Staples (SPLS) Earnings Report: Q1 2016 Conference Call ... · Ronald Sargent (Chairman & CEO):...

CompanyName:StaplesIncCompanyTicker:SPLSSector:ServicesIndustry:SpecialtyRetail

EventDescription:Q12016EarningsCallMarketCapasofEventDate:5.39BPriceasofEventDate:8.275

©2014TheStreet,Inc.Al l R ightsReserved Page1of21

Staples(SPLS)EarningsReport:Q12016ConferenceCallTranscriptThefollowingStaplesconferencecalltookplaceonMay18,2016,08:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

ChrisPowers;StaplesInc.;VPIRRonaldSargent;StaplesInc.;Chairman&CEOChristineKomola;StaplesInc.;CFOShiraGoodman;StaplesInc.;President,NorthAmericanOperations

OtherPart icipants

MichaelLasser;UBS;AnalystMatthewFassler;GoldmanSachs;AnalystMikeBaker;DeutscheBank;AnalystSimeonGutman;MorganStanley;AnalystChrisHorvers;JPMorgan;AnalystKateMcShane;CitiResearch;AnalystGregMelich;EvercoreISI;AnalystDanielBinder;Jefferies;AnalystAnthonyC.Chukumba;BB&T;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Gooddayladiesandgentlemen,welcometotheStaplesInc.,FirstQuarter2016EarningsConferenceCall.Atthistime,allparticipantsareinalisten-onlymode.Later,wewillconductaquestion-and-answersessionandinstructionswillfollowatthattime.

[OperatorInstructions]

Iwouldlikeintroduceyourhostfortoday'sconference,Mr.ChrisPowers,VicePresident,InvestorRelations.Sir,youmaybegin

ChrisPowers (VPIR):

Goodmorningeveryone,andthanksforjoiningusforourFirstQuarter2016EarningsCall.

Duringtoday'scall,wewilldiscusscertainnon-GAAPmetrics.PleaseseetheFinancialMeasuresandOtherDatasectionoftheInvestorInformationportionofstaples.comforareconciliationofthesemeasures.Certaininformationwewilldiscussconstitutesforward-lookingstatementsforthepurposesoftheSafeHarborprovisionsofthePrivateSecuritiesLitigationReformActof1995.Actualresultsmaydiffermateriallyfromthoseindicatedbysuchforward-lookingstatementsasaresultofvariousfactors,includingthosediscussedorreferencedinStaples10-Qfiledthismorning.

HeretodiscussStaplesQ1performance,outlookandstrategicplanareRonSargent,ChairmanandChiefExecutiveOfficer;andChristineKomola,ChiefFinancialOfficer.AlsojoiningusareShiraGoodman,




President,NorthAmericanOperations;andJohnWilson,President,InternationalOperationsandHeadofGlobalTransformation.

Ron?

RonaldSargent (Chairman&CEO):

ThanksChrisandgoodmorning,everybody.Thanksforjoiningustoday.

Thismorningweannouncedourfirst-quarterresultsthatwererightinlinewithourexpectations.BeforeIdiscussQ1inmoredetail,I'dliketostartoffbycoveringsomerecentheadlinesrelatingtotwotopics;one,isourattemptedacquisitionofOfficeDepot,andtwo,isourstrategicplangoingforward.

IthinkeveryoneonthecallknowsthatlastweektheUSDistrictCourtfortheDistrictofColumbiagrantedtheFTC'srequesttoblockouracquisitionofOfficeDepot.WeweredisappointedthattheFTC'srequestwasgranteddespitethefactthatinourview,itfailedtodefinetherelative--therelevantmarketcorrectlyandfellshortofprovingitscase.

TheFTCexcludedinkandtonerfromthemarketdefinitionofconsumableofficesupplies.TheyonlyfocusedonFortune100customersandacknowledgedthattherewerenoconcernsaboutanyharmtoconsumersorsmallormediumbusinesses.TheFTCignoredthecompetitivethreatfromAmazonBusinessandahostofothercompetitors,andalsoencouragedwitnessestosaythingsthatweren'ttruetobolstertheircase.

We'realsodisappointedthatourproposedremediestosatisfytheFTC'sconcernswereunsuccessfulandthatourcommitmenttoinvestasignificantportionofthesynergiesinlowerpricesforallcustomerswasnotheard.WepursuedtheOfficeDepotacquisitiontoprovideincreasedvaluetocustomerstocompetemoreeffectivelyagainstthelargeanddiversesetofcompetitorsandtogeneratetremendousvalueforshareholders.Overthepast20months,wecommittedalotoftimeandresourcestogettingthedealdone.Giventheadditionaltimeandresourceswe'dhavetocommittopursueanappeal,wehavedeterminedthatinthebestinterestofourshareholderstoforgoappealingthecourtruling.

Earlierthisweek,weterminatedthemergeragreementwithOfficeDepotandwewillpaythe$250millionbreakupfeetomorrow.OurdivestitureagreementwithEssendantwasalsoterminatedinconnectionwiththeterminationoftheOfficeDepotmergeragreement.Andfinally,IwouldjustliketothankbothOfficeDepotandEssendantfortheirhardworkandfortheircollaborationaswepursuedthistransaction.

We'renowfocusedonmovingforward,andwe'refocusedonexecutingastrategicplantodriveshareholdervalueorwhatwerereferringtointernally,asStaples20/20.Thisplanbuildsourreinventionsuccessesoverthepastfewyearsanditissupportedbyourstrongestcompetitiveadvantages.Wehavehadgoodsuccessindrivinggrowthincategoriesbeyondofficesuppliesandingrowingourmidmarketcontractbusiness.We'vealsobeenchallengedbyweakresultsinEuropeandinNorthAmericanstores.

