SPLS Staples, Inc.

Staples, Inc. (Nasdaq: SPLS) announced today the results for its third quarter ended October 31, 2015. Total company sales for the third quarter of 2015 were $5.6 billion, a decrease of six percent compared to the third quarter of 2014. On a GAAP basis, the company reported net income of $198 million, or $0.31 per diluted share. Third quarter 2015 results on a GAAP basis include pre-tax charges of $40 million related to the acquisition of Office Depot, as well as $28 million primarily related to restructuring activities.

Total company sales for the third quarter of 2015 were flat compared to the third quarter of 2014 after excluding the impact of store closures during the past year and changes in foreign exchange rates. Excluding the impact of charges taken during the third quarter of 2015, the company reported non-GAAP net income of $226 million, or $0.35 per diluted share, compared to third quarter 2014 non-GAAP net income of $236 million, or $0.37 per diluted share.

“We’re driving solid sales and earnings growth in our North American Commercial business, and stabilizing results in North American Stores and Online,” said Ron Sargent, Staples’ chairman and chief executive officer. “Our strategic reinvention is on track, and we look forward to accelerating the transformation of Staples with the acquisition of Office Depot.”

Third Quarter 2015 Highlights

• Grew sales in North American Commercial one percent in U.S. dollars, or two percent on a local currency basis.
• Increased total company gross profit as a percentage of sales by 44 basis points on a GAAP basis, or 29 basis points after excluding charges related to inventory write-downs of $1 million during the third quarter of 2015 and $11 million during the third quarter of 2014.
• Improved total company operating income as a percentage of sales by 18 basis points on a GAAP basis, or 21 basis points after excluding charges of $40 million during the third quarter of 2015 and $41 million during the third quarter of 2014.
• Grew operating income by $13 million and improved operating income rate by 56 basis points during the third quarter of 2015 in North American Commercial.
• Secured approximately $50 million of annualized cost savings during the third quarter of 2015.
• Secured more than $450 million of annualized cost savings since the beginning of 2014, as part of a previously announced plan to eliminate at least $500 million of annualized costs in 2014 and 2015 combined.
• Closed 18 stores in North America during the third quarter of 2015 and closed 230 stores in North America since the beginning of 2014.

 

Third Quarter 2015 Financial Summary

    Third Quarter (dollar amounts in millions, except per share data) 2015   2014   Change Total company sales $5,593 $5,962 -6.2%

Total company sales growth excluding the impact of storeclosures and changes in foreign exchange rates*

-0.4%   GAAP operating income $318 $328 -$10 Non-GAAP operating income* $358 $369 -$11   GAAP operating income rate 5.7% 5.5% 18 basis points Non-GAAP operating income rate* 6.4% 6.2% 21 basis points   GAAP net income $198 $217 -$19 Non-GAAP net income* $226 $236 -$10   GAAP earnings per diluted share $0.31 $0.34 -9% Non-GAAP earnings per diluted share*     $0.35   $0.37   -5%  

*Indicates a non-GAAP measure. Refer to “Presentation of Non-GAAP Information” and the accompanying reconciliations for more detailed information about these non-GAAP measures.

Total company non-GAAP operating income rate increased 21 basis points to 6.4 percent from an operating income rate of 6.2 percent achieved during the third quarter of 2014. This increase reflects improved product margin rate in North American Stores and Online and North American Commercial, as well as reduced labor expense in North American stores. This was partially offset by investments in sales force to drive growth in categories beyond office supplies in North American Commercial, increased delivery expense in North American Stores and Online, as well as lower product margin rate in International Operations.

The company generated operating cash flow of $703 million and invested $215 million in capital expenditures year to date, resulting in free cash flow of $488 million. The company ended the quarter with $1.9 billion in liquidity, including $782 million in cash and cash equivalents.

        North American Stores and Online               Third Quarter (dollar amounts in millions) 2015 2014 Change Sales $2,613 $2,834 -7.8% Comparable sales* -2% Comparable store sales -2% Staples.com local currency sales growth 1%   Operating income $201 $218 -$17 Operating income rate     7.7%   7.7%   -1 basis point  

*Comparable sales includes comparable store sales and Staples.com sales growth excluding the impact of changes in foreign exchange rates.

