Staples, Inc. Announces Second Quarter Performance Including Results of Corporate Express for July 2008

FRAMINGHAM, Mass.--(BUSINESS WIRE)--Staples, Inc. (Nasdaq: SPLS) announced today the results for its second quarter ended August 2, 2008, including the results of Corporate Express for July 2008. Total company sales increased 18 percent to $5.1 billion compared to the second quarter of 2007. Net income declined 16 percent year over year to $150 million, and earnings per share, on a diluted basis, decreased 16 percent to $0.21, from the $0.25 achieved in the second quarter of last year. Excluding the impact of Corporate Express, second quarter sales increased three percent to $4.4 billion and earnings per share, on a diluted basis, decreased 16 percent to $0.21.

North American Retail sales decreased one percent in the second quarter, and comparable store sales decreased seven percent versus 2007, reflecting declines in customer traffic and average order size as well as weakness in furniture, desktop computers, printers and digital cameras, partially offset by strength in laptops, ink and technology services.

Including $355 million of Corporate Express sales for July 2008, North American Delivery grew sales 25 percent to $2.0 billion. Excluding the impact of Corporate Express, North American Delivery sales grew two percent to $1.6 billion during the second quarter reflecting strong customer acquisition and retention offset by lower spend per existing customer, particularly in durable categories such as furniture.

Including $318 million of Corporate Express sales for July 2008, International sales increased 69 percent to $1.0 billion. Excluding the impact of Corporate Express, International sales grew 17 percent in US dollars and six percent in local currency compared to 2007. During the second quarter of 2008, comparable store sales in Europe were impacted by weakness in customer traffic and average order size, decreasing seven percent versus the same period in 2007.

“I am proud of our team for continuing to manage our business carefully during challenging economic times,” said Ron Sargent, Staples’ chairman and chief executive officer. “We are optimistic about the future for each of our three businesses. We’re excited about the opportunity to drive immediate shareholder value by integrating the Corporate Express acquisition into our North American Delivery business, we’re working hard to improve store productivity in North American Retail, and we’re taking the right steps to build on our foundation for long term growth in International markets.”

Staples maintains its previous outlook, announced on August 19, 2008. On a GAAP basis, including modest accretion from Corporate Express, Staples expects low single-digit earnings per share growth for the full year, compared to $1.38 reported for 2007.

As a result of the Corporate Express acquisition, the company anticipates total annual synergies to build, over a three year period, to a range of $200 million to $300 million. The company’s estimated incremental interest expense is more than $100 million in the back half of 2008. The company’s preliminary forecast for amortization of intangibles is a range of $50 million to $70 million for the same period. The company expects these expenses to double in 2009. Additionally, Staples anticipates integration and restructuring expense to range from $30 million to $40 million in the back half of 2008, and to range from $50 million to $70 million in 2009.

For its pre-acquisition business, Staples expects low single-digit sales growth for 2008. On a non-GAAP basis, the company anticipates that diluted earnings per share will be flat for 2008. This excludes the previously disclosed impact on 2007 earnings for the $38 million pre-tax charge related to the settlement of California wage and hour class action litigation, as well as the impact of the Corporate Express acquisition.

In the near term, Staples plans to deploy free cash flows primarily to repay short term debt, and therefore does not anticipate repurchasing any of its shares.

This press release presents certain results both with and without the July 2008 results of Corporate Express. The presentation of results that exclude these items 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 presented in this press release provide a more meaningful comparison of the company’s year-over-year performance. Management also uses these non-GAAP financial measures to evaluate the company’s pre-acquisition operating results against prior year results and its operating plan.

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.

