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Staples, Inc. Reports Strong Fourth Quarter Earnings; New CEO Ron Sargent Outlines Company Program to Drive Shareholder Value

Tuesday, March 5, 2002 7:00 am EST

Dateline:

FRAMINGHAM, Mass.

Public Company Information:

NASDAQ:
SPLS
"Our goal is to drive our returns to exceed our cost of capital and increase shareholder value."

FRAMINGHAM, Mass.--(BUSINESS WIRE)--Staples, Inc. (Nasdaq:SPLS) today reported net income of $94 million, or $0.20 per share on a diluted basis for the fourth quarter. Excluding special charges, net income for the quarter was $136 million, or $0.29 per share, a 45 percent earnings per share increase compared with the same period last year.

  13 Weeks Ended   14 Weeks Ended
February 2, 2002 February 3, 2001
Net income (loss)
(in thousands):
As reported (GAAP) $ 93,798 $ (111,675)
Adjustments (Net of
Applicable Taxes):
Inventory writedown for
store closures (included
in Cost of goods sold) 4,551 --
Store closure charge 30,807 --
Asset impairment and
other charges 6,591 205,750
As adjusted $ 135,747 $ 94,075
13 Weeks Ended 14 Weeks Ended
February 2, 2002 February 3, 2001
Diluted earnings (loss) per
share:
As reported (GAAP) - Staples,
Inc. Stock $ 0.20 $ --
As reported (GAAP) - Staples
RD
Stock -- (0.23)
Adjustments (Net of Applicable
Taxes):
Inventory writedown for
store
closures (included in
Cost of
goods sold) 0.01 --
Store closure charge 0.07 --
Asset impairment and other
charges 0.01 0.44
Adjustment for conversion
of
Staples.com stock -- (0.01)
As adjusted $ 0.29 $ 0.20

Fourth quarter sales of $2.9 billion decreased six percent compared to the $3.1 billion reported for the same period last year. Adjusting for the extra week in last year's fourth quarter, sales for the quarter increased one percent. Overall comparable sales for the quarter declined four percent, with retail comparable sales down five percent.

For the full year, revenues were $10.7 billion, up three percent adjusted for the extra week included in last year's fourth quarter. Full year total company comparable sales declined two percent and decreased four percent for retail only. Net income for the year excluding special charges was $307 million or $0.66 per share, an increase of 18% compared to earnings per share for the prior year, excluding special charges.

  52 Weeks Ended   53 Weeks Ended
February 2, 2002 February 3, 2001
Net income (in thousands):
As reported (GAAP) $ 264,970 $ 59,712
Adjustments (Net of
Applicable
Taxes):
Inventory writedown for
store
closures (included in
Cost of
goods sold) 4,551 --
Store closure charge
(credit) 30,807 (4,278)
Asset impairment and
other
charges 6,591 205,750
As adjusted $ 306,919 $ 261,184
52 Weeks Ended 53 Weeks Ended
February 2, 2002 February 3, 2001
Diluted earnings per share:
As reported (GAAP) -
Staples,
Inc. Stock $ 0.40 $ --
As reported (GAAP) -
Staples RD
Stock 0.17 0.15
Adjustments (Net of
Applicable
Taxes):
Inventory writedown for
store
closures (included in
Cost of
goods sold) 0.01 --
Store closure charge
(credit) 0.07 (0.01)
Asset impairment and
other
charges 0.01 0.44
Adjustment for conversion
of
Staples.com stock -- (0.02)
As adjusted $ 0.66 $ 0.56

"I am pleased to report that Staples fourth quarter earnings increased and exceeded expectations," said Staples new Chief Executive Officer Ronald L. Sargent. "We are already seeing an improvement in results from strategic initiatives we launched in late 2001."

Back to Brighton -- Back to Basics

Today, Sargent announced Staples' comprehensive three part business improvement plan. Named after the company's first store in Brighton, Mass., Back to Brighton is a multi-faceted program which positions the company for long-term profitable growth, aims to increase profit margins to historical levels and improve asset utilization.

A key initiative driving profitable sales growth in the North American Retail business is the new Dover store format. Initial results of this store format are strong. The company plans to remodel 125 stores this year and all new stores will be the Dover format.

The second element is for improving profit margins and is expected to yield $200 million in cost savings. The company expects to achieve a significant portion of this benefit in 2002. This initiative is designed to increase more profitable sales to the company's small business customers. Examples include fine-tuning the product mix to focus on the needs of small business and expanding the private label products program.