Sales for the third quarter of 2015 were $2.6 billion, a decrease of eight percent compared to the third quarter of 2014. Sales growth was negatively impacted by approximately four percent due to changes in foreign exchange rates. Store closures also negatively impacted third quarter 2015 sales growth by approximately three percent. Comparable sales, which combines comparable store sales and Staples.com sales growth excluding the impact of changes in foreign exchange rates, decreased two percent versus the prior year. Sales declines in mobility, business machines, technology accessories, and ink and toner were partially offset by growth in office supplies, copy and print, and furniture. Comparable store sales decreased two percent, reflecting a one percent decline in average order size and a one percent decline in traffic versus the prior year. Staples.com sales declined two percent in U.S. dollars and grew one percent on a local currency basis during the third quarter of 2015.

Operating income rate decreased 1 basis point to 7.7 percent compared to the third quarter of 2014. This primarily reflects increased delivery expense, increased marketing expense as a percentage of sales, and the negative impact of lower sales on fixed expenses. This was offset by improved product margin rate and reduced labor and rent expense in retail stores.

        North American Commercial               Third Quarter (dollar amounts in millions) 2015 2014 Change Sales $2,173 $2,158 0.7%   Operating income $172 $159 $13 Operating income rate     7.9%   7.4%   56 basis points  

Sales for the third quarter of 2015 were $2.2 billion, an increase of one percent in U.S. dollars or two percent on a local currency basis compared to the third quarter of 2014. This primarily reflects growth in facilities supplies, promotional products, breakroom supplies, and furniture, partially offset by sales declines in ink and toner and paper.

Operating income rate increased 56 basis points to 7.9 percent compared to the third quarter of 2014. This improvement primarily reflects increased product margin rate, lower marketing expense and lower distribution expense. This was partially offset by investments in sales force to drive growth in categories beyond office supplies.

        International Operations               Third Quarter (dollar amounts in millions) 2015 2014 Change Sales $807 $970 -16.8%   Operating income $0 $6 -$6 Operating income rate     0.0%   0.6%   -64 basis points  

Sales for the third quarter of 2015 were $807 million, a decrease of 17 percent in U.S. dollars and a decrease of three percent on a local currency basis compared to the third quarter of 2014. This was primarily driven by sales declines in Europe, partially offset by growth in China.

Operating income rate for International Operations decreased 64 basis points to 0.0 percent compared to the third quarter of 2014. This decrease primarily reflects lower product margin rate and the negative impact of lower sales on fixed expenses in Europe, partially offset by improved profitability in Australia and China.

Outlook

For the fourth quarter of 2015, the company expects sales to decrease versus the fourth quarter of 2014. The company expects to achieve fully diluted non-GAAP earnings per share in the range of $0.26 to $0.30 for the fourth quarter of 2015. The company’s guidance reflects the unfavorable impact of the stronger U.S. dollar on sales and earnings. The company’s earnings guidance excludes any potential impact related to restructuring and other related activities or costs related to the company’s planned acquisition of Office Depot. For the full year 2015, the company expects to generate more than $600 million of free cash flow.

Presentation of Non-GAAP Information

This press release presents certain results with and without restructuring and related charges, long-lived asset impairment, inventory write-downs, costs related to the acquisition of Office Depot, as well as costs related to the PNI data security incident. This press release also presents certain results both with and without the impact of fluctuations in foreign currency exchange rates and with and without the impact of store closures. The presentation of these results, as well as the presentation of free cash flow, are non-GAAP financial measures that should be considered in addition to, and should not be considered superior to, or as a substitute for, the presentation of results determined in accordance with GAAP. Management believes that the non-GAAP financial measures enable management and investors to understand and analyze the company’s performance by providing meaningful information that facilitates the comparability of underlying business results from period to period. Management uses these non-GAAP financial measures to evaluate the operating results of the company’s business against prior year results and its operating plan, and to forecast and analyze future periods. Management recognizes there are limitations associated with the use of non-GAAP financial measures as they may reduce comparability with other companies that use different methods to calculate similar non-GAAP measures. Management generally compensates for these limitations by considering GAAP as well as non-GAAP results. In addition, management provides a reconciliation to the most comparable GAAP financial measure. With respect to earnings per share and free cash flow, financial guidance on a GAAP basis has not been provided given that current estimates for charges to be incurred related to restructuring initiatives, the planned acquisition of Office Depot, and the potential related impact on cash flow represent broad ranges which are based on preliminary analysis and are subject to change as plans become finalized.

