SPLS Staples, Inc.

Staples, Inc. (Nasdaq: SPLS) announced today the results for its third quarter ended October 29, 2016. Total company sales for the third quarter of 2016 were $5.4 billion, a decrease of four percent compared to the third quarter of 2015. On a GAAP basis, the company reported net income of $179 million, or $0.27 per diluted share. Third quarter 2016 results on a GAAP basis include pre-tax charges of $57 million primarily related to impairment of intangible assets in International Operations.

Excluding the impact of the sale of the Staples Print Solutions business during the second quarter of 2016, store closures, and changes in foreign exchange rates, total company sales for the third quarter of 2016 decreased two percent compared to the third quarter of 2015. Excluding the impact of charges taken during the third quarter of 2016, the company reported non-GAAP net income of $220 million, or $0.34 per diluted share, versus third quarter 2015 non-GAAP net income of $226 million, or $0.35 per diluted share.

“During the third quarter we pivoted from planning to execution of the Staples 20/20 strategic plan while delivering results that were right in-line with our expectations,” said Shira Goodman, Staples’ Chief Executive Officer. “Staples 20/20 is a transformational change of our strategy, our mindset, and our operating model to reshape our company for sustainable long-term growth.”

 

           

Third Quarter 2016 Financial Summary

                  Third Quarter (dollar amounts in millions, except per share data)   2016     2015   Change Total company sales $ 5,355 $ 5,593 -4.3 % Total company sales growth excluding the impact of the sale of Staples

Print Solutions, store closures, and changes in foreign exchange rates*

-2 %   GAAP operating income $ 298 $ 318 -$20 Non-GAAP operating income* $ 355 $ 358 -$3   GAAP operating income rate 5.6 % 5.7 % -13 basis points Non-GAAP operating income rate* 6.6 % 6.4 % 22 basis points   GAAP net income $ 179 $ 198 -$19 Non-GAAP net income* $ 220 $ 226 -$6   GAAP earnings per diluted share $ 0.27 $ 0.31 -13 % Non-GAAP earnings per diluted share*     $ 0.34       $ 0.35       -3 %

*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.

Third Quarter 2016 Highlights

• Staples Business Advantage, the company’s North American contract business, experienced a sales decline of three percent compared to the third quarter of 2015 on a GAAP basis, and a sales increase of two percent after excluding a negative impact of approximately five percent due to the sale of the Staples Print Solutions business.
• Excluding pre-tax charges of $57 million during the third quarter of 2016 and $40 million during the third quarter of 2015, the company improved operating income rate by 22 basis points on a non-GAAP basis.
• Improved operating income rate in each of the company’s business units.
• Ended the third quarter of 2016 with $2.2 billion in liquidity, including $1.1 billion in cash and cash equivalents.
• Closed 16 stores during the third quarter of 2016 and 35 stores year to date in North America as part of a plan to close at least 50 stores in North America during 2016.
• Acquired Capital Office Products, an independent office products dealer that generates more than $100 million of annual revenue early in the fourth quarter of 2016.
• Divested the company’s retail business in the United Kingdom for nominal proceeds early in the fourth quarter of 2016.

            North American Commercial                   Third Quarter (dollar amounts in millions)   2016     2015   Change Sales $ 2,110 $ 2,173 -2.9 %   Operating income $ 171 $ 172 -$1 Operating income rate       8.1 %       7.9 %     18 basis points  

North American Commercial sales for the third quarter of 2016 were $2.1 billion, a decline of three percent compared to the third quarter of 2015. Sales growth was negatively impacted by approximately four percent due to the second quarter 2016 sale of the Staples Print Solutions business and also reflects growth in facilities supplies, breakroom supplies, and technology products, partially offset by declines in ink and toner and office supplies.

Staples Business Advantage sales declined three percent on a GAAP basis and increased two percent on a non-GAAP basis after excluding a negative impact of approximately five percent due to the sale of the Staples Print Solutions business.

