Staples, Inc. Reports Record First Quarter Performance; Sales Increase

Staples, Inc. Reports Record First Quarter Performance; Sales Increased 13 Percent and Earnings Per Share Rose 24 Percent; North American Retail Comparable Sales Increased Four Percent

    Business Editors

    FRAMINGHAM, Mass.--(BUSINESS WIRE)--May 17, 2005--Staples, Inc. (Nasdaq: SPLS) announced today the results for its first quarter ended April 30, 2005. Total company sales for the quarter grew to $3.90 billion, an increase of 13 percent versus $3.45 billion for the same quarter of 2004. North American Retail comparable sales increased four percent, with total North American Retail sales growth of nine percent. North American Delivery sales rose 17 percent, and International sales grew 19 percent.
    The company achieved net income of $159 million for the quarter. After adjusting for the three-for-two stock split effective April 15, 2005, this represents earnings per share of $0.21, on a diluted basis, a 24 percent increase over the first quarter of 2004.
    "Our team continues to deliver industry-leading results and drive significant market share gains," said Ron Sargent, Staples' chairman and chief executive officer. "We are reaping the rewards of our balanced approach to growth and profitability. The continued strength of our North American businesses provides us with the flexibility to invest in the many ideas that will sustain our growth in the years to come."

    Highlights of Staples' performance for the first quarter include:

--	North American Retail achieved 40 percent improvement in business unit income, driven by gross profit expansion and operating expense management.
--	North American Delivery increased business unit income 35 percent and now ranks number one in sales in the delivered office products market.
--	The company opened eight stores in Chicago, with sales exceeding expectations.
--	International comparable retail sales were flat, with positive retail comps in Germany, Belgium and Portugal.
--	The company converted 22 Office World stores with plans to complete 25 additional remodels by August.
--	Total company operating margin improved 60 basis points year over year to 6.4 percent, reflecting the company's continued focus on customer service, execution and differentiation.
--	Inventory turns improved by 33 basis points year over year to 5.65 times.
--	The company paid an annual cash dividend of $0.17 per share (or $0.25 on a pre-split basis) on April 14, 2005, to shareholders of record on March 28, 2005.
--	Staples issued a three-for-two common stock dividend on April 15, 2005, to shareholders of record on March 29, 2005.

    Outlook

    For the second quarter of 2005, Staples expects to achieve 18 percent earnings per share growth, consistent with current analyst estimates. Second quarter revenues are expected to increase in the low double-digits, with North American Retail comparable sales in the low single-digits. North American Delivery growth is expected to be in the mid-teens, and the company's International business is expected to have growth in the high-teens.
    For the full-year 2005, the company anticipates revenue growth to be in the low double-digit range, with low single-digit North American Retail comparable sales. North American Delivery sales are expected to increase in the low to mid-teens range, and the International business is expected to have growth in the mid to high-teens. The company is comfortable with the current average analyst earnings estimates for the remainder of the year and expects full-year earnings per share growth to fall in the high end of the previously articulated range of 15 to 18 percent.
    This outlook does not include any impact related to the expensing of stock options, which the company does not expect to implement until the first quarter of 2006.

    About Staples

    Staples, Inc. invented the office superstore concept in 1986 and today is the world's largest office products company. With 65,000 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 2004 sales of $14.4 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 approximately 1,695 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. 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 results; our operating results may be impacted by changes in the economy; our stock price may fluctuate based on market expectations; our quarterly operating results are subject to significant fluctuation and are impacted by the extent to which sales in new stores result in the loss of sales in existing stores, the mix of products sold, pricing actions of competitors, the level of advertising and promotional expenses and seasonality; our expanding international operations expose us to the unique risks inherent in foreign operations; 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; and those other factors discussed in our quarterly report on Form 10-Q for the quarter ended April 30, 2005, 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.

    Financial information follows.

STAPLES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollar Amounts in Thousands, Except Share Data)

April 30, 2005 January 29, (Unaudited) 2005 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $816,180 $997,310 Short-term investments 456,119 472,231 Receivables, net 523,492 485,126 Merchandise inventories, net 1,564,987 1,602,530 Deferred income tax asset 100,256 86,041 Prepaid expenses and other current assets 133,317 138,374 ----------- ----------- Total current assets 3,594,351 3,781,612

Property and equipment: Land and buildings 653,858 649,175 Leasehold improvements 772,706 762,946 Equipment 1,157,763 1,140,234 Furniture and fixtures 612,597 597,293 ----------- ----------- Total property and equipment 3,196,924 3,149,648 Less accumulated depreciation and amortization 1,608,267 1,548,774 ----------- ----------- Net property and equipment 1,588,657 1,600,874