We'reconfidentthatbynarrowingourfocus,moreaggressivelypursuingourbestopportunities,acceleratinggrowthinourassetlightbusinesses,andpullingbackinareaswithlesspotential;wecangetbacktosustainablelong-termsales,andearningsgrowth,andsignificantlyimprovereturnonnetassets.

Ourstrategicplanincludesfourkeypriorities.First,we'refocusingonwinningwithmidmarketcustomersinNorthAmericabyacceleratinggrowthinservicesandproductsbeyondofficesupplies.Second,we'rereshapingStaplesbynarrowingourfocusonNorthAmerica,rightsizingaretailnetwork,andexploringstrategicalternativesforEuropeanoperations.Third,we'retakingaggressiveactiontoreducecostanddriveefficiencyfurtheracrosstheorganization.Fourth,we'recontinuingtoreturncashtoshareholders




throughdividendsandsharerepurchases.

Twomonthsagowestreamlinedorganizationtobuildasimplifiedstructure,speedupdecision-making,andprovideflexibilitytoinvestinourcriticalstrategicobjectives.Thechangeswemadehavesetusupforsuccess,withShiraGoodmanleadingourNorthAmericanoperations,andJohnWilsonoverseeingourinternationaloperationsandourfutureplanningandtransformationefforts,I'mconfidentthatwehavetherightteaminplacetowinwithcustomers.

Overthenextthreeyearswewilldramaticallychangetheprofilestaplesaswepositionourcompanyforthefuture.Morethan95%ofoursaleswillcomefromNorthAmerica,whichisabout85%today.About80%ofoursaleswillbedeliveryversus60%today,andsalesbeyondofficesupplieswillaccountformorethan60%ofourrevenueversuslessthan50%today.

Letmetakeafewminutestogiveyoulittlemorecoloroneachofourfourpriorities.

First,winningwithmidmarketcustomersinNorthAmerica,wedefinethemidmarket,isbusinesscustomerswith10to200employees.Thisisahighlyprofitableandhighlyfragmentedcustomersegment,andtodaywehaveverylowsharewithmidmarketcustomersincategoriesbeyondofficesupplies.Theneedsofthosemidmarketcustomersaligncloselywithourstrengths.Thesecustomersneedawideassortmentofproductsandservices,thesupportivecategoryspecialistwhohaveexpertise,andeasyonlineshoppingexperience,aswellas,quickandreliabledelivery.

Wehaveexpertiseinawiderangeofproductsandservices.Wehaveaworld-classsupplychainandnextdaydeliverycapability.Ourdigitalexpertiseprovidesadifferentiatedcustomerexperience.Wehaveanewmidmarketloyaltyprogramthatisdrivingincreasedspend,hypertensionrates,andincreasedcustomerengagement;andwerecentlyregrettedourB2BdivisionStaplesBusinessAdvantagetoemphasizethemanyadvantagesthatwecanprovidetothosebusinesscustomers.

Toaccelerategrowthinmidmarket,wedevelopedastrongcustomerfocusplanthatbuildsonthestrengths.Ourplanfocusesonincreasingoursharewiththehundredsofthousandsofmidmarketcustomersweservetoday,andonacquiringmanyofthemidmarketcustomersthatwedon'tcurrentlyserve.We'reincreasingofferingofproductsandservicesbeyondofficesupplies,andpursuingmarketsharegainsincorecategorieslikeofficesupplies,ink,toner,andpaper.

We'reinvestinginsharperpricingandenhancedsupply-chaincapabilities.We'redramaticallyexpandingthesizeofourmidmarketsalesforcewiththeadditionofmorethan1000newsalesreps.We'realsopursuingacquisitionsofB2Bserviceprovidersincompaniesspecializingincategoriesbeyondofficesupllies.

Insummary,we'rehelpingsmallermidmarketcustomerscompetelikeaFortune500company

Second,we'rereshapingStaplestoreduceriskandpreserveprofitability.JohnWilsonandtheleadershipteaminEuropehaveworkedtirelesslytostreamlineandstabilizeEuropeoverthepastfewyears.WhilewebelievethereisasignificantopportunitytogeneratevalueinthehighlyfragmentedEuropeanmarket,wealsorecognizethatourbestgrowthopportunitiesareinNorthAmericaandthattheseareourprimaryfocus.Asresult,we'vedecidedtoexplorestrategicalternativesforEuropeanoperations.Overthecomingweeks,weplantomeetwithpotentialbuyersorEuropeanoperationsandwewillprovidemoredetailsontimingandvaluationasweworkthroughthisprocess.

WealsoremaincommittedtoincreasingproductivityandpreservingprofitabilityinourNorthAmericanretailstores.Wehaveclosedmorethan300storesandreducedourleaseobligationsbymorethan$1billioninNorthAmericasince2011.We'vealsoaggressivelymanageourleaserenewalprocess.Today,ouraverageremainingleaselifeinNorthAmericaisabout3.5yearsperstore,whichisareductionof




morethan40%since2011.

Wehavechallengedtheretailstoreteamtodomorewithless,andtheyhavedelivered.Customerservicescoresremainstrongandcustomerconversionisatanall-timehigh.Wewillremainlaserfocusedonthesemetricsgoingforward.WewillalsocontinuetorightsizeourretailstoreportfolioinNorthAmericabyclosingatleast50storesthisyear.

Inadditiontoclosingunproductivestores,wewillcontinuetobuildonthestrengthofouromni-channelcapabilitiesinserviceslikecopyandprint.Webelieveourstoresprovideconvenienceandimmediacythatisvaluedbycustomersofallsizes,includingmidmarketcustomers.