Operating income rate increased 18 basis points to 8.1 percent compared to the third quarter of 2015. This improvement primarily reflects lower compensation expense. This was partially offset by increased supply chain costs and lower product margin rate.

            North American Stores and Online                   Third Quarter (dollar amounts in millions)   2016     2015   Change Sales $ 2,496 $ 2,613 -4.5 % Comparable sales* -3 % Comparable store sales -4 % Staples.com local currency sales growth -1 %   Operating income $ 193 $ 201 -$8 Operating income rate       7.8 %       7.7 %     7 basis points

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

North American Stores and Online sales for the third quarter of 2016 were $2.5 billion, a decrease of four percent compared to the third quarter of 2015. Store closures negatively impacted third quarter 2016 sales growth by approximately one percent. Comparable sales, which combines comparable store sales and Staples.com sales growth excluding the impact of changes in foreign exchange rates, decreased three percent versus the prior year. Sales declines in ink and toner, business machines, technology accessories and mobility were partially offset by growth in computers and facilities supplies. Comparable store sales decreased four percent, primarily reflecting a decline in customer traffic versus the prior year. Staples.com sales declined one percent compared to the third quarter of 2015.

Operating income rate increased 7 basis points to 7.8 percent compared to the third quarter of 2015. This primarily reflects improved product margin rate in stores and online. This was partially offset by the negative impact of lower sales on fixed expenses in stores and online.

            International Operations                   Third Quarter (dollar amounts in millions)   2016     2015   Change Sales $ 749 $ 807 -7.2 %   Operating income $ 6 $ 0 $ 6 Operating income rate       0.7 %       0.0 %     76 basis points  

International Operations sales for the third quarter of 2016 were $749 million, a decrease of seven percent in U.S. dollars or five percent on a local currency basis compared to the third quarter of 2015. This was primarily driven by sales declines in Europe, partially offset by double-digit growth in China.

Operating income rate for International Operations improved 76 basis points to an operating profit of 0.7 percent compared to the third quarter of 2015. This primarily reflects improved profitability in Europe.

OutlookFor the fourth quarter of 2016, the company expects sales to decrease versus the fourth quarter of 2015. The company expects to achieve fully diluted non-GAAP earnings per share in the range of $0.23 to $0.26 for the fourth quarter of 2016. The company’s earnings guidance excludes potential charges related to the company’s strategic plans, including restructuring and related initiatives as well as the ongoing exploration of strategic alternatives for the company’s European operations. For the full year 2016, the company has increased its free cash flow guidance from approximately $600 million to approximately $700 million excluding the after-tax impact to operating cash flow of approximately $340 million of charges associated with financing for the proposed acquisition of Office Depot and costs associated with the termination of the Office Depot merger agreement. The company plans to close at least 50 stores in North America in 2016.

Presentation of Non-GAAP InformationThis press release presents certain results with and without the impairment of goodwill, restructuring and related charges, long-lived asset impairment, gains and losses related to the sale of businesses and assets, costs related to the proposed acquisition of Office Depot and costs related to litigation. This press release also presents certain results both with and without the impact of fluctuations in foreign currency exchange rates, with and without the impact of store closures and with and without the impact of the sale of the Staples Print Solutions business. 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 potential charges to be incurred related to the company’s strategic plans, including restructuring and related initiatives as well as the ongoing exploration of strategic alternatives for the company’s European operations, and the potential related impact on cash flow cannot be reasonably estimated.

Today's Conference CallThe company will host a conference call today at 9:00 a.m. (ET) to review these results and its outlook. The webcast of the conference call and accompanying slides can be accessed on the company’s investor relations website at http://investor.staples.com. A replay will also be available on the company’s investor relations website after the call.