The third component of Back to Brighton is improving asset utilization. Staples plans to reduce its prototype to 20,000 square feet, decreasing square footage growth without sacrificing convenience as well as benefiting from a lower investment in fixtures and inventory.

"Back to Brighton provides a tremendous opportunity to drive improvements in every area of Staples' business," Sargent said. "Our goal is to drive our returns to exceed our cost of capital and increase shareholder value."

Staples North American Retail

In the North American Retail business, sales for the quarter were $1.9 billion, down seven percent versus a year ago. On a 52 week basis, sales for the quarter were even with last year. Continuing a trend of solid improvement resulting from Back to Brighton initiatives, business unit income excluding special charges, increased eight percent versus last year to $149 million. During the fourth quarter, Staples opened 11 new stores in North America, with seven in the United States and four in Canada and announced plans to close 31 under-performing stores in the United States. In 2002, the company plans to open 75 new stores in the United States and 20 in Canada.

Staples North American Delivery

Staples' North American Delivery business, including Staples Contract, Quill, and Staples Business Delivery (the recently renamed combination of Staples.com and Staples' catalog businesses), reported fourth quarter sales of $765 million, down two percent versus the fourth quarter of last year. On a 52 week basis, sales for the quarter rose six percent. Business unit income was $66 million, an increase of 76 percent versus the fourth quarter of 2000. Staples added 2,300 new Contract accounts in Q4, totaling 7,800 new accounts in 2001 while customer retention rates continue to increase. Staples Business Delivery remains the fastest growing segment and is showing dramatic improvement in operating margins. Quill's solid performance resulted in sales growth of seven percent on a 52 week basis and continues to be the most profitable segment in Staples North American Delivery.

Staples European Business

Staples' European business revenues were $236 million, up five percent, or a thirteen percent increase adjusted for the extra week, versus the fourth quarter of last year. Comparable sales growth was eight percent and business unit income increased 350 percent to $9.5 million versus the fourth quarter of last year. The European business was profitable for the quarter and the European retail business was profitable for the year. In 2002, Staples plans to open approximately 20 stores in Europe and enter Belgium in the second half of 2002.

Outlook for 2002

Commenting on the outlook for fiscal year 2002, Sargent stated, "Improvements achieved in operating margins will allow us to invest in new ideas for future growth. We are confident that the plans we have in place have positioned Staples for continued industry-leading profitable growth without depending on an economic recovery. As a result, we are increasing our expectations for earnings per share to be in the range of $0.76 to $0.80 for the year."

Staples will host a live Internet broadcast of its fourth quarter and 2001 year end earnings conference call today at 8:00 a.m. (Eastern). Individuals may access the broadcast from Staples' Web site directly at http://investor.staples.com. A replay of the quarterly earnings conference call will be available at http://investor.staples.com from 11:30 a.m. (Eastern) on March 5, through midnight on Tuesday, March 12.

About Staples

Staples, Inc. is an $11 billion retailer of office supplies, business services, furniture and technology to consumers and businesses from home-based businesses to Fortune 500 companies in the United States, Canada, the United Kingdom, Germany, the Netherlands and Portugal. Headquartered outside Boston, Staples invented the office superstore concept and today is the largest operator of office superstores in the world. The company has approximately 53,000 associates serving customers through more than 1,400 office superstores, mail order catalogs, e-commerce and a contract business. More information about the company is available at http://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 various important factors including risks related to Staples' ability to compete in its highly competitive market, Staples' ability to continue to successfully open new stores, Staples' quarterly operating results being subject to significant fluctuation, Staples' stock price fluctuating based on the expectations of professional securities analysts, the strain on operations due to Staples' rapid growth which can affect operating results, the ability of Staples' foreign operations and Staples.com to become profitable and the ability of Staples to obtain adequate future financing. Additional information concerning these factors is contained in Staples' Quarterly Report on Form 10-Q dated December 11, 2001, which is on file with the Securities and Exchange Commission.

