Staples, Inc. Reports Record Third Quarter Results; Earnings Per Share Increased 30 Percent

Staples, Inc. (Nasdaq: SPLS) announced today the results for its third quarter ended October 28, 2006. The company drove strong performance in each of its three businesses, gaining market share and winning with customers around the world. Total company sales for the third quarter 2006 increased 12 percent to $4.8 billion compared to the $4.2 billion reported for the third quarter of 2005. Net income rose 29 percent year-over-year to $290 million, and earnings per share, on a diluted basis, increased 30 percent to $0.39, from the $0.30 achieved in the third quarter of last year. Third quarter 2006 earnings results reflect a lower tax rate, due to the favorable resolution of certain tax matters, and a correction for prior years’ stock-based compensation. Excluding these items, net income grew 18 percent to $265 million and earnings per share, on a diluted basis, were $0.36, a 20 percent increase versus third quarter 2005. Third quarter North American Retail comparable store sales increased four percent versus 2005, reflecting an excellent back-to-school season, strong traffic, and higher average order size. Total North American Retail sales rose nine percent and North American Delivery grew sales 16 percent versus last year. International sales rose 10 percent in local currency and 15 percent in US dollars, with five percent comparable store sales growth in European Retail. "The Staples team delivered another strong quarter of results,” said Ron Sargent, Staples’ chairman and chief executive officer. "While we continue to improve margins, we’re focused on driving profitable growth, and we’re pleased to see top line momentum in every part of our business.” Highlights for the third quarter include: North American Retail continued to see strength in core office supplies, laptops, copy and print services, ink, and Staples brand products. Operating margins in this segment improved 50 basis points to 10.8 percent. North American Delivery operating margins improved 40 basis points to 10.8 percent, despite costs associated with opening three new fulfillment centers in Orlando, Atlanta, and Chicago this year. Worldwide e-commerce sales grew 27 percent to $1.2 billion. International operating margins improved 130 basis points to 1.5 percent, reflecting leverage on stronger sales and improving trends in Europe, particularly in the UK retail and French catalog businesses. Asian and South American businesses continue to grow rapidly. Total company operating margin improved 13 basis points to 8.46 percent. Inventory turns increased 13 basis points to 5.79 times, as the company continues to focus on its supply chain improvement programs in both retail and delivery. Year-to-date, the company has delivered $277 million in free cash flow after $352 million in capital expenditures. Staples opened 31 new stores in the United States and opened 6 stores in Canada. The company now operates 1,838 stores worldwide. Q4 & FY2006 Outlook For the fourth quarter of 2006, Staples will benefit from an extra week in the quarter. As a result, the company expects high-teens growth for the total company and earnings per share growth slightly higher than 20 percent. The company expects a positive low single-digit comparable sales increase in its North American Retail business. Same store sales are calculated on a 13 week basis. For the full year, the company expects to exceed its previously announced earnings guidance of 15 to 20 percent growth, excluding the third quarter tax benefit and the correction for prior years’ stock-based compensation. Staples expects low double-digit growth for the total company on the top line and a positive, low single-digit comparable sales increase in North American Retail. Staples expects free cash flow generation of about $700 million this year. Earnings growth expectations for the fourth quarter and full year 2006 refer to 2005 earnings restated to include the impact of stock compensation expense under the Financial Accounting Standards Board’s statement 123R, which the company implemented as of January 29, 2006, and exclude the benefit of the resolution of tax matters and the correction for prior years’ stock-based