Staples, the world’s largest office products company, is committed to making it easy for customers to buy a wide range of office products, including supplies, technology, furniture, and business services. With $27 billion in sales, Staples serves businesses of all sizes and consumers in 27 countries throughout North and South America, Europe, Asia and Australia. In July 2008, Staples acquired Corporate Express, one of the world’s leading suppliers of office products to businesses and institutions. Staples invented the office superstore concept in 1986 and is headquartered outside Boston. More information about Staples (Nasdaq: 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 headings that include the words “Outlook” or “Estimates” 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; economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance; we may not be able to successfully integrate Corporate Express into our existing operations to realize anticipated benefits and our growth may strain our operations; we may be unable to continue to open new stores and enter new markets successfully; if we are unable to manage our debt, it could materially harm our business and financial condition and restrict our operating flexibility; we may be unable to attract and retain qualified associates; our quarterly operating results are subject to significant fluctuation; 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 intellectual property and product liability claims; our effective tax rate may fluctuate; our information security may be compromised; various legal proceedings may adversely affect our business and financial performance; and those other factors discussed or referenced in our most recent quarterly report on Form 10-Q filed with the SEC, 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 SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)

			August 2,			February 2,
				2008			2008
ASSETS
Current assets:
	Cash and cash equivalents		$	258,444		$	1,245,448
	Short-term investments			-			27,016
	Receivables, net			2,230,032			822,254
	Merchandise inventories, net			2,934,892			2,053,163
	Deferred income tax asset			167,173			173,545
	Prepaid expenses and other current assets			269,598			233,956
		Total current assets		5,860,139			4,555,382

Property and equipment:
	Land and buildings			1,161,686			859,751
	Leasehold improvements			1,165,106			1,135,132
	Equipment			2,081,470			1,819,381
	Furniture and fixtures			908,673			871,361
		Total property and equipment		5,316,935			4,685,625
	Less accumulated depreciation and amortization			2,727,429			2,524,486
		Net property and equipment		2,589,506			2,161,139

	Lease acquisition costs, net of accumulated amortization			29,967			31,399
	Intangible assets, net of accumulated amortization			1,075,068			231,310
	Goodwill			4,443,547			1,764,928
	Other assets			1,210,517			292,186
		Total assets	$	15,208,744		$	9,036,344

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	2,799,763		$	1,560,728
	Accrued expenses and other current liabilities			1,017,419			1,025,364
	Commercial paper			2,992,993			-
	Debt maturing within one year			584,290			23,806
		Total current liabilities		7,394,465			2,609,898

Long-term debt				864,843			342,169
Other long-term obligations				928,236			356,043
Minority interest				80,327			10,227

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 878,326,991 shares at August 2, 2008 and 867,366,103 shares at February 2, 2008			527			520
	Additional paid-in capital			3,878,412			3,720,319
	Cumulative foreign currency translation adjustments			489,931			476,399
	Retained earnings			4,924,590			4,793,542
	Less: Treasury stock at cost - 166,244,823 shares at August 2, 2008 and 162,728,588 shares at February 2, 2008			(3,352,587	)		(3,272,773	)
		Total stockholders' equity		5,940,873			5,718,007
		Total liabilities and stockholders' equity	$	15,208,744		$	9,036,344

STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)

	13 Weeks Ended						26 Weeks Ended
	August 2,			August 4,			August 2,			August 4,
		2008			2007			2008			2007

Sales	$	5,074,720		$	4,290,424		$	9,959,274		$	8,879,889
Cost of goods sold and occupancy costs		3,723,218			3,080,057			7,236,850			6,384,583
Gross profit		1,351,502			1,210,367			2,722,424			2,495,306

Operating and other expenses:
Selling, general and admin-istrative		1,091,664			926,016			2,136,465			1,884,911
Integration and re- structuring charges		163			-			163			-
Amortization of intangibles		14,259			3,877			18,415			7,310
Total operating expenses		1,106,086			929,893			2,155,043			1,892,221

Operating income		245,416			280,474			567,381			603,085

Other income (expense):
Interest income		6,293			10,630			17,781			26,181
Interest expense		(21,190	)		(11,065	)		(28,446	)		(22,200	)
Miscellaneous income (expense)		(604	)		(892	)		(389	)		(1,489	)
Income before income taxes and minority interest		229,915			279,147			556,327			605,577
Income tax expense		77,700			100,493			191,944			218,008
Income before minority interests		152,215			178,654			364,383			387,569
Minority interest income		1,982			(174	)		1,868			(402	)
Net income	$	150,233		$	178,828		$	362,515		$	387,971


