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Staples Announces Strong Second Quarter 2002 Results; Earnings Per Share Increase 44 Percent

FRAMINGHAM, Mass., Aug 20, 2002 (BUSINESS WIRE) -- Staples, Inc. (Nasdaq: SPLS) today announced the results for the second quarter ended August 3, 2002. The company reported net income of $60 million for the quarter, or $0.13 per share on a diluted basis, exceeding the First Call consensus estimate of $0.12, and a 44 percent increase over earnings per share of $0.09 reported for the second quarter of 2001.

Sales grew to $2.43 billion, an increase of five percent, versus $2.31 billion reported for the same period the prior year. Overall comparable sales were flat and retail only decreased one percent. Core office product categories remained strong, with comparable sales increasing seven percent, but weakness in technology categories continued to weigh on Staples' overall comparable sales performance. Profitability levels advanced in each business unit with an overall improvement of 30 percent in business unit income.

In addition, the key metrics that the company tracks to measure the success of the business showed positive momentum in the second quarter, for example:

  • Comparable growth in gross margin dollars increased five percent in the retail business, and six percent for the total company. Gross profit margins increased by 89 basis points, reflecting better buying and an improved product mix resulting from the company's focus on small business customers.
  • Sales per new store week increased three percent for both US and Canadian stores, due to the success of the company's real estate strategy focusing on adding stores in existing markets.
  • Customer count comparables remained positive for the quarter and customer service metrics improved in both the retail and delivery businesses.
  • Return on net assets improved 178 basis points year over year.

At the beginning of the year, Staples announced its comprehensive profit improvement plan, called Back to Brighton. The plan is composed of three key elements: driving profitable sales growth, improving operating margins and enhancing asset utilization. Several initiatives fall under each of the three categories, which are being implemented in an integrated way to drive the single goal of creating shareholder value.

"We're delighted to report strong results that prove our Back to Brighton plan is achieving its goals," said Ron Sargent, Staples President and Chief Executive Officer. "In the second quarter we achieved an additional $40 million of our $200 million goal of operating margin savings and improved return on net assets significantly. We also made excellent progress in the initiatives we identified to grow our top line profitably."

Staples North American Retail

Staples has rolled out its Back to Brighton customer service initiatives to nearly 400 stores, with plans to complete the year with a total of 650 stores converted. This initiative aims to enhance customer engagement and includes a new associate incentive plan promoting teamwork. The initial results, as measured by increases in sales, customer transactions and margins, are exceeding expectations and Mystery Shop scores have improved dramatically.

Staples North American Delivery

On July 17, Staples closed the previously announced acquisition of Medical Arts Press (MAP), a leading direct marketer of specialized printed office products and practice related supplies for medical offices. MAP, which reports to Quill, will provide significant opportunities to expand Staples' product offering, as well as to increase sales to the profitable medical vertical market.

Staples Europe

"In addition to improved profitability levels throughout our business, we've rallied the entire company behind our comprehensive improvement plan," said Sargent. "We're confident that we'll achieve our aggressive goals this year and continue to build on our platform for profitable growth."

Outlook for Third Quarter and Fiscal Year 2002

Staples will host a live Internet broadcast of its second quarter 2002 earnings conference call today at 8:00 a.m. E.D.T. Individuals may access the broadcast from Staples' Web site directly at http://investor.staples.com. A replay of the quarterly earnings conference call will be available at http://investor.staples.com from 11:30 a.m. E.D.T. on August 20, through midnight on Monday, August 26.