STAPLES,INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

  13 Weeks   14 Weeks   52 Weeks   53 Weeks
Ended Ended Ended Ended
February 2, February 3, February 2, February 3,
2002 2001 2002 2001
Sales $ 2,929,207 $ 3,114,819 $ 10,744,373 $ 10,673,671
Cost of goods
sold
and occupancy
costs 2,212,188 2,370,908 8,173,880 8,097,166
Gross profit 717,019 743,911 2,570,493 2,576,505
Operating
expenses:
Operating and
selling 412,958 455,354 1,651,846 1,643,162
Pre-opening 1,293 2,705 13,685 22,297
General and
administrative 84,009 110,142 379,505 409,575
Amortization of
goodwill 1,646 2,912 6,584 13,628
Store closure
charge (credit) 50,092 -- 50,092 (7,250)
Asset impairment
and other
charges 10,717 205,750 10,717 205,750
Interest and
other expense,
net 3,787 13,349 27,219 45,158
Total operating
and other
expenses 564,502 790,212 2,139,648 2,332,320
Income (loss)
before income
taxes 152,517 (46,301) 430,845 244,185
Income tax
expense 58,719 65,374 165,875 184,473
Net income
(loss) $ 93,798 $ (111,675) $ 264,970 $ 59,712
Net income
(loss)
attributed to:
Staples, Inc.
Stock $ 93,798 $ -- $ 185,110 $ --
Staples RD
Stock -- (106,422) 79,740 71,197
Staples.com
Stock -- (5,253) 120 (11,485)
$ 93,798 $ (111,675) $ 264,970 $ 59,712
Basic earnings
(loss) per
common share:
Staples, Inc.
Stock $ 0.20 $ -- $ 0.40 $ --
Staples RD
Stock $ -- $ (0.23) $ 0.18 $ 0.16
Staples.com
Stock $ -- $ (0.41) $ 0.01 $ (0.84)
Diluted earnings
(loss) per
common share:
Staples, Inc.
Stock $ 0.20 $ -- $ 0.40 $ --
Staples RD
Stock $ -- $ (0.23) $ 0.17 $ 0.15
Staples.com
Stock $ -- $ (0.41) $ 0.01 $ (0.84)
Number of shares
used in
computing basic
earnings (loss)
per common
share:
Staples, Inc.
Stock 460,859 -- 460,362 --
Staples RD
Stock -- 453,128 455,399 454,490
Staples.com
Stock -- 12,946 7,980 13,665
Number of shares
used in
computing
diluted
earnings (loss)
per common
share:
Staples, Inc.
Stock 467,475 -- 466,491 --
Staples RD
Stock -- 453,128 461,379 460,791
Staples.com
Stock -- 12,946 9,819 13,665
STAPLES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar Amounts in Thousands, Except Share Data)
  February 2,   February 3,
2002 2001
ASSETS
Current Assets:
Cash and cash equivalents $ 394,824 $ 263,560
Merchandise inventories 1,459,792 1,639,698
Receivables, net 338,581 297,916
Deferred income taxes 117,560 43,955
Prepaid expenses and other current assets 92,070 110,982
Total current assets 2,402,827 2,356,111
Property and Equipment:
Land and buildings 433,569 400,971
Leasehold improvements 552,250 519,681
Equipment 820,053 692,783
Furniture and fixtures 406,565 352,712
Total property and equipment 2,212,437 1,966,147
Less accumulated depreciation and
amortization 853,685 665,622
Net property and equipment 1,358,752 1,300,525
Other Assets:
Lease acquisition costs, net of
amortization 54,557 58,596
Goodwill, net of amortization 223,718 238,536
Other 53,181 30,155
Total other assets 331,456 327,287
$ 4,093,035 $ 3,983,923
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 935,442 $ 983,851
Accrued expenses and other current
liabilities 655,274 542,923
Debt maturing within one year 4,983 184,505
Total current liabilities 1,595,699 1,711,279
Long-Term Debt 350,225 441,257
Deferred Tax Liability 6,738 8,916
Other Long-Term Obligations 86,199 73,047
Stockholders' Equity:
Preferred stock, $.01 par
value-authorized 5,000,000 shares;
no shares issued -- --
Common stock:
Staples, Inc. Stock, $.0006 par
value-authorized 2,100,000,000 shares;
issued 491,564,105 shares at
February 2, 2002 295 --
Staples RD Stock, $.0006 par
value-authorized 1,500,000,000 shares;
issued 477,111,602 shares at
February 3, 2001 -- 285
Staples.com Stock, $.0006 par
value-authorized 600,000,000 shares;
issued 14,105,821 shares at
February 3, 2001 -- 8
Additional paid-in capital 1,364,355 1,285,719
Cumulative foreign currency translation
adjustments (27,129) (14,354)
Retained earnings 1,272,991 1,008,021
Less: treasury stock at cost, 27,569,880
shares at February 2, 2002 and
24,743,420 shares at February 3, 2001 (556,338) (530,255)
Total stockholders' equity 2,054,174 1,749,424
$ 4,093,035 $ 3,983,923
STAPLES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)
 