compensation. Pro forma restated financial statements and other supplemental financial information are available on the "Financial Measures” section of the investor relations website on www.staples.com. The company’s earnings outlook also reflects the impact of a 53rd week in fiscal 2006. FY2007 Outlook The company’s guidance for 2007 is based on comparison to 2006 performance adjusted for the 53rd week, the third quarter earnings per share impact of favorable tax events, and the correction for prior years’ stock-based compensation. Excluding these items, the company expects to achieve sales growth of 10 to 15 percent and earnings growth of 15 to 20 percent for the full year 2007, equating to a range of $1.43 to $1.49 of GAAP earnings per share. Staples expects a positive, low single-digit comparable sales increase in North American Retail. After adjusting for the additional week in 2006, the company expects to grow North American Delivery revenues in the mid-teens, and in International, Staples expects low double-digit growth in local currency. Q3 2006 Tax Rate Benefit The effective tax rate was 28.1 percent for the third quarter of 2006 and 32.6 percent for year-to-date 2006, compared to 36.5 percent for the third quarter and year-to-date 2005. This increased diluted EPS by $0.04 per share. The company’s effective tax rate applicable to results from continuing operations is 36.0 percent. Q3 2006 Stock Based Compensation Correction During the third quarter of 2006, the company and its Audit Committee, assisted by outside counsel, conducted a review of the company’s historical stock option granting practices during the period from 1997 to the present. Based on the results of the review, the company has recorded a $10.8 million expense ($8.6 million net of taxes) in the third quarter to reflect the cumulative impact of accounting errors due to the use of incorrect measurement dates, without restating any historical financial statements. The Company has concluded that the use of incorrect measurement dates was not the result of intentional wrongdoing and has taken steps to improve the controls over its option granting processes. Presentation of Non-GAAP Information This press release presents net income and earnings per share results both with and without the tax rate benefit and stock based compensation correction described above. The presentation of results that exclude these two 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. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are provided below under the heading "Reconciliation of GAAP to Non-GAAP Financial Measures.” 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 core operating results against plan, to compare the company’s performance to that of its competitors, and to provide earnings guidance to the investing community. 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, Inc. invented the office superstore concept in 1986 and today is the world's largest office products company. With 69,000 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 2005 sales of $16.1 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 more than 1,800 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 including, but not limited to, the information set forth under the headings "Q4 & FY2006 Outlook" and "FY2007 Outlook” 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; 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 performance; our operating results may be impacted by changes in the economy that impact business and consumer spending; our business and financial performance is dependent upon our ability to attract and retain qualified associates; our stock price may fluctuate based on market expectations; 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 product liability claims; 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 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 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. STAPLES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollar Amounts in Thousands, Except Share Data)     October 28, Restated 2006  January 28, (Unaudited) 2006  ASSETS Current assets: Cash and cash equivalents $ 804,744  $ 977,822  Short-term investments 516,234  593,082  Receivables, net 717,769  576,672  