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Staples, Inc. Reports Record First Quarter Performance; Earnings Per Share Rose 25 Percent and Company Sales Increased Nine Percent

Tuesday, May 16, 2006 7:00 am EDT

Dateline:

FRAMINGHAM, Mass.

Public Company Information:

NASDAQ:
SPLS
"We're off to a great start in 2006, posting strong results in the first quarter"

FRAMINGHAM, Mass.--(BUSINESS WIRE)--Staples, Inc. (Nasdaq: SPLS) announced today the results for its first quarter ended April 29, 2006. Total company sales increased nine percent to $4.2 billion compared to the first quarter of 2005. Net income rose 26 percent year over year to $186 million, and earnings per share, on a diluted basis, increased 25 percent to $0.25, from the $0.20 achieved in the first quarter of last year.

First quarter North American Retail comparable sales increased one percent versus 2005, reflecting positive customer traffic and strong comps in core supplies categories and copy and print services, offset by weaker performance in furniture and technology. Total North American Retail sales grew seven percent. North American Delivery continued its strong growth, increasing sales 17 percent versus last year. International sales rose six percent in local currency, but declined one percent in US dollars due to a $40 million negative foreign exchange impact.

"We're off to a great start in 2006, posting strong results in the first quarter," said Ron Sargent, Staples' chairman and chief executive officer. "Our associates continue to deliver the numbers and provide an easy customer shopping experience. As Staples celebrates its 20th anniversary this month, we are very proud of what we've accomplished, but even more excited about what lies ahead."

Highlights for the first quarter include:

  • Total company operating income improved 79 basis points year over year to 6.7 percent, with all business units growing profits much faster than sales.
  • North American Retail operating margins were 7.8 percent, up 63 basis points versus 2005, reflecting strong gross margin comps due to improved product mix, with strength in supplies and services.
  • North American Delivery continues its momentum, with strong sales growth across all product categories, improving customer satisfaction scores, and a 64 basis point improvement in operating profit to 9.4 percent.
  • Profits tripled in International this quarter, with operating margins of 1.9 percent, an increase of 129 basis points versus last year, reflecting early progress in the company's European turnaround.
  • Inventory turns rose 15 basis points to 5.80 times.
  • Staples opened two new stores in the United States, three stores in Canada, and one store in Portugal. The company now operates 1,786 stores worldwide.
  • The company generated $54 million in free cash flow during the first quarter of the year after $115 million in capital expenditures.

Outlook

For the second quarter of 2006, Staples anticipates low double-digit sales growth for the total company and expects earnings per share to grow 15 to 20 percent. Given the upside achieved in the first quarter, for the full year, the company expects to be at the high end of the range of its previously stated earnings guidance of 15 to 20 percent. Earnings growth expectations for the second quarter and full year 2006 refer to 2005 earnings restated to include the impact of stock compensation expense under the Financial Accounting Standards Board's statement 123R, which the company implemented as of January 29, 2006. Pro forma restated financial statements are available on the "Financial Measures" section of the investor relations website on www.staples.com. The company's earnings outlook also reflects the impact of a 53rd week in fiscal 2006.

About Staples

Staples, Inc. invented the office superstore concept in 1986 and today is the world's largest office products company. With 69,000 talented associates, the company is committed to making it easy to buy a wide range of office products, including supplies, technology, furniture, and business services. With 2005 sales of $16.1 billion, Staples serves consumers and businesses ranging from home-based businesses to Fortune 500 companies in 21 countries throughout North and South America, Europe and Asia. Headquartered outside of Boston, Staples operates 1,786 office superstores and also serves its customers through mail order catalog, e-commerce and contract businesses. More information is available at www.staples.com.

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 the heading "Outlook" and other statements regarding our future business and financial performance. 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: our market is highly competitive and we may not continue to compete successfully; we may be unable to continue to open new stores and enter new markets successfully; our growth may continue to strain operations, which could adversely affect our business and financial results; our operating results may be impacted by changes in the economy that impact business and consumer spending; our business and financial performance is dependent upon our ability to attract and retain qualified associates; our stock price may fluctuate based on market expectations; our quarterly operating results are subject to significant fluctuation and are impacted by the extent to which sales in new stores result in the loss of sales in existing stores, the mix of products sold, pricing actions of competitors, the level of advertising and promotional expenses, extreme weather-related disruptions and seasonality; our expanding international operations expose us to the unique risks inherent in foreign operations; our business may be adversely affected by the actions of and risks associated with our third-party vendors; our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims; our debt level and operating lease commitments could impact our ability to obtain future financing and continue our growth strategy; a California wage and hour class action lawsuit may adversely affect our business and financial performance; and those other factors discussed or referenced in our quarterly report on Form 10-Q for the quarter ended April 29, 2006, under the heading "Risk Factors" and elsewhere, and any subsequent periodic reports filed by us with the SEC. In addition, any forward-looking statements represent our estimates only as of today 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.

Financial information follows.