Ourthirdpriorityistoaggressivelyreducecostsacrossthecompanytodriveefficiencyandfundourgrowthinvestments.Overthepastthreeyears,wehavegeneratedapproximately$750millionofannualizedpretaxcostsavingsbyevolvingthebusinessprocesses,increasingproductivity,anddevelopingmoreefficientwaystoservecustomers.

Lastweek,weannouncedanewmulti-yearcostsavingsplanwhichisexpectedtogenerateanadditional$300millionofannualizedpre-taxcostsavingsbytheendof2018.We'refocusedonreducingproductcosts,optimizingpromotions,increasingthemixofStaplesbrandproducts,andreducingoperatingexpenses.Wewillalsocontinuetoreducecostinretailstoresaswerightsizeourstorenetwork.

Ourfourthpriorityistocontinuereturningcashtoshareholders.Weremaincommittedtoourongoingcashdividendprogram.Weplantoresumerepurchasingourcommonstockthroughopenmarketpurchasesduringthesecondquarterof2016.Wearecurrentlyplanningforsharerepurchasesofapproximately$100millionin2016.

Astheindustryleader,wepursuedtheacquisitionofOfficeDepotfromapositionofstrength.We'renowpursuingourstrategicplanfromasimilarposition;wearedramaticallyreshapingourbusinesswhileincreasingourfocusoncategoriesbeyondofficesuppliesandevolvingtomeetthechangingneedsofmidmarketcustomers.Wearereducingourexposuretounderperformingbusinessesandwearereiteratingourcommitmentreturncashtoourshareholders

Now,let'sturntoourfirstquarterresults.TotalcompanysalesforQ1weredownabout1%year-over-year,excludingtheimpactofstoreclosuresandchangesinforeignexchangerates.Non-GAAPoperatingincomerateindollarsimprovedversusQ1oflastyear.Non-GAAPearnings-per-shareof$00.17wasflatversusQ1lastyear.

OnourQ4earningscall,wetalkedaboutourkeyprioritiesfor16',whicharenowacriticalpartofourstrategicplan.Letmetakeafewminutestogiveyousomecoloronourprogressduringthefirstquarter.

Oneofourtopprioritiesistoaccelerategrowthincategoriesbeyondofficesupplies.Today,nearlyhalfofoursalesaregeneratedbeyondofficesupplies;businesscustomersareincreasinglyrelyingonStaplestoprovidethemawiderassortmentofproductsandservices.Themarketforthesecategoriesishighlyfragmentedandwe'rewinningwithbusinesscustomersofallsizesbyprovidingadifferentiatedlevelofserviceandexpertise.

DuringQ1,theNorthAmericancontractcontinuedtoleadthewayherewithgrowthandpromotionalproducts,facilitysupplies,breakroomsupplies,technologyandfurniture.WealsogrewkeycategoriesbeyondofficesuppliesNorthAmericanstoresandonlineduringQ1,withcomparablesalesgrowthinfurniture,facilitysupplies,copyandprint,mailandship,andbreakroomsupplies.

Anotherpriorityistogrowourmidmarketpenetrationandcontract.DuringQ1,wegrewNorthAmerican




contractsalesby2%inlocalcurrency.Ourstrongestmomentumwasinthemidmarketwheresaleswereupinthemid-singledigitsdrivenbysalesbeyondofficesupplies,whichisupabout10%year-over-year.Improvedcustomeracquisitionandretentionoffsetmodestlylowersalestoexistingcustomers,andthiswassupportedbyadditionalmidmarketsalesrepsthatwehiredduringQ1aswellascontinuedstrongperformanceinourmidmarketmembershipprogram.

Wealsonarrowedourfocusonourbestgrowthopportunitiesincontractsduringthefirstquarterwiththeannouncementofourintentiontosellourcontract,print,manufacturing,andoperationsbusinesstoTaylorCorporation.WeacquiredthecontractprintbusinesswhenweboughtCorporateExpressin2008.Asweincreaseourfocusongrowingourassetlightbusinessesandimprovingreturnonnetassets,itmadesenseforustopartwayswithcontractprint.

AtStaples,welackthescaleandmanufacturingexpertisethatthisbusinessrequires.Thebusinessisalsoverycapital-intensive;itgeneratesanoperatingmarginbelowthehouseandgeneratesareturnonnetassetsbelowourcostofcapital.Whilethisbusinessisn'tagreatfitintheStaplesportfolio,it'saperfectfitforTaylor.Weexpectthedealtocloseduringthesecondquarter.Welookforwardtocontinuingtoofferawideassortmentofprintsolutionsforcontractcustomerthroughvendorpartnershipsandourownin-storecapabilities.

We'realsofocusedonimprovingtraffic,bothin-storeandonline.Resultsherebeenmixedduringthefirstquarter.InCanada,trafficinstoresandonlineincreasedyear-over-yearandweimprovedcustomerconversion.IntheUnitedStates,wealsoimprovedcustomerconversioninstoresandonlinebutthiswasnotenoughtooffsetlowercustomertrafficacrossbothchannels.Weremaincommittedtoimprovingcustomertrafficonlineandconversionstores.Afewweeksagowelaunchedthenewunbeatablepricesforinkandtoner.Andwhileit'sstillearly,I'mpleasedreportthatthecustomerfeedbackhasbeenverypositive,andwehaveseenaniceimprovementinonlinetrafficintheUSduringthefirstfewweeksofQ2.Weknowthisistherightdecisiontoimprovepriceperceptionwhiledrivingbusinesscustomeracquisitionandretentionoverthelong-term.