Earnings Per Share:

Basic earnings per common share	$	0.22		$	0.25		$	0.52		$	0.55

Diluted earnings per common share	$	0.21		$	0.25		$	0.51		$	0.53

Dividends declared per common share	$	-		$	-		$	0.33		$	0.29


Weighted average shares outstanding:

Basic		695,870,460			708,145,408			694,636,258			709,822,203

Diluted		711,403,428			726,071,464			709,670,297			727,494,199

STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)

		26 Weeks Ended
		August 2,			August 4,
			2008			2007
Operating Activities:
	Net income	$	362,515		$	387,971
	Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization		224,906			186,635
	Amortization of Debt Issuance Costs		3,514			-
	Stock-based compensation		86,797			83,118
	Deferred tax benefit		14,419			21,839
	Excess tax benefits from stock-based compensation arrangements		(2,421	)		(15,973	)
	Other		4,593			373
	Changes in assets and liabilities:
	Increase in receivables		(58,603	)		(45,731	)
	Increase in merchandise inventories		(147,943	)		(259,261	)
	Decrease (increase) in prepaid expenses and other assets		20,324			(56,166	)
	Increase in accounts payable		103,150			81,086
	Decrease in accrued expenses and other liabilities		(495,876	)		(259,673	)
	Increase in other long-term obligations		72,545			82,006
Net cash provided by operating activities			187,920			206,224

Investing Activities:
	Acquisition of property and equipment		(168,663	)		(205,574	)
	Acquisition of businesses and investments in joint ventures, net of cash acquired		(4,381,780	)		(178,295	)
	Proceeds from the sale of short-term investments		27,019			3,415,874
	Purchase of short-term investments		(3	)		(3,123,358	)
Net cash used in investing activities			(4,523,427	)		(91,353	)

Financing Activities:
	Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans		70,683			109,030
	Proceeds from issuance of commercial paper, net of repayments		2,992,993			-
	Proceeds from borrowings		650,809			17,224
	Payments on borrowings		(52,328	)		(3,213	)
	Payments of debt issuance costs		(15,850	)		-
	Cash dividends paid		(231,465	)		(207,552	)
	Excess tax benefits from stock-based compensation arrangements		2,421			15,973
	Purchase of treasury stock, net		(79,814	)		(393,864	)
Net cash provided by (used in) financing activities			3,337,449			(462,402	)

Effect of exchange rate changes on cash and cash equivalents			11,054			21,776

Net decrease in cash and cash equivalents			(987,004	)		(325,755	)
Cash and cash equivalents at beginning of period			1,245,448			1,017,671
Cash and cash equivalents at end of period		$	258,444		$	691,916

STAPLES, INC. AND SUBSIDIARIES
Segment Reporting
(Dollar Amounts in Thousands)
(Unaudited)

	(Unaudited)						(Unaudited)
	13 Weeks Ended						26 Weeks Ended

	August 2,			August 4,			August 2,			August 4,
		2008			2007			2008			2007
Sales:
North American Retail
North American Delivery	$	2,087,863		$	2,111,192		$	4,496,364		$	4,474,795
International Operations		1,965,801			1,576,829			3,686,292			3,169,858
Total sales		1,021,056			602,403			1,776,618			1,235,236
	$	5,074,720		$	4,290,424		$	9,959,274		$	8,879,889
Business Unit Income:
North American Retail	$	110,542		$	156,832		$	278,784		$	346,384
North American Delivery		173,555			168,099			336,817			319,929
International Operations		14,917			4,401			38,740			19,890
Total business unit income		299,014			329,332			654,341			686,203
Stock-based compensation		(53,435	)		(48,858	)		(86,797	)		(83,118	)
Integration and restructuring costs		(163	)		-			(163	)		-
Total segment income		245,416			280,474			567,381			603,085
Interest and other income, net		(15,501	)		(1,327	)		(11,054	)		2,492
Income before income taxes and minority interest	$	229,915		$	279,147		$	556,327		$	605,577