Merchandise inventories, net 1,909,252  1,706,372  Deferred income tax asset 128,180  149,257  Prepaid expenses and other current assets 155,371  141,339  Total current assets 4,231,550  4,144,544    Property and equipment: Land and buildings 775,754  705,978  Leasehold improvements 946,436  884,853  Equipment 1,472,756  1,330,181  Furniture and fixtures 727,269  672,931  Total property and equipment 3,922,215  3,593,943  Less accumulated depreciation and amortization 2,036,965  1,835,549  Net property and equipment 1,885,250  1,758,394    Lease acquisition costs, net of accumulated amortization 34,743  34,885  Intangible assets, net of accumulated amortization 223,238  240,395  Goodwill 1,381,348  1,378,752  Other assets 275,190  175,750  Total assets $ 8,031,319  $ 7,732,720    LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,525,562  $ 1,435,815  Accrued expenses and other current liabilities 958,790  1,041,201  Debt maturing within one year 201,997  2,891  Total current liabilities 2,686,349  2,479,907    Long-term debt 320,640  527,606  Deferred income tax liability 8,050  5,845  Other long-term obligations 257,560  233,426  Minority interest 6,697  4,335  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 845,100,211 shares at October 28, 2006 and 829,695,100 shares at January 28, 2006 507  498  Additional paid-in capital 3,228,351  2,937,362  Cumulative foreign currency translation adjustments 119,898  87,085  Retained earnings 3,668,926  3,192,630  Less: Treasury stock at cost - 121,225,929 shares at October 28, 2006, and 99,253,565 shares at January 28, 2006 (2,265,659) (1,735,974) Total stockholders' equity 4,752,023  4,481,601  Total liabilities and stockholders' equity $ 8,031,319  $ 7,732,720  STAPLES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Dollar Amounts in Thousands, Except Per Share Data) (Unaudited)   13 Weeks Ended 39 Weeks Ended Restated Restated October 28, October 29, October 28, October 29, 2006  2005  2006  2005    Sales $ 4,756,550  $ 4,245,519  $ 12,874,870  $ 11,616,535  Cost of goods sold and occupancy costs 3,394,092  3,024,821  9,226,811  8,344,599  Gross profit 1,362,458  1,220,698  3,648,059  3,271,936    Operating and other expenses: Operating and selling 757,790  695,306  2,138,922  1,955,855  General and administrative 199,066  168,700  559,113  506,286  Amortization of intangibles 3,421  3,178  9,667  10,021  Total operating expenses 960,277  867,184  2,707,702  2,472,162    Operating income 402,181  353,514  940,357  799,774    Other income (expense): Interest income 12,317  15,928  42,929  40,718  Interest expense (10,934) (14,910) (36,678) (39,948) Miscellaneous expense   (62) (927) (921) (1,086) Income before income taxes and minority interest 403,502  353,605  945,687  799,458  Income tax expense 113,555  129,066  308,742  291,802  Income before minority interest 289,947  224,539  636,945  507,656  Minority interest 19  53  (234) 251  Net income $ 289,928  $ 224,486  $ 637,179  $ 507,405      Earnings Per Share:   Basic earnings per common share $ 0.40  $ 0.31  $ 0.88  $ 0.69    Diluted earnings per common share $ 0.39  $ 0.30  $ 0.86  $ 0.67    Dividends declared per common share $ -  $ -  $ 0.22  $ 0.17      Weighted average shares outstanding:   Basic 718,172,288  729,572,273  722,468,584  733,018,598    Diluted 736,235,167  747,552,145  741,535,481  751,764,513  STAPLES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollar Amounts in Thousands) (Unaudited)   39 Weeks Ended Restated October 28, October 29, 2006  2005  Operating Activities: Net income $ 637,179  $ 507,405  Adjustments to reconcile net income to net cash provided by operating activities:   Depreciation and amortization 247,832  223,429  Stock-based compensation 130,912  93,477  Deferred tax benefit (62,484) (22,870) Excess tax benefits from stock-based compensation arrangements (25,523) (21,093) Other 5,139  4,404  Changes in assets and liabilities: Increase in receivables (134,543) (73,434) Increase in merchandise inventories (184,154) (106,333) Increase in prepaid expenses and other assets (22,721) (5,323) Increase in accounts payable 76,694  120,804  Decrease in accrued expenses and other liabilities (54,075) (3,746) Increase in other long-term obligations 14,549  16,082  Net