Fiscal Year Ended

February 2,   February 3,
2002 2001
Operating Activities:
Net income $ 264,970 $ 59,712
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 248,965 223,510
Asset impairment and other charges 10,717 205,750
Store closure charge (credit) 50,092 (7,250)
Deferred income taxes expense (benefit) (80,370) 20,733
Other 19,278 19,304
Change in assets and liabilities, net of
companies acquired/divested using
purchase accounting:
Decrease (Increase) in merchandise
inventories 148,687 (50,380)
Decrease (Increase) in receivables 1,855 (40,650)
Retained securitized accounts receivable (86,109) 109,301
Increase in prepaid expenses and other
assets (684) (19,017)
Increase in accounts payable, accrued
expenses and other current liabilities 94,438 158,058
Increase in other long-term obligations 12,960 12,627
419,829 631,986
Net cash provided by operating activities 684,799 691,698
Investing Activities:
Acquisition of property and equipment (340,118) (450,217)
Proceeds from sales and maturities of
short-term investments 25,535 --
Proceeds from sales and maturities of
long-term investments 1,654 9,156
Purchase of long-term investments (250) (59,147)
Acquisition of lease rights (2,568) (216)
Net cash used in investing activities (315,747) (500,424)
Financing Activities:
Proceeds from sale of capital stock 53,549 54,207
Proceeds from borrowings 522,110 2,876,615
Payments on borrowings (800,194) (2,753,733)
Termination of interest rate swap
agreement 18,027 --
Purchase of treasury stock (26,083) (133,095)
Settlement of equity forward purchase
agreement -- (78,684)
Net cash used in financing activities (232,591) (34,690)
Effect of exchange rate changes on cash (5,197) (3,507)
Net increase in cash and cash equivalents 131,264 153,077
Cash and cash equivalents at beginning of
period 263,560 110,483
Cash and cash equivalents at end of period $ 394,824 $ 263,560
STAPLES, INC. AND SUBSIDIARIES
Segment Reporting
(Dollar Amounts in Thousands)
  13 Weeks   14 Weeks   52 Weeks   53 Weeks
Ended Ended Ended Ended
February 2, February 3, February 2, February 3,
2002 2001 2002 2001
Sales by Segment:
North American
Retail $ 1,928,830 $ 2,066,239 $ 6,914,219 $ 7,001,339
North American
Delivery 764,663 782,278 3,008,618 2,779,921
European
Operations 235,714 224,348 796,356 717,069
Total $ 2,929,207 $ 3,072,865 $ 10,719,193 $ 10,498,329
Divested
Businesses -- 41,954 25,180 175,342
Consolidated $ 2,929,207 $ 3,114,819 $ 10,744,373 $ 10,673,671
Business Unit
Income (Loss):
North American
Retail (1) $ 142,046 $ 138,473 $ 321,364 $ 427,954
North American
Delivery 65,575 37,284 205,630 112,100
European
Operations 9,492 2,120 (6,584) (24,378)
Total business
unit income $ 217,113 $ 177,877 $ 520,410 $ 515,676
Divested
Businesses -- (5,079) (1,537) (27,833)
Store closure
(charge) credit (50,092) -- (50,092) 7,250
Asset impairment
and other
charges (10,717) (205,750) (10,717) (205,750)
Interest and
other
expense, net (3,787) (13,349) (27,219) (45,158)
Income (loss)
before income
taxes $ 152,517 $ (46,301) $ 430,845 $ 244,185

(1) Business Unit Income for the 13 and 52 weeks ended February 2,

2002 includes a $7.4 million charge related to the write-down of

inventory to net realizable value for 31 stores to be closed in Q1

2002.

Contact:

Staples, Inc.
Laurel Lefebvre
Director, Investor Relations
508-253-4080
or
Staples, Inc.
Tom Nutile
Vice President, Public Relations
508-253-1833
or
Staples, Inc.
Deborah Hohler
Public Relations Manager
508-253-8509

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