world in eCommerce sales. With 88,000 associates worldwide, Staples operates in 26 countries throughout North and South America, Europe, Asia and Australia, making it easy for businesses of all sizes and consumers. The company is headquartered outside Boston. More information about Staples (Nasdaq: SPLS) is available at www.staples.com/media.

Certain information contained in this news release constitutes forward-looking statements for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995 including, but not limited to, the information set forth under “Outlook” and other statements regarding our future business and financial performance. Any statements contained in this news release 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. Forward-looking statements are based on a series of expectations, assumptions, estimates and projections which involve substantial uncertainty and risk, including the review of our assessments by our outside auditor and changes in management’s assumptions and projections. Actual results may differ materially from those indicated by such forward-looking statements as a result of risks and uncertainties, including but not limited to: global economic conditions could adversely affect our business and financial performance; we face uncertainties in connection with the implementation of our strategies to transform our business; we have recognized substantial goodwill impairment charges in the current period and may be required to recognize additional goodwill impairment charges in the future; our market is highly competitive and we may not be able to continue to compete successfully; if the products and services that we offer fail to meet our customer needs, our performance could be adversely affected; we may be unable to continue to enter new markets successfully; our international operations expose us to risks inherent in foreign operations; failure to manage growth and our operations successfully could adversely affect our financial results; our effective tax rate may fluctuate; fluctuations in foreign exchange rates could lead to lower earnings; we may be unable to attract, train, engage and retain qualified associates; our quarterly operating results are subject to significant fluctuation; our indebtedness could adversely affect us by reducing our flexibility to respond to changing business and economic conditions; 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; problems in our information systems and technologies may disrupt our operations; compromises of our information systems or unauthorized access to confidential information or our customers’ or associates’ personal information may materially harm our business or damage our reputation; our business may be adversely affected by the actions of and risks associated with third-party vendors and service providers; various legal proceedings may adversely affect our business and financial performance; failure to comply with laws, rules and regulations could negatively affect our business operations and financial performance; and those factors discussed or referenced in our most recent quarterly report on Form 10-Q filed with the SEC, under the heading “Risk Factors” and elsewhere, and any subsequent periodic or current reports filed by us with the SEC. In addition, any forward-looking statements represent our estimates only as of the date such statements are made (unless another date is indicated) and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.

STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
		October 27, 2012				January 28, 2012
ASSETS
Current assets:
Cash and cash equivalents		$	1,020,043			$	1,264,149
Receivables, net		1,892,390				2,033,680
Merchandise inventories, net		2,417,366				2,431,845
Deferred income tax assets		281,481				305,611
Prepaid expenses and other current assets		286,119				255,535
Current assets of discontinued operations		185,949				—
Total current assets		6,083,348				6,290,820
Property and equipment:
Land and buildings		1,009,754				1,034,983
Leasehold improvements		1,332,450				1,330,373
Equipment		2,526,041				2,462,351
Furniture and fixtures		1,100,325				1,084,358
Total property and equipment		5,968,570				5,912,065
Less: Accumulated depreciation		4,052,158				3,831,704
Net property and equipment		1,916,412				2,080,361
Intangible assets, net of accumulated amortization		395,504				449,781
Goodwill		3,169,260				3,982,130
Other assets		587,461				627,530
Total assets		$	12,151,985			$	13,430,622
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,170,422			$	2,220,414
Accrued expenses and other current liabilities		1,326,441				1,414,721
Debt maturing within one year		119,046				439,143
Current liabilities of discontinued operations		143,911				—
Total current liabilities		3,759,820				4,074,278
Long-term debt		1,541,786				1,599,037
Other long-term obligations		671,650				735,094
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 929,838,181 and 674,178,263 shares at October 27, 2012 and 922,126,579 shares and 695,743,547 shares at January 28, 2012, respectfully		558				553
Additional paid-in capital		4,661,932				4,551,299
Accumulated other comprehensive loss		(380,313		)		(319,743		)
Retained earnings		6,688,614				7,199,060
Less: Treasury stock at cost, 255,659,918 shares at October 27, 2012 and 226,383,032 shares at January 28, 2012		(4,799,238		)		(4,416,018		)
Total Staples, Inc. stockholders’ equity		6,171,553				7,015,151
Noncontrolling interests		7,176				7,062
Total stockholders’ equity		6,178,729				7,022,213
Total liabilities and stockholders’ equity		$	12,151,985			$	13,430,622

STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
		13 Weeks Ended								39 Weeks Ended
		October 27, 2012				October 29, 2011				October 27, 2012				October 29, 2011
Sales		$	6,353,140			$	6,481,023			$	17,812,530			$	18,290,446
Cost of goods sold and occupancy costs		4,601,286				4,660,041				13,040,678				13,319,460
Gross profit		1,751,854				1,820,982				4,771,852				4,970,986
Operating expenses:
Selling, general and administrative		1,237,196				1,275,785				3,673,598				3,756,593
Impairment of goodwill and long-lived assets		810,996				—				810,996				—
Restructuring charges		30,396				—				30,396				—
Amortization of intangibles		30,413				15,957				60,466				49,443
Total operating expenses		2,109,001				1,291,742				4,575,456				3,806,036
Operating (loss) income		(357,147		)		529,240				196,396				1,164,950
Other (expense) income:
Interest income		1,249				1,774				4,251				5,662
Interest expense		(40,343		)		(40,906		)		(124,195		)		(131,422		)
Other expense		(1,788		)		(3,676		)		(3,469		)		(4,228		)
(Loss) income from continuing operations before income taxes		(398,029		)		486,432				72,983				1,034,962
Income tax expense		170,703				162,712				323,780				331,155
(Loss) income from continuing operations, including the portion attributable to the noncontrolling interests		(568,732		)		323,720				(250,797		)		703,807
Discontinued Operations:
(Loss) income from discontinued operations, net of income taxes		(27,559		)		2,610				(38,084		)		(3,495		)
Consolidated net (loss) income		(596,291		)		326,330				(288,881		)		700,312
Loss attributed to the noncontrolling interests		(39		)		(50		)		(119		)		(751		)
(Loss) income attributed to Staples, Inc.		$	(596,252	)		$	326,380			$	(288,762	)		$	701,063
Amounts attributable to Staples, Inc.
(Loss) income from continuing operations		$	(568,693	)		$	323,770			$	(250,678	)		$	704,558
(Loss) income from discontinued operations		(27,559		)		2,610				(38,084		)		(3,495		)
(Loss) income attributed to Staples, Inc.		$	(596,252	)		$	326,380			$	(288,762	)		$	701,063
Basic Earnings Per Common Share:
Continuing operations attributed to Staples, Inc.		$	(0.85	)		$	0.47			$	(0.37	)		$	1.01
Discontinued operations attributed to Staples, Inc.		(0.04		)		—				(0.06		)		(0.01		)
Net (loss) income attributed to Staples, Inc.		$	(0.89	)		$	0.47			$	(0.43	)		$	1.00
Diluted Earnings Per Common Share:
Continuing operations attributed to Staples, Inc.		$	(0.85	)		$	0.46			$	(0.37	)		$	1.00
Discontinued operations attributed to Staples, Inc.		(0.04		)		0.01				(0.06		)		(0.01		)
Net (loss) income attributed to Staples, Inc.		$	(0.89	)		$	0.47			$	(0.43	)		$	0.99
Dividends declared per common share		$	0.11			$	0.10			$	0.33			$	0.30

Condensed Consolidated Statements of Comprehensive Income
		13 Weeks Ended								39 Weeks Ended
		October 27, 2012				October 29, 2011				October 27, 2012				October 29, 2011
Comprehensive (loss) income from continuing operations		$	(437,206	)		$	241,953			$	(310,544	)		$	804,720
Comprehensive (loss) income from discontinued operations		(24,438		)		1,553				(38,674		)		(37		)
Comprehensive (loss) income from consolidated operations		$	(461,644	)		$	243,506			$	(349,218	)		$	804,683
Comprehensive income (loss) attributed to noncontrolling interests		128				96				114				(399		)
Comprehensive (loss) income attributed to Staples, Inc.		$	(461,772	)		$	243,410			$	(349,332	)		$	805,082
Weighted Average Shares Outstanding:
Basis		$	666,989			$	691,205			$	673,366			$	698,813
Diluted		$	666,989			$	698,009			$	673,366			$	708,028

STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
		39 Weeks Ended
		October 27, 2012				October 29, 2011
Operating Activities:
Consolidated net (loss) income, including loss from the noncontrolling interests		$	(288,881	)		$	700,312
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		301,840				311,190
Amortization of intangible assets		60,466				49,443
Impairment of goodwill and long-lived assets		810,996				—
Stock-based compensation		90,406				117,072
Excess tax benefits from stock-based compensation arrangements		(179		)		(1,023		)
Deferred income tax expense		68,915				127,328
Other		(932		)		19,828
Changes in assets and liabilities:
Decrease (increase) in receivables		10,622				(118,920		)
Increase in merchandise inventories		(40,094		)		(146,023		)
(Increase) decrease in prepaid expenses and other assets		(65,109		)		58,692
Increase in accounts payable		31,188				103,474
Decrease in accrued expenses and other liabilities		(40,855		)		(133,249		)
(Decrease) increase in other long-term obligations		(42,997		)		7,508
Net cash provided by operating activities		895,386				1,095,632
Investing Activities:
Acquisition of property and equipment		(204,163		)		(243,740		)
Proceeds from the sale of property and equipment		9,500				—
Acquisition of businesses, net of cash acquired		(1,941		)		—
Net cash used in investing activities		(196,604		)		(243,740		)
Financing Activities:
Proceeds from the exercise of stock options		26,039				32,989
Proceeds from borrowings		70,031				214,669
Payments on borrowings		(423,303		)		(789,931		)
Purchase of noncontrolling interest		(5,651		)		(3,591		)
Cash dividends paid		(221,682		)		(209,604		)
Excess tax benefits from stock-based compensation arrangements		179				1,023
Purchase of treasury stock, net		(383,220		)		(512,496		)
Net cash used in financing activities		(937,607		)		(1,266,941		)
Effect of exchange rate changes on cash and cash equivalents		(4,640		)		14,156
Net decrease in cash and cash equivalents		(243,465		)		(400,893		)
Cash and cash equivalents at beginning of period		1,264,149				1,461,257
Cash and cash equivalents at end of period		$	1,020,684			$	1,060,364
Less: Cash and cash equivalents attributed to discontinued operations		(641		)		—
Cash and cash equivalents at the end of the period attributed to continuing operations		$	1,020,043			$	1,060,364

STAPLES, INC. AND SUBSIDIARIES
Segment Reporting
(Dollar Amounts in Thousands)
(Unaudited)
		13 Weeks Ended								39 Weeks Ended
		October 27, 2012				October 29, 2011				October 27, 2012				October 29, 2011
		Sales
North American Delivery		$	2,609,034			$	2,582,729			$	7,576,860			$	7,527,592
North American Retail		2,646,554				2,656,612				6,959,524				7,029,840
International Operations		1,097,552				1,241,682				3,276,146				3,733,014
Total segment sales		$	6,353,140			$	6,481,023			$	17,812,530			$	18,290,446
		Business Unit Income (Loss)
North American Delivery		$	227,736			$	244,997			$	614,462			$	646,612
North American Retail		285,477				284,204				540,846				564,425
International Operations		(1,692		)		35,641				(27,114		)		70,985
Business unit income		511,521				564,842				1,128,194				1,282,022
Stock-based compensation		(27,276		)		(35,602		)		(90,406		)		(117,072		)
Impairment of goodwill and long-lived assets		(810,996		)		—				(810,996		)		—
Restructuring charges		(30,396		)		—				(30,396		)		—
Interest and other expense, net		(40,882		)		(42,808		)		(123,413		)		(129,988		)
(Loss) income from continuing operations before income taxes		$	(398,029	)		$	486,432			$	72,983			$	1,034,962

STAPLES, INC. AND SUBSIDIARIES
Reconciliation of GAAP to Non-GAAP Income Statement Disclosures
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
		13 Weeks Ended
		October 27, 2012
						Adjustments
		As Reported				Impairment of Goodwill and Long-Lived Assets (1)				Restructuring Charges (2)				Accelerated trade-name amortization (3)				Non-GAAP
Operating (loss) income		$	(357,147	)		$	810,996			$	30,396			$	15,599			$	499,844
Interest and other expense, net		(40,882		)														(40,882		)
(Loss) income from continuing operations before income taxes		$	(398,029	)														$	458,962
Income tax expense		$	170,703															$	170,703
Adjustments (4)		—																(21,541		)
Adjusted income tax		$	170,703															$	149,162
(Loss) income from continuing operations		$	(568,732	)														$	309,800
Loss attributed to the noncontrolling interests		(39		)														(39		)
(Loss) income from continuing operations attributed to Staples, Inc.		$	(568,693	)														$	309,839
Effective Tax Rate		(42.9		)%														32.5		%
Per share (loss) income from continuing operations attributed to Staples, Inc:
Basic and diluted earnings per common share		$	(0.85	)														$	0.46
Weighted average common shares outstanding		666,989																666,989
Effect of dilutive securities		—																4,354
Weighted average common shares outstanding assuming dilution		666,989																671,343