STAPLES, INC. AND SUBSIDIARIES
Reconciliation of GAAP to Non-GAAP Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Share Data)

	Quarter Ended
	August 2,												August 4,
	2008													2007
	As Reported			Corporate Express			Other Adjustments (1)			As Adjusted			As Reported

Sales	$	5,074,720		$	672,518					$	4,402,202		$	4,290,424
Cost of goods sold and occupancy costs		3,723,218			538,857						3,184,361			3,080,057
Gross profit		1,351,502			133,661						1,217,841			1,210,367

Operating expenses:
Selling, general and administrative		1,091,664			109,794						981,870			926,016
Integration and restructuring charges		163			163						-			-
Amortization of intangibles		14,259			1,769			8,648			3,842			3,877
Total operating expenses		1,106,086			111,726			8,648			985,712			929,893

Operating income		245,416			21,935			(8,648	)		232,129			280,474
Interest and other expense, net		15,501			2,101			13,306			94			1,327
Income before income taxes		229,915			19,834			(21,954	)		232,035			279,147
Income tax expense		77,700			6,843			(10,454	)		81,311			100,493

Income before minority interest		152,215			12,991			(11,500	)		150,724			178,654
Minority interest		1,982			2,129						(147	)		(174	)
Net income	$	150,233		$	10,862		$	(11,500	)	$	150,871		$	178,828

Effective tax rate		33.8	%		34.5	%					35.0	%		36.0	%


Historical diluted earnings per share:	$	0.21		$	0.02		$	(0.02	)	$	0.21		$	0.25



Number of shares used in computing historical
earnings per share:		711,403,428												726,071,464

(1) Other adjustments consist of the following:
- Amortization of $8.6 million for the identifiable intangible assets related to the acquisition of Corporate Express.
- Interest related to the acquisition financing.
- Adjustment to income taxes for the consolidated entity from the rate reported for the period to the rate reported for the first quarter of 2008.

STAPLES, INC. AND SUBSIDIARIES
Reconciliation of GAAP to Non-GAAP Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Share Data)

	Six Months Ended
	August 2,												August 4,
	2008													2007
	As Reported			Corporate Express			Other Adjustments (1)			As Adjusted			As Reported

Sales	$	9,959,274		$	672,518					$	9,286,756		$	8,879,889
Cost of goods sold and occupancy costs		7,236,850			538,857						6,697,993			6,384,583
Gross profit		2,722,424			133,661						2,588,763		$	2,495,306

Operating expenses:
Selling, general and administrative		2,136,465			109,794						2,026,671			1,884,911
Integration and restructuring charges		163			163						-		$	-
Amortization of intangibles		18,415			1,769			8,648			7,998			7,310
Total operating expenses		2,155,043			111,726			8,648			2,034,669			1,892,221

Operating income		567,381			21,935			(8,648	)		554,094			603,085
Interest and other expense, net		11,054			2,101			13,306			(4,353	)		(2,492	)
Income before income taxes		556,327			19,834			(21,954	)		558,447			605,577
Income tax expense		191,944			6,843			(10,454	)		195,555			218,008

Income before minority interest		364,383			12,991			(11,500	)		362,892			387,569
Minority interest		1,868			2,129						(261	)		(402	)
Net income	$	362,515		$	10,862		$	(11,500	)	$	363,153		$	387,971

Effective tax rate		34.5	%		34.5	%					35.0	%		36.0	%


Historical diluted earnings per share:	$	0.51		$	0.02		$	(0.02	)	$	0.51		$	0.53



Number of shares used in computing historical
earnings per share:		709,670,297												727,494,199


(1) Other adjustments consist of the following:
- Amortization of $8.6 million for the identifiable intangible assets related to the acquisition of Corporate Express.
- Interest related to the acquisition financing.
- Adjustment to income taxes for the consolidated entity from the rate reported for the period to the rate reported for the first quarter of 2008.

CONTACT:
Staples, Inc.
Media Contact
Paul Capelli/Owen Davis, 508-253-8530/8468
or
Investor Contact
Laurel Lefebvre/Chris Powers, 508-253-4080/4632