About Staples

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: Staples' market is highly competitive and Staples may not continue to compete successfully; Staples may be unable to continue to successfully open new stores; Staples' new Dover format store may not be successful; Staples' quarterly operating results are subject to significant fluctuation 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; Staples' operating results may be impacted by changes and uncertainty in the economy; Staples' stock price may fluctuate based on market expectations; Staples' growth may continue to strain operations; Staples' European operations may not become profitable; Staples' International operations expose Staples to the unique risks inherent in foreign operations; Staples may be unable to obtain adequate future financing; and those factors discussed in Staples' Form 10-Q for the quarter ending May 4, 2002, which is on file with the Securities and Exchange Commission. 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)
                                                 August 3, February 2,
                                                     2002        2002
                                               (Unaudited)
ASSETS
Current Assets:
  Cash and cash equivalents                     $ 174,880   $ 394,824
  Merchandise inventories                       1,696,132   1,459,792
  Receivables, net                                242,445     338,581
  Deferred income taxes                           103,406     117,560
  Prepaid expenses and other current assets        86,911      92,070
       Total current assets                     2,303,774   2,402,827
Property and Equipment:
  Land and buildings                              457,156     433,569
  Leasehold improvements                          592,299     552,250
  Equipment                                       872,989     820,053
  Furniture and fixtures                          444,772     406,565
       Total property and equipment             2,367,216   2,212,437
  Less accumulated depreciation and
   amortization                                   976,789     853,685
       Net property and equipment               1,390,427   1,358,752
Other Assets:
  Lease acquisition costs, net of amortization     52,169      54,557
  Goodwill, net of amortization                   567,221     223,718
  Other                                            83,209      53,181
       Total other assets                         702,599     331,456
                                              $ 4,396,800 $ 4,093,035

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable                              $ 979,731   $ 935,442
  Accrued expenses and other current
   liabilities                                    555,136     655,274
  Debt maturing within one year                    16,189       4,983
       Total current liabilities                1,551,056   1,595,699
Long-Term Debt                                    459,620     350,225
Deferred Tax Liability                              3,541       6,738
Other Long-Term Obligations                        89,430      86,199
Stockholders' Equity:
  Preferred stock, $.01 par value 5,000,000
   shares authorized; no shares issued                  -           -
  Common stock:
  Staples, Inc. Stock, $.0006 par value
   2,100,000,000 shares authorized;
   issued 497,060,316 shares at August 3, 2002
    and 491,564,105 shares at February 2, 2002        298         295
  Additional paid-in capital                    1,436,745   1,364,355
  Cumulative foreign currency translation
   adjustments                                    (13,482)    (27,129)
  Retained earnings                             1,426,414   1,272,991
  Less: Staples, Inc. treasury stock at cost,
   27,728,182 shares at August 3, 2002,
   and 27,569,880 shares at February 2, 2002     (556,822)   (556,338)
           Total stockholders' equity           2,293,153   2,054,174
                                              $ 4,396,800 $ 4,093,035

                    STAPLES, INC. AND SUBSIDIARIES
                   Consolidated Statements of Income
         (Dollar Amounts in Thousands, Except Per Share Data)
                           (Unaudited)                (Unaudited)
                          13 Weeks Ended             26 Weeks Ended
                      August 3,    August 4,     August 3,   August 4,
                          2002         2001          2002        2001
Sales              $ 2,426,475  $ 2,314,229   $ 5,171,241 $ 4,981,305
Cost of goods sold
 and occupancy costs 1,828,513    1,764,499     3,913,361   3,814,968
  Gross profit         597,962      549,730     1,257,880   1,166,337
Operating and other expenses:
  Operating and
   selling             400,006      380,127       845,616     807,551
  Pre-opening            2,346        3,971         4,232       9,147
  General and
   administrative       98,698       89,610       205,782     199,499
  Amortization of
   goodwill                  -        1,646             -       3,292
  Interest and other
   expense, net          2,381        8,762         4,753      16,995
   Total operating and
    other expenses     503,431      484,116     1,060,383   1,036,484
   Income before income
    taxes               94,531       65,614       197,497     129,853
Income tax expense      34,976       25,261        44,073      49,993
   Net income         $ 59,555     $ 40,353     $ 153,424    $ 79,860
 Net income attributed to:
  Staples, Inc. Stock $ 59,555          $ -     $ 153,424         $ -
  Staples RD Stock           -       40,057             -      79,740
  Staples.com Stock          -          296             -         120
                      $ 59,555     $ 40,353     $ 153,424    $ 79,860
 Basic earnings per common share:
  Staples, Inc. Stock   $ 0.13          $ -        $ 0.33         $ -
  Staples RD Stock         $ -       $ 0.09           $ -      $ 0.18
  Staples.com Stock        $ -       $ 0.04           $ -      $ 0.01
 Diluted earnings per common share:
  Staples, Inc. Stock   $ 0.13          $ -        $ 0.32         $ -
  Staples RD Stock         $ -       $ 0.09           $ -      $ 0.17
  Staples.com Stock        $ -       $ 0.03           $ -      $ 0.01
 Number of shares used in computing
 basic earnings per common share:
  Staples, Inc. Stock  466,507            -       465,181           -
  Staples RD Stock           -      456,004             -     455,399
  Staples.com Stock          -        7,430             -       7,980
 Number of shares used in computing
 diluted earnings per common share:
  Staples, Inc. Stock  472,835            -       472,332           -
  Staples RD Stock           -      461,227             -     461,379
  Staples.com Stock          -        9,332             -       9,819