 
STAPLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
   
 
April 29, Restated
2006 January 28,
(Unaudited) 2006
ASSETS
Current assets:
Cash and cash equivalents $875,112 $977,822
Short-term investments 498,304 593,082
Receivables, net 606,554 576,672
Merchandise inventories, net 1,751,349 1,706,372
Deferred income tax asset 149,013 149,257
Prepaid expenses and other current assets 145,954   141,339  
Total current assets 4,026,286 4,144,544
 
Property and equipment:
Land and buildings 740,794 705,978
Leasehold improvements 900,648 884,853
Equipment 1,382,387 1,330,181
Furniture and fixtures 691,122   672,931  
Total property and equipment 3,714,951 3,593,943
Less accumulated depreciation and
amortization 1,911,841   1,835,549  
Net property and equipment 1,803,110 1,758,394
 
Lease acquisition costs, net of accumulated
amortization 34,358 34,885
Intangible assets, net of accumulated
amortization 230,573 240,395
Goodwill 1,378,752 1,378,752
Other assets 184,007   175,750  
Total assets $7,657,086   $7,732,720  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,438,500 $1,435,815
Accrued expenses and other current
liabilities 965,674 1,041,201
Debt maturing within one year 2,221   2,891  
Total current liabilities 2,406,395 2,479,907
 
Long-term debt 516,470 527,606
Deferred income tax liability 6,286 5,845
Other long-term obligations 259,577 233,426
Minority interest 4,083 4,335
 
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
834,444,525 shares at April 29, 2006 and
829,695,100 shares at January 28, 2006 501 498
Additional paid-in capital 3,041,514 2,937,362
Cumulative foreign currency translation
adjustments 108,542 87,085
Retained earnings 3,218,214 3,192,630
Less: Treasury stock at cost - 106,130,705
shares at April 29, 2006, and 99,253,565
shares at January 28, 2006 (1,904,496 ) (1,735,974 )
Total stockholders' equity 4,464,275   4,481,601  
Total liabilities and stockholders'
equity $7,657,086   $7,732,720  
 
 
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
   
13 Weeks Ended
Restated
April 29, April 30,
2006 2005
 
Sales $4,237,646 $3,899,052
Cost of goods sold and occupancy costs 3,048,649   2,837,200  
Gross profit 1,188,997 1,061,852
 
Operating and other expenses:
Operating and selling 716,157 652,421
General and administrative 183,723 173,583
Amortization of intangibles 3,203   3,402  
Total operating expenses 903,083   829,406  
 
Operating income 285,914 232,446
 
Other income (expense):
Interest income 19,517 10,950
Interest expense (14,656 ) (9,988 )
Miscellaneous expense (428 ) (621 )
Income before income taxes and minority
interest 290,347 232,787
Income tax expense 104,525   84,967  
Income before minority interest 185,822 147,820
Minority interest (252 ) 78  
Net income $186,074   $147,742  
 
 
Earnings Per Share:
 
Basic earnings per common share $0.26   $0.20  
 
Diluted earnings per common share $0.25   $0.20  
 
Dividends declared per common share $0.22   $0.17  
 
 
Weighted average shares outstanding:
 
Basic 725,767,271 737,158,410
Diluted 744,303,611 755,861,932
 
 
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
   
13 Weeks Ended
Restated
April 29, April 30,
2006 2005
Operating Activities:
Net income $186,074 $147,742
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 79,704 73,185
Stock-based compensation 34,962 30,352
Deferred tax expense (benefit) 882 (4,738 )
Excess tax benefits from stock-based
compensation arrangements (14,856 ) (6,100 )
Other 1,777 1,743
Changes in assets and liabilities:
Increase in receivables (27,152 ) (36,585 )
(Increase) decrease in merchandise
inventories (35,451 ) 38,029
(Increase) decrease in prepaid expenses
and other assets (8,863 ) 655
Decrease in accounts payable (4,460 ) (27,617 )
Decrease in accrued expenses and other
liabilities (53,256 ) (70,438 )
Increase in other long-term obligations 8,954   11,337  
Net cash provided by operating activities 168,315 157,565
 
Investing Activities:
Acquisition of property and equipment (114,557 ) (63,448 )
Increase in investment, net of cash acquired - (3,872 )
Purchase of short-term investments (2,257,198 ) (1,824,115 )
Proceeds from the sale of short-term
investments 2,351,975   1,840,227  
Net cash used in investing activities (19,780 ) (51,208 )
 
Financing Activities:
 
Proceeds from the exercise of stock options
and the sale of stock under employee stock
purchase plans 55,141 24,693
Payments on borrowings (1,487 ) (637 )
Cash dividends paid (160,490 ) (122,916 )
Excess tax benefits from stock-based
compensation arrangements 14,856 6,100
Purchase of treasury stock, net (168,522 ) (191,692 )
Net cash used in financing activities (260,502 ) (284,452 )
 
Effect of exchange rate changes on cash and
cash equivalents 9,257 (3,035 )
 
Net decrease in cash and cash equivalents (102,710 ) (181,130 )
Cash and cash equivalents at beginning of
period 977,822   997,310  
Cash and cash equivalents at end of period $875,112   $816,180  
 
 
STAPLES, INC. AND SUBSIDIARIES
Segment Reporting
(Dollar Amounts in Thousands)
   
 
(Unaudited)
13 Weeks Ended
Restated
April 29, April 30,
2006 2005
 
Sales:
North American Retail $2,311,600 $2,166,623
North American Delivery 1,381,551 1,183,316
International Operations 544,495   549,113  
Total sales $4,237,646   $3,899,052  
 
Business Unit Income:
North American Retail $180,237 $155,338
North American Delivery 130,119 103,920
International Operations 10,520   3,540  
Total business unit income $320,876 $262,798
Stock-based compensation (34,962 ) (30,352 )
Total reportable segments 285,914 232,446
Interest and other income, net 4,433   341  
Income before income taxes and minority
interest $290,347   $232,787  

Contact:

Staples, Inc.
Media Contact:
Paul Capelli/Owen Davis
508-253-8530/8468
or
Investor Contact:
Laurel Lefebvre/Katie Sullivan
508-253-4080/0879

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