About Staples, Inc.Staples helps small business customers make more happen by providing a broad assortment of products, expanded business services and easy ways to shop – in stores, online, via mobile or through social apps. Staples Business Advantage, the business-to-business division, caters to mid-market, commercial and enterprise-sized customers by offering a one-source solution for the products and services they need, combined with best-in-class customer service, competitive pricing and a state-of-the-art ecommerce site. Headquartered outside of Boston, Staples, Inc. operates throughout North and South America, Europe, Asia, Australia and New Zealand. More information about Staples (NASDAQ: SPLS) is available at www.staples.com.

Safe Harbor for Forward-looking StatementsCertain 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 risks and uncertainties, including but not limited to our ability to meet the changing needs of our customers; our ability to successfully transform our business; industry, operating and competitive pressures and global economic conditions, including their impact on prices and demand for our products and services, our financial condition and our results of operations; risks related to international operations and fluctuations in foreign exchange rates, including as a result of the uncertainty related to Britain’s decision in 2016 to exit the European Union; compromises of our information security; changes in our effective tax rate; our ability to retain qualified employees; the impact of regulation and regulatory, investigative and legal proceedings and legal compliance risks; and factors discussed or referenced in our Annual Report on Form 10-K filed on March 4, 2016, 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. 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 Millions, Except Share Data)

(Unaudited)

  October 29, 2016 January 30, 2016 ASSETS Current assets: Cash and cash equivalents $ 1,076 $ 825 Receivables, net 1,865 1,899 Merchandise inventories, net 2,019 2,078 Prepaid expenses and other current assets 374   310   Total current assets 5,334 5,112   Net property and equipment 1,412 1,586 Intangible assets, net of accumulated amortization 202 274 Goodwill 2,010 2,653 Other assets 429   547   Total assets $ 9,387   $ 10,172     LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities:

Accounts payable

$ 2,025 $ 1,894 Accrued expenses and other current liabilities 1,193 1,353 Debt maturing within one year 23   17   Total current liabilities 3,241 3,264   Long-term debt 1,024 1,018 Other long-term obligations 467 506   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 andoutstanding 951,785,057 and 650,543,868 shares at October 29, 2016 and946,964,792 and 645,723,603 shares at January 30, 2016

1 1 Additional paid-in capital 5,039 5,010 Accumulated other comprehensive loss (1,096 ) (1,116 ) Retained earnings 6,122 6,900 Less: Treasury stock at cost, 301,241,189 shares at October 29, 2016 and January 30, 2016 (5,419 ) (5,419 ) Total Staples, Inc. stockholders’ equity 4,647 5,376 Noncontrolling interests 8   8   Total stockholders’ equity 4,655   5,384   Total liabilities and stockholders’ equity $ 9,387   $ 10,172    

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Amounts in Millions, Except Per Share Data)

(Unaudited)

        13 Weeks Ended 39 Weeks Ended October 29, 2016     October 31, 2015 October 29, 2016     October 31, 2015 Sales $ 5,355 $ 5,593 $ 15,208 $ 15,791 Cost of goods sold and occupancy costs 3,912   4,071   11,285   11,659   Gross profit 1,443 1,522 3,923 4,132 Operating expenses: Selling, general and administrative 1,078 1,163 3,277 3,466 Merger termination fee — — 250 — Impairment of goodwill and long-lived assets 44 2 704 25 Restructuring charges 7 22 17 85 Amortization of intangibles 14   17   44   51  

Total operating expenses

1,143   1,204   4,292   3,627     (Loss) gain on sale of businesses and assets, net (2 ) — (50 ) 3   Operating income (loss) 298 318 (419 ) 508   Other income (expense): Interest income 1 1 5 2 Interest expense (11 ) (40 ) (71 ) (90 ) Loss on early extinguishment of debt — — (26 ) — Other (expense) income, net (4 ) (8 ) 3   (9 ) Income (loss) before income taxes 284 271 (508 ) 411 Income tax expense 105   73   37   118   Net income (loss) $ 179   $ 198   $ (545 ) $ 293     Earnings Per Common Share: Basic Earnings Per Common Share $ 0.28   $ 0.31   $ (0.84 ) $ 0.46   Diluted Earnings Per Common Share $ 0.27   $ 0.31   $ (0.84 ) $ 0.45     Dividends declared per common share $ 0.12   $ 0.12   $ 0.36   $ 0.36     Comprehensive income (loss) $ 152   $ 188   $ (525 ) $ 221    