Overthepastfewyearswe'vehadsuccessdrivinggrowthincategorybeyondofficesupplies,growingourmidmarketcontractbusiness,andprovidingbettervaluetoourcustomersbyinvestinginlowerprices.Ourmomentumcontinuedduringthefirstquarter,ourstrategicplanissupportedbyourstrongestcompetitiveadvantagesandbuildsonthesuccesses.We'reconfidentthatbynarrowingourfocusandmoreaggressivelypursuingourbestopportunities,wewillspeedupourtransformationwhilepositioningStaplesforsustainablelong-termsalesandearningsgrowth.

Let'stakeaquicklookatfirst-quarterresultsfromeachofourbusinessunits.I'mgoingtostartwiththeNorthAmericancommercial.Heresaleswereup1%year-over-year,excludingthenegativeimpactofchangesinforeignexchangerates.OnaGAAPbasis,salesinUSdollarswereflatversusQ1lastyearat$2.1billion.Incontract,salesgrew2%inlocalcurrencyduringthequarter.

AsImentionedafewminutesago,wecontinuetodrivestronggrowthincategoriesbeyondofficesuppliesandcontractduringthefirstquarter.Weachieveddouble-digitgrowthinpromotionalproductsandbreakroomsupplies,andsaleswereupinhighsingledigitsinfacilitysupplies.Contractsalesincorecategorieslikeink,andtoner,andpaper,weredowninthelowtomid-singledigits,andsalesofofficesupplieswereflatversusQ12015.

Duringthefirstquarter,NorthAmericanCommercialoperatingmarginsincreased63basispointsto7%,andoperatingincomegrewbyproximally$14millionorabout10%year-over-year.Thisimprovementprimarilyreflectslowerlevellaborcostandreducedmarketingexpense.WeexpectthedivestitureofStaplesprintsolutionstocloseoverthecomingweeks.Asaresultofthesale,weareplanningforabouta4%headwindtoourreportedNorthAmericancommercialsalesandabouta2%headwindtoour




reportedtotalcompanysalesoverthenextyear.

TurningtoNorthAmericanstoresandonline,salesdeclinedapproximately2%excludingthenegativeimpactofchangesinforeignexchangeratesandstoreclosures.OnaGAAPbasis,salesweredown5%to$2.2billionversusQ1oflastyear.Duringthefirstquarter,combinedNorthAmericanstoresandonlinecomparablesalesdeclinedby3%.Thisreflectsa1%localcurrencysalesgrowthonstaples.comanda4%declineinsame-storesales.ResultsinCanadawerestrongerthantheUSinbothstoresandonlineduringthefirstquarter.

Fromacategoryperspective,the3%declineincomparablesalesduringQ1wasentirelydrivenbyongoingweaknessintechnology,aswellasweaknessininkandtoner.Intechnologytabletsandtechnologyaccessorieswereourweakestcategorieswithdouble-digitdeclinesyear-over-year.Inkandtonerweredownthelowsingledigits.Outsideoftechnologyandinkandtoner,comparablesalesinstoresandonlinegrewduringthefirstquarter.Thisgrowthwasdrivenbyfurniture,officesupplies,facilitysupplies,andcopyandprint.

NorthAmericanstoresonlineoperatingmargindecreased40basispointsyear-over-yearto2.8%.Thisprimarilyreflectsthenegativeimpactoflowersalesandfixedexpenses,aswellaslowerproductmargininStaples.comversusQ1oflastyear.Thiswaspartiallyoffsetbyreducedmarketingexpense,improvedretailproductmarginrate,andsavingsrelatedtoreductioninheadcount.WecontinuetorightsizeourretailstorenetworkinNorthAmerica,duringthequarterweclosed14storesintheUnitedStates,endingQ1with1288storesintheUnitedStatesand305storesinCanada.Wehavenowclosedabout256storesorabout14%oftheNorthAmericanchainsince2014,

Finallyturninginternationaloperations,salesheredecreased3%excludingthenegativeimpactofchangesonforeignexchangerates.OnaGAAPbasis,salesinUSdollarsweredown6%year-over-yearto$738millionversusQ1oflastyear.InEuroperetail,same-storesalesdeclined9%duringthefirstquarterdrivenprimarilybyadecreaseincustomertrafficversusQ1.InourcontractbusinessinEurope,localcurrencysalesweredowninthehighsingledigitduringthefirstquarterandourEuropeanonlinebusiness,localcurrencysalesweredowninthelowsingledigit.

DespitetheweaksalestrendsinEuropeduringthefirstquarter,JohnWilsonandhisteaminEuropedidagreatjobaggressivelymanagingexpenses,andinfact,droveimprovedprofitabilityyear-over-year.

OutsideofEurope,wecontinuetodrivesolidgrowthinChinaduringQ1withsalesupinthestrongdouble-digitrangeinlocalcurrencyversusQ1oflastyear.WealsocontinuedtomakeprogressimprovingthebottomlineinAustralia,NewZealand,aswellasChina.Onthebottomlineinternationaloperatingmarginratesimproved13basispointsversusQ1oflastyeartoanoperatinglossof2.4%,andthiswasdrivenbyyear-over-yearimprovementinAustralia,ChinaandinEurope.

Andwiththat,letmeturnitovertoChristinetoreviewourfinancialresults.Christine.

Christ ineKomola(CFO):

ThanksRon.Goodmorningeveryone.

Totalcompanysalesforthefirstquarterwere$5.1billion.Onanon-GAAPbasis,totalcompanysalesdeclined1%versusQ1oflastyear.Thisexcludesa1%headwindfromchangesinforeignexchangeratesanda1%headwindfromstoreswe'veclosedinNorthAmericaduringthepastyear.OnaGAAPbasis,salesdeclined3%versusQ1oflastyear.