Lease acquisition costs, net of accumulated amortization 38,530 38,400 Intangible assets, net of accumulated amortization 230,490 222,520 Goodwill 1,335,416 1,321,464 Other assets 78,358 106,578 ----------- ----------- Total assets $6,865,802 $7,071,448 =========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $1,212,831 $1,241,433 Accrued expenses and other current liabilities 888,417 954,184 Debt maturing within one year 1,165 1,244 ----------- ----------- Total current liabilities 2,102,413 2,196,861

Long-term debt 541,160 557,927 Deferred income tax liability 34,096 23,314 Other long-term obligations 191,984 178,150

Minority interest 4,319 -

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 815,300,058 shares at April 30, 2005 and 813,049,136 shares at January 29, 2005 489 488 Additional paid-in capital 2,300,359 2,254,947 Cumulative foreign currency translation adjustments 100,830 114,427 Retained earnings 2,854,673 2,818,163 Less: Treasury stock at cost - 77,661,461 shares at April 30, 2005, and 68,547,587 shares at January 29, 2005 (1,264,521) (1,072,829) ----------- ----------- Total stockholders' equity 3,991,830 4,115,196 ----------- ----------- Total liabilities, minority interest and stockholders' equity $6,865,802 $7,071,448 =========== ===========

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

13 Weeks Ended ----------------------- April 30, May 1, 2005 2004 ----------- -----------

Sales $3,899,052 $3,452,155 Cost of goods sold and occupancy costs 2,836,520 2,516,530 ----------- ----------- Gross profit 1,062,532 935,625

Operating and other expenses: Operating and selling 645,539 587,280 General and administrative 162,745 144,442 Amortization of intangibles 3,402 1,989 ----------- ----------- Total operating expenses 811,686 733,711 ----------- -----------

Operating income 250,846 201,914

Other income (expense): Interest income 10,950 4,601 Interest expense (9,988) (8,111) Miscellaneous expense (621) (402) ------------ ----------- Income before income taxes and minority interest 251,187 198,002 Income tax expense 91,683 72,271 ----------- ----------- Income before minority interest 159,504 125,731 Minority interest 78 - ----------- ----------- Net income $159,426 $125,731 =========== ===========

Earnings Per Share:

Basic earnings per common share $0.22 $0.17 =========== =========== Diluted earnings per common share $0.21 $0.17 =========== =========== Dividends declared per common share $0.17 $0.13 =========== ===========

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

13 Weeks Ended ----------------------- April 30, May 1, 2005 2004 ----------- ----------- Operating Activities: Net income $159,426 $125,731 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 73,185 67,639 Deferred tax benefit (5,224) (2,542) Other 13,695 12,144 Changes in assets and liabilities: Increase in receivables (36,585) (5,953) Decrease in merchandise inventories 38,029 74,609 Decrease in prepaid expenses and other assets 655 12,984 Decrease in accounts payable (27,617) (41,730) Decrease in accrued expenses and other liabilities (63,236) (62,592) Increase in other long-term obligations 11,337 2,558 ----------- ----------- Net cash provided by operating activities 163,665 182,848

Investing Activities: Acquisition of property and equipment (63,448) (55,140) Increase in investment, net of cash acquired (3,872) - Purchase of short-term investments (1,824,115) (3,569,858) Proceeds from the sale of short-term investments 1,840,227 3,475,653 ----------- ----------- Net cash used in investing activities (51,208) (149,345)

Financing Activities: Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans 24,693 18,912 Payments on borrowings (637) (2,557) Cash dividends paid (122,916) - Purchase of treasury stock, net (191,692) (110,599) ----------- ----------- Net cash used in financing activities (290,552) (94,244)

Effect of exchange rate changes on cash and cash equivalents (3,035) (6,906)

Net decrease in cash and cash equivalents (181,130) (67,647) Cash and cash equivalents at beginning of period 997,310 457,465 ----------- ----------- Cash and cash equivalents at end of period $816,180 $389,818 =========== ===========

Supplemental Non Cash Financial Activity: Cash dividend payable on common stock $- $99,553

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

(Unaudited) 13 Weeks Ended ----------------------- April 30, May 1, 2005 2004 ----------- ----------- Sales: North American Retail $2,166,623 $1,982,383 North American Delivery 1,183,316 1,007,916 International Operations 549,113 461,856 ----------- ----------- Total sales $3,899,052 $3,452,155 =========== ===========

Business Unit Income: North American Retail $149,081 $106,114 North American Delivery 98,603 73,105 International Operations 3,162 22,695 ----------- ----------- Total business unit income $250,846 $201,914 Interest and other expense, net 341 (3,912) ----------- ----------- Income before income taxes $251,187 $198,002 =========== ===========

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CONTACT: Staples, Inc. Media Contact: Paul Capelli/Deborah Hohler, 508-253-8530/8509 or Investor Contact: Laurel Lefebvre/Katy Nash, 508-253-4080/7342

KEYWORD: MASSACHUSETTS INDUSTRY KEYWORD: RETAIL EARNINGS SOURCE: Staples, Inc.

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