 

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Amounts in Millions)

(Unaudited)

    39 Weeks Ended October 29, 2016     October 31, 2015 Operating Activities: Net (loss) income $ (545 ) $ 293 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 288 292 Amortization of intangibles 44 51 Loss (gain) on sale of businesses and assets, net 50 (3 ) Interest and fees paid from restricted cash account, net 66 — Impairment of goodwill and long-lived assets 704 25 Inventory write-downs related to restructuring activities — 1 Stock-based compensation 47 49 Excess tax benefits from stock-based compensation arrangements — (5 ) Deferred income tax expense 78 43 Other 4 9 Changes in assets and liabilities: Increase in receivables (12 ) (66 ) Decrease (increase) in merchandise inventories 7 (36 ) Increase in prepaid expenses and other assets (50 ) (43 ) Increase in accounts payable 141 175 Decrease in accrued expenses and other liabilities (157 ) (23 ) Decrease in other long-term obligations (35 ) (59 ) Net cash provided by operating activities 630 703   Investing Activities: Acquisition of property and equipment (158 ) (215 ) Proceeds from the sale of property and equipment — 9 Sale of businesses, net 83 2 Increase in restricted cash (66 ) — Acquisition of businesses, net of cash acquired —   (23 ) Net cash used in investing activities (141 ) (227 )   Financing Activities: Proceeds from the exercise of stock options and sale of stock under employee stock purchase plans 15 24 Proceeds from borrowings 187 4 Payments on borrowings, including payment of deferred financing fees and capital lease obligations (200 ) (89 ) Cash dividends paid (233 ) (231 ) Excess tax benefits from stock-based compensation arrangements — 5 Repurchase of common stock (13 ) (23 ) Net cash used in financing activities (244 ) (310 ) Effect of exchange rate changes on cash and cash equivalents 6   (11 ) Net increase in cash and cash equivalents 251 155 Cash and cash equivalents at beginning of period 825   627   Cash and cash equivalents at the end of the period $ 1,076   $ 782    

STAPLES, INC. AND SUBSIDIARIES

Segment Reporting

(Amounts in Millions)

(Unaudited)

        13 Weeks Ended 39 Weeks Ended October 29, 2016     October 31, 2015 October 29, 2016     October 31, 2015 Sales North American Commercial $ 2,110 $ 2,173 $ 6,270 $ 6,330 North American Stores & Online 2,496 2,613 6,730 7,092 International Operations 749   807   2,208   2,369   Total segment sales $ 5,355   $ 5,593   $ 15,208   $ 15,791     Business Unit Income (Loss) North American Commercial $ 171 $ 172 $ 465 $ 444 North American Stores & Online 193 201 267 304 International Operations 6   —   (26 ) (42 ) Business unit income 370 373 706 706 Merger termination fee — — (250 ) — Stock-based compensation and retention (15 ) (15 ) (48 ) (49 ) Impairment of goodwill and long-lived assets (44 ) (2 ) (704 ) (25 ) Litigation costs — — (17 ) — Restructuring charges and costs related to strategic plans (11 ) (23 ) (32 ) (91 ) (Loss) gain related to sale of businesses and assets, net (2 ) — (50 ) 3 Interest and other expense, net (14 ) (47 ) (63 ) (97 ) Loss on early extinguishment of debt — — (26 ) — Merger-related costs — (12 ) (24 ) (33 ) PNI data security incident costs —   (3 ) —   (3 ) Income (loss) before income taxes $ 284   $ 271   $ (508 ) $ 411    