(1) Consists of goodwill impairment charges of $468.1 million and $303.3 million related to the Company's Europe Catalog and Europe Retail reporting units, respectively, and $39.5 million for the write-down of fixed assets primarily related to the planned closure and consolidation of certain operations.(2) Restructuring charges include $19.2 million for severance and benefits and $11.2 million of other associated costs related to the planned closure of 46 retail stores and the consolidation of certain sub-scale delivery businesses in Europe.(3) Relates to a strategic decision to transition from using the legacy Corporate Express tradename in the Company's Australian business to the exclusive use of the Staples tradename.(4) The $21.5 million adjustment to income tax expense in 2012 relates to the establishment of valuation allowances for previously recorded deferred tax assets as a result of the planned closure and consolidation of certain operations in the Company's Europe Retail and Europe Catalog reporting units, net of tax benefits related to the impairment and restructuring charges and accelerated tradename amortization.

STAPLES, INC. AND SUBSIDIARIES
Reconciliation of GAAP to Non-GAAP Income Statement Disclosures
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
		52 Weeks Ended
		January 28, 2012
		As revised to present discontinued operations				Adjustments				Non-GAAP
Income from continuing operations before income taxes		$	1,464,644			$	—			$	1,464,644
Income tax expense		477,247				20,800				498,047
Income (loss) from continuing operations, including the portion attributable to the noncontrolling interests		987,397				(20,800		)		966,597
Discontinued Operations:										—
Loss from discontinued operations, net of tax benefit		(3,564		)		—				(3,564		)
Consolidated net income (loss)		983,833				(20,800		)		963,033
Loss attributed to the noncontrolling interests		(823		)		—				(823		)
Net income (loss) attributed to Staples, Inc.		$	984,656			$	(20,800	)		$	963,856
Amounts attributable to Staples, Inc.
Income (loss) from continuing operations		$	988,220			$	(20,800	)		$	967,420
Loss from discontinued operations		(3,564		)						(3,564		)
Net income (loss) attributed to Staples, Inc.		$	984,656			$	(20,800	)		$	963,856
Diluted Earnings Per Common Share:
Continuing operations attributed to Staples, Inc.		$	1.40			$	(0.03	)		$	1.37
Discontinued operations attributed to Staples, Inc.		—				—				—
Net (loss) income attributed to Staples, Inc.		$	1.40			$	(0.03	)		$	1.37
Number of shares used in computing earnings per share		704,019

STAPLES, INC. AND SUBSIDIARIES
Reconciliation of GAAP to Non-GAAP Sales Growth
(Dollar Amounts in Thousands)
(Unaudited)
		13 Weeks Ended October 27, 2012
		Sales Growth GAAP			Impact of Local Currency			Sales Growth on a Local Currency Basis
Sales:
North American Delivery		1.0	%		(0.1	)%		0.9	%
North American Retail		(0.4	)%		(0.3	)%		(0.7	)%
International Operations		(11.6	)%		4.0	%		(7.6	)%
Total sales		(2.0	)%		0.6	%		(1.4	)%
		39 Weeks Ended October 27, 2012
		Sales Growth GAAP			Impact of Local Currency			Sales Growth on a Local Currency Basis
Sales:
North American Delivery		0.7	%		0.1	%		0.8	%
North American Retail		(1.0	)%		0.4	%		(0.6	)%
International Operations		(12.2	)%		5.0	%		(7.2	)%
Total sales		(2.6	)%		1.2	%		(1.4	)%

This presentation refers to growth rates in local currency so that business results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of Staples' business performance. To present this information, current period results for entities reporting in currencies other than U.S. dollars are converted into U.S. dollars at the prior year average monthly exchange rates.

STAPLES, INC. AND SUBSIDIARIES
Reconciliation of GAAP to Non-GAAP Income Statement Disclosures
(Dollar Amounts in Thousands)
(Unaudited)
		39 Weeks Ended
		October 27, 2012				October 29, 2011
Net cash provided by operating activities		$	895,386			$	1,095,632
Acquisition of property and equipment		(204,163		)		(243,740		)
Free cash flow		$	691,223			$	851,892

Free cash flow is not defined under U.S. GAAP. Therefore, it should not be considered a substitute for income or cash flow data prepared in accordance with GAAP and may not be comparable to similarly titled measures used by other companies. The company defines free cash flow as net cash provided by operating activities less capital expenditures. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The company believes free cash flow is a useful measure of performance and uses this measure as an indication of the company's ability to generate cash and invest in its business.

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