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 makes it easy to make more happen with more products and more ways to shop. Through its world-class retail, online and delivery capabilities, Staples lets customers shop however and whenever they want, whether it’s in-store, online or on mobile devices. Staples offers more products than ever, such as technology, facilities and breakroom supplies, furniture, safety supplies, medical supplies, and Copy and Print services. Headquartered outside of Boston, Staples operates throughout North and South America, Europe, Asia, Australia and New Zealand. More information about Staples (SPLS) 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 “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 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, although not all forward-looking statements include such words. 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 the risks and uncertainties, including but not limited to those factors discussed or referenced in our Annual Report on Form 10-K filed on March 6, 2015, as well as our quarterly reports on Form 10-Q filed with the SEC since the 10-K, 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 SUBSIDIARIESCondensed Consolidated Balance Sheets(Dollar Amounts in Millions, Except Share Data)(Unaudited)

     

October 31,2015

January 31,2015

ASSETS Current assets: Cash and cash equivalents $ 782 $ 627 Receivables, net 1,967 1,928 Merchandise inventories, net 2,156 2,144 Deferred income tax assets 199 224 Prepaid expenses and other current assets   335     252   Total current assets 5,439 5,175   Property and equipment: Land and buildings 916 948 Leasehold improvements 1,182 1,231 Equipment 2,843 2,825 Furniture and fixtures   977     1,016   Total property and equipment 5,918 6,020 Less: Accumulated depreciation   4,348     4,314   Net property and equipment 1,570 1,706   Intangible assets, net of accumulated amortization 292 335 Goodwill 2,663 2,680 Other assets   354     412   Total assets $ 10,318   $ 10,308   LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 2,022 $ 1,867 Accrued expenses and other current liabilities 1,284 1,332 Debt maturing within one year   19     92   Total current liabilities 3,325 3,291   Long-term debt, net of current maturities 1,016 1,018 Other long-term obligations 630 686   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 944,842,977 and 643,601,788 shares atOctober 31, 2015 and 941,561,541 shares and 640,320,352 shares at January 31, 2015, respectively

1 1 Additional paid-in capital 4,978 4,935 Accumulated other comprehensive loss (1,113 ) (1,041 ) Retained earnings 6,892 6,829 Less: Treasury stock at cost, 301,241,189 shares at October 31, 2015 and January 31, 2015   (5,419 )   (5,419 ) Total Staples, Inc. stockholders’ equity 5,339 5,305 Noncontrolling interests   8     8   Total stockholders’ equity   5,347     5,313   Total liabilities and stockholders’ equity $ 10,318   $ 10,308      

STAPLES, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Income(Amounts in Millions, Except Per Share Data)(Unaudited)

      13 Weeks Ended 39 Weeks Ended

October 31, 2015

 

November 1, 2014

October 31, 2015

 

November 1, 2014

Sales $ 5,593 $ 5,962 $ 15,791 $ 16,836 Cost of goods sold and occupancy costs   4,071     4,366     11,659     12,521   Gross profit 1,522 1,596 4,132 4,315 Operating expenses: Selling, general and administrative 1,163 1,224 3,466 3,627 Impairment of long-lived assets 2 9 25 36 Restructuring charges 22 25 85 126 Amortization of intangibles   17     16     51     46   Total operating expenses   1,204     1,274     3,627     3,836     Gain on sale of businesses and assets, net — 6 3 27   Operating income 318 328 508 506   Other income (expense): Interest income 1 1 2 2 Interest expense (40 ) (13 ) (90 ) (37 ) Other income (expense), net   (8 )   (3 )   (9 )   3   Income before income taxes 271 314 411 474 Income tax expense   73     97     118     79   Net income $ 198   $ 217   $ 293   $ 395     Earnings Per Share: Basic Earnings Per Common Share $ 0.31   $ 0.34   $ 0.46   $ 0.62   Diluted Earnings Per Common Share $ 0.31   $ 0.34   $ 0.45   $ 0.61     Dividends declared per common share $ 0.12   $ 0.12   $ 0.36   $ 0.36     Comprehensive (loss) income $ 188   $ 80   $ 221   $ 258      

STAPLES, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Cash Flows(Amounts in Millions)(Unaudited)

    39 Weeks Ended

October 31,2015

 