STAPLES, INC. AND SUBSIDIARIES

Reconciliation 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 comparable GAAP measures are shown below:

    13 Weeks Ended October 29, 2016 GAAP    

Impairment of long-lived assets

   

Loss on sale of businesses and assets, net

   

Costs related to restructuring and strategic plans

    Non-GAAP               Operating income $ 298 $ 44 $ 2 $ 11 $ 355 Interest and other expense, net 14   — — — 14   Income before income taxes 284 341   Income tax expense 105 105 Adjustments —   16   Adjusted income tax expense 105   121   Net income $ 179   $ 220     Effective tax rate 36.9 % 35.5 %   Income per common share: Diluted earnings per common share $ 0.27 $ 0.34     39 Weeks Ended October 29, 2016 GAAP     Impairment of goodwill and long-lived assets     Merger-related costs     Loss on sale of businesses and assets, net     Litigation     Costs related to restructuring and strategic plans     Non-GAAP Gross profit $ 3,923 $ —     $ — $ — $ — $ 4     $ 3,927   Operating (loss) income (419 ) 704 274 50 17 32 658 Interest and other expense, net 63 — (37 ) — — — 26 Loss on early extinguishment of debt 26   — (26 ) — — — —   (Loss) income before income taxes (508 ) 632   Income tax expense 37 37 Adjustments —   188   Adjusted income tax expense 37 225     Net (loss) income $ (545 ) $ 407     Effective tax rate (7.3 )% 35.5 %   (Loss) income per common share: Basic earnings per common share $ (0.84 ) $ 0.63 Diluted earnings per common share $ (0.84 ) $ 0.63   Weighted average common shares outstanding 648 648 Effect of dilutive securities —   4   Weighted average common shares outstanding assuming dilution. 648   652       13 Weeks Ended October 31, 2015 GAAP    

Restructuringcharges

   

Impairment of long lived assets

   

Merger-related costs

   

PNI datasecurity incident costs

    Non-GAAP Operating income $ 318 $ 23 $ 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     Restructuring charges    

Impairment of long-lived assets & accelerated depreciation

   

Gain on sale of assets, net

   

Merger-related costs

   

PNI data security incident costs

    Non-GAAP Operating income $ 508 $ 86 $ 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 commonshare

$ 0.45 $ 0.63

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

 

STAPLES, INC. AND SUBSIDIARIES

Reconciliation of GAAP to Non-GAAP Sales Growth

(Dollar amounts in Millions)

(Unaudited)

    Staples Business Advantage Sales Growth

Third quarter offiscal 2016

GAAP sales growth $ (48 ) GAAP sales growth (2.6 )%   Impact of divestiture of Staples Print Solutions $ 86   Non-GAAP sales growth $ 38 Non-GAAP sales growth 2.1 %     13 Weeks Ended October 29, 2016 Sales Growth GAAP    

Impact ofLocalCurrency

   

Sales Growth on aLocal Currency Basis

Sales: North American Commercial (2.9 )%

—

%

(2.9 )% North American Stores & Online (4.5 )% 0.1 % (4.6 )% International Operations (7.2 )% (2.4 )% (4.8 )% Total sales (4.2 )% (0.3 )% (3.9 )%

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.

   

13 Weeks EndedOctober 29, 2016

GAAP sales growth (4.2 )% Impact of change in exchange rates (0.3 )% Impact of store closures (0.6 )% Impact of divestitures (1.5 )% Non-GAAP sales growth (1.8 )%  

STAPLES, INC. AND SUBSIDIARIES

Reconciliation of Free Cash Flow Disclosures

(Amounts in Millions)

(Unaudited)

    39 Weeks Ended October 29, 2016     October 31, 2015 Net cash provided by operating activities $ 630 $ 703 Acquisition of property and equipment (158 ) (215 ) Free cash flow $ 472   $ 488    

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:Bill Durling, 508-253-2882Investor Contact:Chris Powers/Scott Tilghman, 508-253-4632/1487