cash provided by operating activities 628,805  732,802    Investing Activities: Acquisition of property and equipment (352,186) (289,338) Increase in investment, net of cash acquired (2,596) (16,636) Acquisition of businesses, net of cash acquired -  (40,560) Purchase of short-term investments (5,820,743) (6,037,124) Proceeds from the sale of short-term investments 5,897,590  5,950,498  Net cash used in investing activities (277,935) (433,160)   Financing Activities: Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans 135,323  102,929  Payments on borrowings (3,104) (18,850) Cash dividends paid (160,883) (123,402) Excess tax benefits from stock-based compensation arrangements 25,523  21,093  Purchase of treasury stock, net (529,685) (504,221) Net cash used in financing activities (532,826) (522,451) Effect of exchange rate changes on cash and cash equivalents 8,878  (4,231) Net decrease in cash and cash equivalents (173,078) (227,040) Cash and cash equivalents at beginning of period 977,822  997,310  Cash and cash equivalents at end of period $ 804,744  $ 770,270  STAPLES, INC. AND SUBSIDIARIES Segment Reporting (Dollar Amounts in Thousands)   (Unaudited) (Unaudited) 13 Weeks Ended 39 Weeks Ended Restated Restated October 28, October 29, October 28, October 29, 2006  2005  2006  2005    Sales: North American Retail $ 2,672,716  $ 2,450,926  $ 7,016,454  $ 6,468,839  North American Delivery 1,497,887  1,285,905  4,218,161  3,617,436  International Operations 585,947  508,688  1,640,255  1,530,260  Total sales $ 4,756,550  $ 4,245,519  $ 12,874,870  $ 11,616,535    Business Unit Income: North American Retail $ 288,876  $ 251,777  $ 627,494  $ 546,662  North American Delivery 161,494  133,822  432,240  354,030  International Operations 8,736  943  11,535  (7,441) Business unit income $ 459,106  $ 386,542  $ 1,071,269  $ 893,251  Stock-based compensation (56,925) (33,028) (130,912) (93,477) Total reportable segments 402,181  353,514  940,357  799,774  Interest and other income, net 1,321  91  5,330  (316) Income before income taxes and minority interest $ 403,502  $ 353,605  $ 945,687  $ 799,458  Reconciliation of GAAP to Non-GAAP Financial Measures   STAPLES, INC. AND SUBSIDIARIES Proforma Consolidated Statements of Income (Dollar Amounts in Thousands, Except Per Share Data) (Unaudited)   13 Weeks Ended October 28, 2006 39 Weeks Ended October 28, 2006 As reported Tax benefit Correction for prior years' stock-based compensation Pro forma As reported Tax benefit Correction for prior years' stock-based compensation Pro forma     Sales $ 4,756,550  $ -  $ -  $ 4,756,550  $ 12,874,870  $ -  $ -  $ 12,874,870  Cost of goods sold and occupancy costs 3,394,092  -  (343) 3,393,749  9,226,811  -  (343) 9,226,468  Gross profit 1,362,458  -  343  1,362,801  3,648,059  -  343  3,648,402    Operating and other expenses: Operating and selling 757,790  -  (3,887) 753,903  2,138,922  -  (3,887) 2,135,035  General and administrative 199,066  -  (6,599) 192,467  559,113  -  (6,599) 552,514  Amortization of intangibles 3,421  -  -  3,421  9,667  -  -  9,667  Total operating expenses 960,277  -  (10,486) 949,791  2,707,702  -  (10,486) 2,697,216    Operating income 402,181  -  10,829  413,010  940,357  -  10,829  951,186    Other income (expense): Interest income 12,317  -  -  12,317  42,929  -  -  42,929  Interest expense (10,934) -  -  (10,934) (36,678) -  -  (36,678) Miscellaneous expense (62) -  -  (62) (921) -  -  (921) Income before income taxes and minority interest 403,502  -  10,829  414,331  945,687  -  10,829  956,516  Income tax expense 113,555  33,343  2,262  149,160  308,742  33,343  2,262  344,347  Income before minority interest 289,947  (33,343) 8,567  265,171  636,945  (33,343) 8,567  612,169  Minority interest 19  -  -  19  (234) -  -  (234) Net income $ 289,928  $ (33,343) $ 8,567  $ 265,152  $ 637,179  $ (33,343) $ 8,567  $ 612,403      Earnings Per Share:   Basic earnings per common share $ 0.40  $ (0.04) $ 0.01  $ 0.37  $ 0.88  $ (0.04) $ 0.01  $ 0.85    Diluted earnings per common share $ 0.39  $ (0.04) $ 0.01  $ 0.36  $ 0.86  $ (0.04) $ 0.01  $ 0.83    Dividends declared per common share $ -  $ 0.22      Weighted average shares outstanding:   Basic 718,172,288  722,468,584    Diluted 736,235,167  741,535,481