November 1,2014

Operating Activities: Net income $ 293 $ 395 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 292 300 Amortization of intangibles 51 46 Gain on sale of businesses and assets, net (3 ) (27 ) Impairment of long-lived assets 25 36 Inventory write-downs related to restructuring activities 1 26 Stock-based compensation 49 51 Excess tax benefits from stock-based compensation arrangements (5 ) — Deferred income tax expense (benefit) 43 (21 ) Other 9 16 Changes in assets and liabilities: Increase in receivables (66 ) (151 ) Increase in merchandise inventories (36 ) (72 ) (Increase) decrease in prepaid expenses and other assets (43 ) 48 Increase in accounts payable 175 221 (Decrease) increase in accrued expenses and other liabilities (23 ) 71 Decrease in other long-term obligations   (59 )   (31 ) Net cash provided by operating activities 703 908   Investing Activities: Acquisition of property and equipment (215 ) (201 ) Proceeds from the sale of property and equipment 9 3 Sale of businesses, net 2 59 Acquisition of businesses, net of cash acquired   (23 )   (68 ) Net cash used in investing activities (227 ) (207 )   Financing Activities: Proceeds from the exercise of stock options and sale of stock under employee stock purchase plans 24 20 Proceeds from borrowings 4 19 Payments on borrowings, including payment of deferred financing fees (89 ) (45 ) Cash dividends paid (231 ) (230 ) Excess tax benefits from stock-based compensation arrangements 5 — Repurchase of common stock   (23 )   (183 ) Net cash used in financing activities (310 ) (419 ) Effect of exchange rate changes on cash and cash equivalents   (11 )   (13 ) Net increase in cash and cash equivalents 155 269 Cash and cash equivalents at beginning of period   627     493   Cash and cash equivalents at end of period 782 762 Add: Cash and cash equivalents attributed to disposal group held for sale at February 1, 2014   —     8   Cash and cash equivalents at the end of the period $ 782   $ 770      

STAPLES, INC. AND SUBSIDIARIESSegment Reporting(Amounts in Millions)(Unaudited)

      13 Weeks Ended 39 Weeks Ended October 31, 2015   November 1, 2014 October 31, 2015   November 1, 2014 Sales North American Stores & Online $ 2,613 $ 2,834 $ 7,092 $ 7,750 North American Commercial 2,173 2,158 6,330 6,211 International Operations   807     970     2,369     2,875   Total segment sales $ 5,593   $ 5,962   $ 15,791   $ 16,836     Business Unit Income (Loss) North American Stores & Online $ 201 $ 218 $ 304 $ 338 North American Commercial 172 159 444 425 International Operations   —     6     (42 )   (41 ) Business unit income 373 383 706 723 Stock-based compensation (15 ) (14 ) (49 ) (51 ) Impairment of long-lived assets (2 ) (9 ) (25 ) (36 ) Restructuring charges (22 ) (25 ) (85 ) (126 ) Inventory write-downs related to restructuring activities (1 ) (11 ) (1 ) (26 ) Accelerated depreciation related to restructuring activities — (2 ) (5 ) (4 ) Gain on sale of businesses and assets, net — 6 3 27 Interest and other expense, net (47 ) (15 ) (97 ) (32 ) Merger-related costs (12 ) — (33 ) — PNI data security incident costs   (3 )   —     (3 )   —   Income before income taxes $ 271   $ 314   $ 411   $ 474    

STAPLES, INC. AND SUBSIDIARIESReconciliation of GAAP to Non-GAAP Income Statement Disclosures(Dollar Amounts in Millions, Except Per Share Data)(Unaudited)For the non-GAAP measures related to results of operations, reconciliations to the most directly comparableGAAP measures are shown below (amounts in millions, except per share data):

    13 Weeks Ended October 31, 2015 GAAP  

Inventorywrite-downsrelated torestructuringactivities

 

Restructuringcharges

 

Impairment oflong-livedassets

 

Merger-related costs

 

PNI datasecurityincident costs

  Non-GAAP Operating income $ 318 $ 1   $ 22   $ 2 $ 12   $ 3 $ 358 Interest and other expense, net   47   28   19   Income before income taxes 271 339   Income tax expense 73 73 Adjustments   —     40   Adjusted income tax expense 73 113     Net income $ 198   $ 226     Effective tax rate 27.0 % 33.5 %   Diluted earnings per common share $ 0.31 $ 0.35     39 Weeks Ended October 31, 2015 GAAP  

Inventorywrite-downsrelated torestructuringactivities

 

Restructuringcharges

 

Impairment oflong-livedassets &accelerateddepreciation

 

Gain on saleof assets, net

 

Merger-related costs

 

PNI datasecurityincidentcosts

  Non-GAAP Operating income $ 508 $ 1   $ 85 $ 30 $ (3 ) $ 33 $ 3 $ 657 Interest and other expense, net   97   56   41   Income before income taxes 411 616   Income tax expense 118 118 Adjustments   —     88   Adjusted income tax expense 118 206     Net income $ 293   $ 410     Effective tax rate 28.8 % 33.5 %   Diluted earnings per common share $ 0.45 $ 0.63     13 Weeks Ended November 1, 2014 GAAP  