Duringthefirstquarter,weachievednon-GAAPdilutedearningspershareof$00.17,whichwasunchangedversusQ1oflastyear.OurQ12016non-GAAPdilutedearningspershareexcludespre-tax




chargesof$66millionprimarilyrelatedtocostsassociatedwiththeproposedacquisitionofOfficeDepotandstoreclosures.Italsoexcludesapretaxchargeof$32millionrelatedtothependingsaleofStaples'printsolutions.

OnaGAAPbasis,wereportednetearningsof$00.06pershare.Thoseprofitmarginsforthefirstquarterdecreased33basispointsto25.3%versusQ1oflastyear.Thisprimarilyreflectslowerproductmarginrateininternationaloperations,anditwaspartiallyoffsetbyimprovedproductmarginsinNorthAmericastores.

Duringthefirstquarter,totalcompanySG&Adecreased$59millionyear-over-year,afterexcludinga$24millionchargeinQ1ofthisyear,primarilyrelatedtheproposedacquisitionofOfficeDepotas$11millionofacquisitionrelatedcostsand$4millionofaccelerateddepreciationduringQ1lastyear.Thisreflectslowerlaborcostsduetoheadcountreductionsandstoreclosures,lowermarketingexpense,andthefavorableimpactofthestrongerUSdollar.AsapercentageofsalesSG&Aexcludingchargesdecreased44basispointsto21.5%.Excludingtheimpactofcharges,non-GAAPtotalcompanyoperatingmarginratesincreased14basispointsyear-over-yearto3.4%

TurningtoourQ1taxrate,excludingtheimpactofcharges,ournon-GAAPeffectivetaxratewas33.5%versusournon-GAAPeffectivetaxrateof33.5%inQ1of2015.Thismodestyearoveryearincreaseinoureffectivetaxratewithprimarilydrivenbychangesinourgeographicmixofearnings,versus2015.Q1capitalexpenditurescameinat$44million,adecreaseof$16millionintheprioryear.Withoperatingcashflowof$276million,wegeneratedfreecashflowof$232millionduringthefirstquarter.

Duringthefirstquarter,wedidmakecashpaymentsof$69millionrelatedOfficeDepotfinancingcommitmentfeesearnedbyourlendersin2015.Ifyouexcludethenegativeimpactofthesepayments,ourfirstquarterfreecashflowcameinat$301million.AttheendofQ1,Stapleshadapproximately$2billioninliquidityincludingcashandcashequivalenceof$946millionandavailablelinesofcreditofabout$1.1billion.

AsRonmentionedatthebeginningofthecall,onofourtopprioritiesistocontinuereturningexcesscashtoshareholders.

Wereturnedmorethan$300milliontoshareholdersannualthroughcashdividendsandweremaincommittedtoourdividendprogram.WealsoplantoresumesharerepurchasesduringQ2.Ourcurrentforecastisforabout$100millionofsharerepurchasesin2016.Asaresult,weplantoreturnapproximately$400milliontoshareholdersthisyearthroughdividendsandrepurchases.

Now,turningtoouroutlook,weremainontracktogetbacktoearningsgrowthin2016.Duringthesecondquarter,weexpecttotalcompanysalestodecreaseversusQ2oflastyear.WeexpecttodrivegrowthincategoriesbeyondofficesuppliesandourcontractbusinessinNorthAmerica.ThiswillbeoffsetbytheheadwindrelatedtothesaleofStaplesPrintSolutions,aswellasongoingweaknessesintechnology,andourretailstoresandforeclosures.

Onthebottomline,weexpectsecondquarternon-GAAPdilutedearningspershareintherageof$00.11to$00.13.OurearningsguidanceexcludesremainingcostsassociatedwiththeproposedacquisitionofOfficeDepot,andtheimpactofongoingstoreclosures,aswellasthenegativeimpactoftheOfficeDepotbreakupfee.Weexpecttogenerateapproximately$600millionofcashflowin2016.Ourfreecashflowguidanceexcludestheimpactofcashpaymentsrelatedacquisitionfinancing,aswellastheimpactofthebreakupfeethatwewillpayOfficeDepotthisweek.

In2016,weplantocloseatleast50retailstoresinNorthAmerica.Overtime,ourstrategicplanwilldriveimprovementinbothtopandbottomline.WewillexperiencesalespressuresasweexplorestrategicalternativesinEuropeandaswecontinuetocloseretailstoresinNorthAmerica.Theseheadwindswillbe




offsetbymidmarketgrowth,fueledbythecategoriesbeyondofficesupplies.

WeexpecttogetbacktosustainableearningsgrowthaswereshapeStaplesandresumeourrepurchaseprograms.WealsoexpectStaplesfreecashflowandthesignificantimprovementinreturnonnetassetsasweincreaseourfocusonassetlightbusinessesandreduceourexposuretoourweakestperformingbusiness.

I'llnowturnitbackovertoourconferencecallmoderatorforQ&A.

QUESTIONS&ANSWERS

Operator :

Thankyou

(OperatorInstructions)

MichaelLasser,UBS.


GoodmorningMichael.

MichaelLasser (Analyst-UBS):

HeyRon.Goodmorningandthanksfortakingmyquestion.

SoRon,itseemsliketheweekoftheODPsituation,thestrategyisnowjusttoreturntowhatweretheareasoffocusthatwereinplacepriortothedealandinchipawayafromwhatyou'vebeenworkingon,whetherit'srepairingcosts,growingcategoriesbeyondofficesupplies.Howdoyouknowthat,that'stherightstrategyoratleastthatyou'repursuingthatstrategyattherightpace?Whywouldnotmovingintomoreaggressiveactionsandstepsbetherighttherightpathtopursue?


