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Staples, Inc. Reports Record Second Quarter Performance; Revenues Increased 12 Percent and Earnings Per Share Rose 25 Percent; Net Income Increased 20 Percent; North American Retail Comparable Sales Rose Three Percent

Tuesday, August 16, 2005 7:00 am EDT

Dateline:

FRAMINGHAM, Mass.

Public Company Information:

NASDAQ:
SPLS
"Our team delivered another strong quarter of profitable growth through our commitment to making it easy for our customers"

FRAMINGHAM, Mass.--(BUSINESS WIRE)--Staples, Inc. (Nasdaq: SPLS) announced today the results for its second quarter ended July 30, 2005. Total company revenues increased 12 percent to $3.47 billion, compared to $3.09 billion for the second quarter of 2004. Compared to last year's second quarter, net income rose 20 percent to $147 million, and earnings per share rose 25 percent to $0.20, on a diluted basis.

Second quarter North American Retail comparable sales increased three percent year over year, with total North American Retail sales growth of nine percent. North American Delivery sales grew 17 percent, with double digit growth in all three businesses. International sales rose 15 percent or two percent excluding benefits from foreign currency exchange and acquisitions.

"Our team delivered another strong quarter of profitable growth through our commitment to making it easy for our customers," said Ron Sargent, Staples' chairman and chief executive officer. "We continue to drive sustainable market share gains through consistent execution and focus on our growth initiatives."

Highlights for the second quarter include:

-- Total company operating income improved 34 basis points year over year to 6.7 percent.

-- Operating income in the company's North American businesses increased significantly, up 160 basis points to 7.2 percent in Retail and up 70 basis points to 9.7 percent in Delivery.

-- Inventory turns increased 22 basis points to 5.61 times, reflecting continued improvement in supply chain performance from the Summit program.

-- Staples opened an additional seven stores in Chicago, bringing the total number of stores to 15. The Chicago market launch continues to exceed expectations.

-- North American Delivery has benefited from the Chicago retail market entry, particularly Staples Business Delivery which has nearly doubled its sales in this market since the company's retail launch. To support significant growth in the Midwest, the company will be opening a new fulfillment center near Chicago next year.

-- The company has developed four innovative products, under the Staples brand, from the 2004 Invention Quest contest. These products, including the winner, the WordLock, were brought to market in time for the back to school selling season.

-- The company launched Staples.com 5.0, its redesigned web-site, which offers a host of "easy" improvements based on extensive customer research.

-- Staples converted 12 Office World stores in the UK to the Staples format during the quarter, and will have remodeled all 46 Office World stores by the end of August.

-- Staples opened 14 new stores and closed one store in the US and opened seven stores in Canada. In Europe, Staples opened two new stores in Portugal and closed one store in the UK. The company now operates 1,716 stores worldwide.

-- The company generated $127 million in free cash flow in the first half of 2005.

Outlook

For the third quarter of 2005, Staples expects to achieve earnings per share growth in line with average analyst estimates. Staples expects to achieve low double digit sales growth for the total company. For North American Retail, the company expects a low single digit comparable sales increase. In the North American Delivery business, the company expects sales growth in the mid-teens, and for the International business, Staples expects low single digit sales growth.

For the full year 2005, Staples expects revenues to grow in the low double digits, with low single digit North American Retail comparable sales. North American Retail sales are expected to increase in the high single digits, North American Delivery revenue growth is expected to be in mid-teens range, and the International business is expected to have mid to high single digit sales growth. The company is comfortable with the current average analyst earnings estimates for the remainder of the year and expects the earnings per share growth rate for the full year to be in the high teens. In addition, Staples expects free cash flow generation of approximately $750 million.

About Staples

Staples, Inc. invented the office superstore concept in 1986 and today is the world's largest office products company. With 65,000 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 2004 sales of $14.4 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 approximately 1,716 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. 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; 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 and seasonality; our expanding international operations expose us to the unique risks inherent in foreign operations; 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; and those other factors discussed in our quarterly report on Form 10-Q for the quarter ended July 30, 2005, 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, ExceptShare Data)
 
 
July, 30
2005 January 29,
(Unaudited) 2005
ASSETS
Current assets:
Cash and cash equivalents $ 681,733 $ 997,310
Short-term investments 511,810 472,231
Receivables, net 517,663 485,126
Merchandise inventories, net 1,729,901 1,602,530
Deferred income tax asset 101,297 86,041
Prepaid expenses and other current assets 129,561 138,374
Total current assets 3,671,965 3,781,612
 
Property and equipment:
Land and buildings 670,103 649,175
Leasehold improvements 775,950 762,946
Equipment 1,176,920 1,140,234
Furniture and fixtures 611,595 597,293
Total property and equipment 3,234,568 3,149,648
Less accumulated depreciation and
amortization 1,631,906 1,548,774
Net property and equipment 1,602,662 1,600,874
 
Lease acquisition costs, net of accumulated
amortization 36,873 38,400
Intangible assets, net of accumulated
amortization 221,764 222,520
Goodwill 1,326,646 1,321,464
Other assets 88,467 106,578
Total assets $ 6,948,377 $ 7,071,448
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,335,488 $ 1,241,433
Accrued expenses and other current
liabilities 804,450 954,184
Debt maturing within one year 2,533 1,244
Total current liabilities 2,142,471 2,196,861
 
Long-term debt 536,801 557,927
Deferred income tax liability 29,552 23,314
Other long-term obligations 203,497 178,150
 