Inventorywrite-downs

 

Restructuringcharges

 

Impairment oflong livedassets &accelerateddepreciation

 

Gain on sale ofbusiness

  Non-GAAP Sales $ 5,962 $ 5,962 Gross profit 1,596 $ 11 — — — 1,607 Gross profit rate 26.8 % 27.0 %   Operating income 328 11 $ 25 $ 11 $ (6 ) 369 Interest and other expense, net   15     15   Income before income taxes 314 354   Income tax expense 97 97 Reduction of liability for unrecognized tax benefits — 6 Tax benefit on charges related to restructuring activities   —     16   Adjusted income tax expense 97 119     Net income $ 217   $ 236     Effective tax rate 30.9 % 33.5 %   Diluted earnings per common share $ 0.34 $ 0.37     39 Weeks Ended November 1, 2014 GAAP  

Inventorywrite-downs

 

Restructuringcharges

 

Impairment oflong livedassets &accelerateddepreciation

 

Gain on sale ofbusinesses, net

  Non-GAAP Sales $ 16,836 $ 16,836 Gross profit 4,315 $ 26 — — — 4,341 Gross profit rate 25.6 % 25.8 %   Operating income 506 26 $ 126 $ 40 $ (27 ) 672 Interest and other expense, net   32     32   Income before income taxes 474 640   Income tax expense 79 79 Reduction of liability for unrecognized tax benefits & other discrete tax items — 63 Tax benefit on charges related to restructuring activities   —     72   Adjusted income tax expense 79 214     Net income   395     425     Effective tax rate 16.7 % 33.5 %   Diluted earnings per common share $ 0.61 $ 0.66

Note that certain percentage figures shown in the tables above may not recalculate due to rounding.

STAPLES, INC. AND SUBSIDIARIESReconciliation of GAAP to Non-GAAP Sales Growth(Dollar amounts in Millions)(Unaudited)

        Staples.com Sales Growth

Third quarter offiscal 2015

Third quarter offiscal 2014

Change GAAP sales $ 584 $ 595 $ (11 ) GAAP sales growth (1.8 )%   Impact of changes in exchange rates $ 17   Non-GAAP sales $ 601 $ 595 $ 6 Non-GAAP sales growth 1.1 %        

Year-to-datefiscal 2015

Year-to-datefiscal 2014

Change GAAP sales $ 1,720 1,730 $ (10 ) GAAP sales growth (0.6 )%   Impact of changes in exchange rates $ 42   Non-GAAP sales $ 1,762 $ 1,730 $ 32 Non-GAAP sales growth 1.9 %     13 Weeks Ended October 31, 2015

Sales GrowthGAAP

 

Impact ofLocalCurrency

 

Sales Growth on aLocal CurrencyBasis

Sales: North American Stores & Online (7.8 )% 3.6 % (4.2 )% North American Commercial 0.7 % 1.0 % 1.7 % International Operations (16.8 )% 14.0 % (2.8 )% Total sales (6.2 )% 4.4 % (1.8 )%   39 Weeks Ended October 31, 2015

Sales GrowthGAAP

Impact ofLocalCurrency

Sales Growth on aLocal CurrencyBasis

Sales: North American Stores & Online (8.5 )% 2.9 % (5.6 )% North American Commercial 1.9 % 0.9 % 2.8 % International Operations (17.6 )% 15.6 % (2.0 )% Total sales (6.2 )% 4.3 % (1.9 )%

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 SUBSIDIARIESReconciliation of GAAP to Non-GAAP Sales Growth (continued)(Unaudited)

   

13 Weeks EndedOctober 31, 2015

GAAP sales growth (6.2 )% Impact of change in exchange rates (4.4 )% Impact of store closures (1.4 )% Non-GAAP sales growth (0.4 )%  

STAPLES, INC. AND SUBSIDIARIESReconciliation of Free Cash Flow Disclosures(Amounts in Millions)(Unaudited)

    39 Weeks Ended October 31, 2015   November 1, 2014 Net cash provided by operating activities $ 703 $ 908 Acquisition of property and equipment   (215 )   (201 ) Free cash flow $ 488   $ 707    

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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Staples, Inc.Media Contact:Kirk Saville, 508-253-8530orInvestor Contact:Chris Powers, 508-253-4632