Well,there'sacoupleofthings,thereasonwe'repursuingthisisbecausewetookagoodhardlookwithalotofinsideandoutsidehelpofallthat'sbeeninvolvedinthisprojectoverthelastseveralmonthswithsomeoutsideresourcesaswell.Welookedatkindof,wheredowecompetebest,whereourstrongestcompetitiveadvantages.

Welookedatnotonlyyouknow,today,butalsokindofdowntheroad.Andyouknow,basicallyitbuildsonsomeofthethingsthatwe'vebeenverysuccessfulatoverthelastseveralyears,andwhetherthat'stheopportunityofmidmarketcustomers.Wherewethinkthere'sagreatopportunitytoone,getmoreofthemaswellassellmoretothem,whetherthat'sgettingfocusedasmoreofadeliveryassetlightcompanyversusanassetheavycompany.

Andwe'vetalkedaboutwhatwe'redoingwithretailsandwhatwe'vedonewithretailstores,whetherthattalksaboutthemakingofareallyatoughdecisionaboutlookingatopportunitiesandoptionsrelatingtoourEuropeanbusiness,andIthinkyouknow,inoursituationandthedecliningindustrycostevaluationissomethingwehavetocontinuetodo.We'vedoneagoodjobwiththataswell.SoIthinkthosearetheelementsofthestrategy.

ImeanI'msureanybodycansay,"you'rebeingtooaggressive"or"notaggressiveenoughaboutyourparticularpartofthestrategy,"butIthink--youknow,inacompetitivesituationwe'realsolookingtoseehowourcompetitorsrespondgoingforward,andwewilladjustandactappropriatelygoingforward.





Andmyfollow-upquestionis,Ithinkwecanhaveaneasierviewonwherewethinkultimately--yoursaleswillleveloffjudgingbytheperformanceofthevarioussegments.

What'sharderforustograspishowsignificantarethepoolsofdiscretionaryexpensesthatyou'redrawingthatyoucouldpotentiallyreducefurtherfromhere,andhowdoyoubalancetoreducetheexpenseswiththeneedforgrowth?Acoupleyearsago,youleftalotandyouslowedtheinvestmenttotryandrealizeareturnoninvestment,what'sthestrategyfromhere?Howbigisthebucketandwheredoyougofromhere?


Well,whenyou'reover$20billionofrevenue,allthebucketsarelarge.

Obviouslyproductbucketisthebiggestbucket--theproductcost.Andwethinkourownbrandrepresentsarealopportunityforustotakecoststhere.

Lookatoursecondbiggestcost--wouldprobablybeinthesupplychainarea,andwe'relookingatalotofthedifferentwaysofapproachingsupplychainandatsomepointifyouwanttoknowmoreaboutthat,Shiracanrespondtothat.

Soyes,thebucketsarelargeanditisalwaysabalancingact.Ithinkwesaidthatthreemonthsagothatweexpecttoimpacttheearningsgrowththisyearafterthree,four,orfiveyearsofreducedearningsyear-over-yearaswe'veinvestedinthebusiness.AndIthinkthisyearistheyearwesaid,we'regoingtogrowthebottomline."

Weexpecttostartgrowingthetoplineagain.Idothinkthat'strue,butasChristinesaid,"wedon'texpecttodothatthisyear."Soyes,it'sabalancingactandthebucketsofopportunityarelarge.


Interesting.

YoumentionedthattheNorthAmericaproductmarginswereoffyear-over-yearthefirstquarter,wasthatjustduetothelowerpenetrationoftechnology,orinthelikeforlikebasisormarginsworkingup?Thankyousomuch.


Itwasactuallyapartiallyacouplethings.

Oneisyes,itwaspartlymixedbutitwasalsotothepointof--wehaddonealotofhardworkinlookingatourpromotionalstrategy.Sogettingmoretargetedonthetypesofpromotionsthatwehaveoutthereandbeingabletomovemoreofthosedollarstoeverydaylowprices,inparticularlyonline.Soyou'vebeenableto--we'vebeenabletofigureouthowtoreallybalancethattypeofmarketingcampaign.AndIwouldsaythattheU.S.retailhasdonealottogrowtheirservicesbusinessovertimeaswell.

SoIthinkit'sallofthosethingscomingtogetherandthat'sbacktoRon'spointon"largepool",therearealotoflargepoolsthatwedohaveavarietyofwaysthatarestartingtakeholdthatwewillbeabletopursueevenmoreaggressively.


That'sveryhelpfulcommentary.Thankyousomuch





ThanksMichael.

Operator :

SimeonGutman,MorganStanley

SimeonGutman (Analyst-MorganStanley):

Hieveryone,it'sSimeonGutman.

Somyfirstquestionitwasmentioned--returningbacktoearningsgrowth,canwespeaktoitintermsofEBITorEBITDAgrowth,isthatgoingtobepositiveeventually?Andinthatsameregard,the$300millionofcostsavingsoverthenextfewyearsisthattooffsetinvestmentorisitsomeofthatcanflowtothebottom--IguesstotheEBITorthebottomline?


Sure,soI'lltakethequestion.

Theearningsgrowthwillcome,wekindofhaven'tdefinitivelydefinedthatyetbecausewedon'twanttogiveforwardlookingguidancebutwedefinitelythinkitwillbetowardsonthebottomline.AndIthinkthe$300million,it'sgoingtobeacombinationofthings,someofitwillgototheshareholdersandthebottomline,someofitwillbeusedtoinvestinthebusiness.Andwewillbeflexibleandwedothinkearningswillgrowjust--inanormalcourseparticularlyonsomeofthesecontractbusinessesthatyousawthisquarter.Sowe'llcontinuetodrivethegrowththroughthesalesofthatbusinessaswellastomangethe$300millionopportunitythatwe'vegot.