Minority interest 4,439 -
 
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
819,333,403 shares at July 30, 2005 and
813,049,136 shares at January 29, 2005 492 488
Additional paid-in capital 2,372,319 2,254,947
Cumulative foreign currency translation
adjustments 70,443 114,427
Retained earnings 3,001,363 2,818,163
Less: Treasury stock at cost - 84,703,038
shares at July 30, 2005, and 68,547,587
shares at January 29, 2005 (1,413,000) (1,072,829)
Total stockholders' equity 4,031,617 4,115,196
Total liabilities, minority interest and
stockholders' equity $ 6,948,377 $ 7,071,448
STAPLES, INC.AND SUBSIDIARIES
Consolidated Statements ofIncome
(Dollar Amounts in Thousands, ExceptPer Share Data)
(Unaudited)
       
13 Weeks Ended 26 Week s Ended
July 30, July 31, July 30, July 31,
2005 2004 2005 2004
 
Sales $ 3,471,964 $ 3,089,252 $ 7,371,016 $ 6,541,407
Cost of goods sold
and occupancy costs 2,481,891 2,218,567 5,318,411 4,735,097
Gross profit 990,073 870,685 2,052,605 1,806,310
 
Operating and other
expenses:
Operating and
selling 601,095 533,951 1,246,634 1,121,231
General and
administrative 152,824 138,545 315,569 282,987
Amortization of
intangibles 3,441 1,861 6,843 3,850
Total operating
expenses 757,360 674,357 1,569,046 1,408,068
 
Operating income 232,713 196,328 483,559 398,242
 
Other income
(expense):
Interest income 13,841 5,793 24,791 10,395
Interest expense (15,051) (9,088) (25,039) (17,200)
Miscellaneous
income / (expense) 462 (173) (159) (575)
Income before
income taxes and
minority interest 231,965 192,860 483,152 390,862
Income tax expense 84,667 70,394 176,350 142,665
Income before
minority interest 147,298 122,466 306,802 248,197
Minority interest 120 - 198 -
Net income $ 147,178 $ 122,466 $ 306,604 $ 248,197
 
 
Earnings Per Share:
 
Basic earnings
per common share $ 0.20 $ 0.17 $ 0.42 $ 0.33
 
Diluted earnings
per common share $ 0.20 $ 0.16 $ 0.41 $ 0.33
 
Dividends declared per
common share $ - $ - $ 0.17 $ 0.13
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
   
26 Weeks Ended
July 30, July 31,
2005 2004
Operating Activities:
Net income $ 306,604 $ 248,197
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 149,175 136,400
Deferred tax benefit (7,823) (1,667)
Other 32,529 24,421
Changes in assets and liabilities:
(Increase) decrease in receivables (40,077) 6,283
Increase in merchandise inventories (143,065) (128,756)
(Increase) decrease in prepaid expenses
and other assets (1,428) 15,198
Increase in accounts payable 106,895 65,245
Decrease in accrued expenses and other
liabilities (115,698) (104,308)
Increase in other long-term obligations 13,776 5,007
Net cash provided by operating activities 300,888 266,020
 
Investing Activities:
Acquisition of property and equipment (173,505) (135,586)
Increase in investment, net of cash acquired (3,872) -
Purchase of short-term investments (3,831,936) (6,103,230)
Proceeds from the sale of short-term
investments 3,792,356 6,643,396
Net cash (used in) provided by investing
activities (216,957) 404,580
 
Financing Activities:
Proceeds from the exercise of stock options
and the sale of stock under employee stock
purchase plans 72,238 103,102
Proceeds from borrowings 1,576 -
Payments on borrowings (1,316) (3,786)
Cash dividends paid (123,405) (99,531)
Purchase of treasury stock, net (340,171) (248,166)
Net cash used in financing activities (391,078) (248,381)
 
Effect of exchange rate changes on cash and
cash equivalents (8,430) (2,944)
 
Net (decrease) increase in cash and cash
equivalents (315,577) 419,275
Cash and cash equivalents at beginning of
period 997,310 457,465
Cash and cash equivalents at end of period $ 681,733 $ 876,740
STAPLES, INC. AND SUBSIDIARIES
SegmentReporting
(Dollar Amounts in Thousands)
       
(Unaudited) (Unaudited)
13 Weeks Ended 26 Weeks Ended
July 30, July 31, July 30, July 31,
2005 2004 2005 2004
 
Sales:
North American Retail $ 1,851,290 $ 1,700,508 $ 4,017,913 $ 3,682,891
North American
Delivery 1,148,215 979,538 2,331,531 1,987,454
International
Operations 472,459 409,206 1,021,572 871,062
Total sales $ 3,471,964 $ 3,089,252 $ 7,371,016 $ 6,541,407
 
Business Unit Income:
North American Retail $ 133,629 $ 96,207 $ 282,710 $ 202,321
North American
Delivery 111,355 88,281 209,958 161,386
International
Operations (12,271) 11,840 (9,109) 34,535
Total business unit
income $ 232,713 $ 196,328 $ 483,559 $ 398,242
Interest and other
expense, net (748) (3,468) (407) (7,380)
Income before income
taxes $ 231,965 $ 192,860 $ 483,152 $ 390,862

Contact:

Staples, Inc.
Media Contact:
Paul Capelli/Deborah Hohler
508-253-8530/8509
or
Investor Contact:
Laurel Lefebvre/Katie Zimbone
508-253-4080/0879

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