                    STAPLES, INC. AND SUBSIDIARIES
                 Consolidated Statements of Cash Flows
                     (Dollar Amounts in Thousands)
                                                     (Unaudited)
                                                    26 Weeks Ended
                                                August 3,    August 4,
                                                    2002         2001
Operating Activities:
 Net income                                    $ 153,424     $ 79,860
 Adjustments to reconcile net income to net
  cash provided by (used in) operating activities:
   Depreciation and amortization                 128,326      119,319
   Tax benefit from worthless stock deduction    (29,000)           -
   Deferred tax expense (benefit)                 17,274       (7,396)
   Other                                          17,365       11,138
   Change in assets and liabilities, net of
    companies acquired/divested using purchase
    accounting:
     Increase in merchandise inventories        (212,653)     (61,438)
     Decrease (increase) in receivables           13,899      (56,084)
     Decrease (increase) in prepaid expenses
      and other assets                             7,972      (23,711)
     Decrease in accounts payable, accrued
      expenses and other current liabilities     (29,063)     (78,381)
     Increase in other long-term obligations       2,909        4,327
                                                 (82,971)     (92,226)
Net cash provided by (used in) operating
 activities                                       70,453      (12,366)
Investing Activities:
 Acquisition of property and equipment          (133,257)    (183,065)
 Acquisition of businesses, net of cash
  acquired                                      (383,192)           -
 Proceeds from the sale of short-term
  investments                                          -        8,938
 Purchase of long-term investments                     -         (250)
 Other                                              (403)        (446)
Net cash used in investing activities           (516,852)    (174,823)
Financing Activities:
 Proceeds from sale of capital stock              43,122       18,252
 Proceeds from borrowings                         85,568      530,070
 Payments on borrowings                           (1,097)    (493,634)
 Decrease (increase) in retained securitized
  accounts receivable                            100,000      (61,109)
 Purchase of treasury stock                         (484)      (7,423)
Net cash provided by (used in) financing
 activities                                      227,109      (13,844)
Effect of exchange rate changes on cash             (654)      (2,457)
Net decrease in cash and cash equivalents       (219,944)    (203,490)
Cash and cash equivalents at beginning of
 period                                          394,824      263,560
Cash and cash equivalents at end of period     $ 174,880     $ 60,070

                    STAPLES, INC. AND SUBSIDIARIES
                           Segment Reporting
                     (Dollar Amounts in Thousands)
                             (Unaudited)             (Unaudited)
                            13 Weeks Ended          26 Weeks Ended
                         August 3,   August 4,   August 3,   August 4,
                             2002        2001        2002        2001
Sales by Segment:
North American Retail $ 1,456,129 $ 1,427,628 $ 3,183,022 $ 3,133,729
North American Delivery   780,712     722,668   1,592,703   1,466,357
European Operations       189,634     163,933     395,516     356,039
 Total                $ 2,426,475 $ 2,314,229 $ 5,171,241 $ 4,956,125
Divested Business               -           -           -      25,180
 Consolidated         $ 2,426,475 $ 2,314,229 $ 5,171,241 $ 4,981,305
Business Unit
 Income/(Loss):
North American Retail    $ 45,790    $ 40,129   $ 105,008    $ 78,854
North American Delivery    57,145      46,651     104,879      85,345
European Operations        (6,023)    (12,404)     (7,637)    (15,814)
 Total business unit
  income                 $ 96,912    $ 74,376   $ 202,250   $ 148,385
Divested Business               -           -           -      (1,537)
Interest and other
 expense, net              (2,381)     (8,762)     (4,753)    (16,995)
 Income before income
  taxes                  $ 94,531    $ 65,614   $ 197,497   $ 129,853

CONTACT:

Staples, Inc.
Investor Contact
Laurel Lefebvre, 508/253-4080
or
Media Contact
Deborah Hohler, 508/253-8509