Fromthedemandside,someofthecategoriesyousellfacepressure,canyoutalkabouthowthatcurvelookstodayversushowitdidayearago?Isthecurvesteepeningwhenyoulookatink,andtoner,andpaperdemand?Oristherateofdeclineandthatisthatholdingsteady?


Ithinkit'srelativelysteady.

Whenyoulookat,officesupplieswereshrinkingandnowthey'rekindofflattish.Soofficesuppliesthemselvesaregettingalittlebetter.Whenyoulookattheinktonerandpaper,Ithinkthey'vebeendowninthe3to4%overthelastfewyears,andthat'scontinuingon.

Intermsoftechnology,thetechnologyparticularlyinretail,thatrateofdeclineisslowing.We'restillverynegative,butnotnearlyasnegativewasafewyearsago.


Okaymyfinalquestionisonthemarketingexpense.

Ithinkithelpedacrosstheboardbutin--toNorthAmericanindeliveryandinthestores,istherea--firstofall,howdiditcomedown?Whattypeofspendacamedownandistherearesidualhitfromthat?Inotherwords,isthatnotonlyanimpactthatyoucouldseeintheneartermfromleftmarketing,butcouldtherebesomeresidualimpactoverthenextcouplequartersfromit?





Aswelookatthemarketingexpense,we'vereallybeenveryscientificandusedalotmoreoftheanalyticcapabilitythatwe'vebeenabletobuildin-house.

Soingeneral,themerchantsandthemarketingpeoplewouldsay,"you'regoingtolosesomesales"andthat'sprobablytrue,butwethinkthatwehaveenoughoffsetinopportunitywithinvestinginpriceontheonlinesideofthehouseforexampleandinvestinginsomeofthesalesforceandthedigitaltoolsinthecontractbusiness.Sowe'vebeenverythoughtfulabouthowwemanagethroughtheusageofthatspendandreallydrivingsalesactivitiesinalaserfocusedwayversuskindofagenericbrandfocusthatwe'vehadinthepast.


Okay,thankyou.

Operator :

MikeBaker,DeutscheBank.

MikeBaker (Analyst-DeutscheBank):

Hi,howareyou?

Iwantedtoaskacouplequestionsaboutthatmiddlemarketopportunity.Socanyouhelpusbysizing,whatpercentofyourcommercialbusinessnow--wouldyouconsidermiddlemarkets?Anycommentaryonwhatyouthinkyoursharemightbethere?Thentosortoffollow-up,ishowthisinitiative--ifweretalkingaboutsales,wouldbedifferentthaninthepast.Youknow,I'vecoveredyouforalongtimeandthisisn'tthefirsttimewe'veheardaboutamiddle-marketinitiative.SoIjustwanttoflushthatout.Thanks.


Onthestatus,it'sabout20%ofourcontractsales.

AndIwillaskShiraGoodmanwho'sbeenheavilyinvolvedinthis.

ShiraGoodman (President,NorthAmericanOperations):

Yes,firstofall,mid-market,whileitisprimarilyaStaplesbusinessadvantage,itactuallyspreadsacrossthecompanyandwehavemidmarketcustomerswhoshopinstores,throughstaples.com,quillandSBA.Andactually,that'salotoftheopportunitywhichis,howwebringthedifferentchanneltogetherandreallyhaveaconvergenceofcoursetogomuchmoreafter?SofromaNorthAmericaperspectiveitiscloserto10or15%ofthetotalNorthAmericanbusiness.

Andwe'realready,youknowtoday,growingandgainingshareinthemarket.Andthatthekeyonit,isthatthesecompaniesarelargeenoughthattheyhavemoresophisticatedneedsinmarketing,facilities,etc,butthey'resmallenoughthattheydon'tactuallyhavethesophisticationorthescaletohavethosein-house.Soweareseeingthatthevaluepropositionofbroadassortment,competitivepricing,veryreliabledelivery,plustheexpertisethatwebringisreallyenablingustogainshareofinthecore,butespeciallyinthebeyondofficebycategory.


Andso,anyideawhatthatshareiscurrently?





Sotheshareinjustacrosstheboard--ourmid-marketshareislowerthanitisforeithersmallbusinessesorlargerbusinesses,becauseweinvestedmoreintheotherendsofthespectrum.

Thecoreshareisstillverysolidthelastyear,theboughtshareisin1%to2%.It'sahugeopportunity.


Okay,interesting.

Thefollowupquestion,justontheStaplesprintbusinessthatyou'redivesting,soyousaiditwouldbea4%hit,whatwillitdototheoperatingprofitinthecommercialbusinessandwillthatbeaccountedforasadiscontinuedoperation?


Itwillprobablybenegligibletothebottomlinebecauseitdoeshavealotcapital,alotofintensityontheactualoperationssideofit,sowedon'texpectasignificanthit.Itwillgointo--althoughwewillsellitveryquickly,soitwillslowthroughdiscontinuedunlessit'sjustacompletesaleinQ2.


Okaythanksforthecolor.

Operator :

MatthewFassler,GoldmanSachs

MatthewFassler (Analyst-GoldmanSachs):

Goodmorning.Thanks.

Myfirstquestion--apartofitwasaskedprior,butifyouthinkaboutthedeclinebothinmarketingcostsasapercentofsalesandalsothelowerlaborexpensesforNorthAmericandeliveryandthenicemarginexpansionthatyousawthere,withoutissuingguidanceasIknowyou'rereluctanttodo--wouldyousaythatmarginexpansionisfeasiblethereoverthecourseoftheyeargoingforwardwiththekindofsalesperformancethatyouputupinQ1?


HiMatt,itsChristine.

Actually,asyouknowwefocusedondollargrowth.Sothat'skindofouremphasishere.Havingsaid,thatyouknow,we'vehadkindofnicesteadyreturnsandweexpectthattocontinuethroughouttheyear.


Soinotherwords,theinvestmentlevelshavegoneinsuchthatwithlimitedtopline,youshouldbeabletoatleastholdprogressandprofitability?


Yes,Ithinkthat'showwestartedtoseeitandyouseethereturncomingthroughonsomeoftheseinvestmentsthatwehavemade.


Secondquestion,kindofstrategically--havingjustbeenthroughthisveryextendedprocessandhaving




gottentoknowthecompetitionIguessIabitbetter,maybeabitdifferently--nowthatyou'veemergedfromthisprocess,anynewperspectivesyouwouldbewillingtoofferaboutwhereyouallthinkyouhaveparticularcompetitivestrengthsandareaswherewereyoufeelcompelledtoimprovethebusinessrelativetocompetition?


Yes,Imeanobviously--Idon'tknowifyou'retalkingaboutAmazonbusinessspecifically,butourviewstherehaven'tchangedatallof.Westillthinkthattheyareaverystrongcompetitorinretailforstaples.comandincontracts.Youknow,webelievethatinordertobesuccessfulinthisindustrywe'vegottobecompetitiveonassortment;we'vegottobecompetitiveonpricesanddeliverycapabilities.

Ithinkourdifferentiationgoingforward,notonlyagainstAmazonbusiness,butanybodyisyouwe'retodifferentiatebestbasedonexpertisethatwecanprovidetomid-marketaswellasservicesthatwecanprovidemid-market.Ithinkwe'vegotlotofinitiativesunderwaythatzeroinonthatmid-marketsegment.AndyouknowatthesametimeIcantellyou,Ithinkstoresstillprovideacompetitiveadvantage.Peoplestillwanttoshopinstores,onlinepurchasingisstillsmall.Ithinkforthecountry,it'sonlyabout20%ofretail,so80%percentisstillgoingonstores.

TheremaybetoomanystoresoutthereandIwouldagreewiththat,andIthinktherewillbefewerstoresgoingforward.ButIthinkthestoredrepresentcompetitoradvantage.Ithinkourspecializedfocusontheofficeproductsandmid-marketisaisgoingtobeacompetitiveadvantageversusothers.

Ithinkyouknow--whenyou'rebuyingasmuchproductaswe'rebuying,weshouldbeabletobuyverywellintheindustry.Sotherearealotofcompetitiveadvantages.Ibelievewehavenotonlyagainsttraditionalofficeproductstoplayers,butalsoIthinkincreasinglygoingforwardgoingagainstAmazon.


Finally,Iknowyou--Ithinkyouwalkedthroughsomeoftheresidualcashcostsassociatedwiththemerger.Iknowyourstoreclosingprogramhascashcostsassociatedwithit.

Aswethinkaboutfreecashflowinandmodelitoutfor2016,Christine,what'stheaggregatedollaramountaboveandbeyondyourGAAPearningsandsortoftraditionalCAPEXetc--thatweneedtothinkabouttogettoayearendcashnumber?


Sowe'vegotabout$100millionrelatedtotherestructuringandkindoftheothercoststhatareusual.We'renotincludingthe$250millionbreakupfee.

Soyouknow,wethinkthatthe$600millionisprobablytherightnumberinthekindofordinarycourseofbusiness.


Gotit.Thankyousomuch.


ThanksMatt.

Operator :

ChrisHorvers,JPMorgan.




ChrisHorvers (Analyst-JPMorgan):

Thanksgoodmorningeverybody.

Iwantedtofollowuponthatquestion.Sothecompetitiveadvantagequestion,thispastyearDepothashadalotofchallengessigningupnewcontractcustomers,canyoutalkaboutyourabilitytomaintainthatedge?Haveyouseenalotofresumesfromtheirsalesforceofthepastyear?HasthedelayedOfficeMaxpledgeandintegrationbenefitedyourbusiness?HowdoyouthinkyoumaintainthisgetscompetitivegapoverDepotgoingforward?


Shira?


Sowe'veactuallylookedatthatgapoveracoupleofyearsandithasbeenprettysteadythatourcontractfordeliverbusinessgrows600to800basispointsfasterthanOfficeDepot.SoIdon'tthinkit'sachangeintrend.

Whenyoulookatwhat'sdrivingourgrowth,we'vebeensteadyoncustomeracquisition,we'vebeensteadyoncustomerretention.What'sreallydrivingtheStaplesadvantagegrowthismid-marketcustomersandcategoriesbeyondofficesupplies,andneitherofthose,IthinkarereallycoretoOfficeDepot'scontractbusiness.


Understood,Andthensoagain,andthat'sveryhelpful.

Ron,canyoutalkaboutwhatyourvisionorhowyouthinkaboutthenumberofstores--therightnumberstoresinNorthAmericaortheUnitedStatesfortheofficeproductsindustry?You'vehadsomeviewsinthepastaftergoingthroughthisandseeinghowthebusinesshastransformed,howyouthinkaboutthatgoingforward?


Well,IthinkthecustomerisgoingtodecidehowmanystoresshouldbeoperatingintheUnitedStatesandwho'sgoingtobeowningthestores.

IthinkinthepastI'vequotedanumberofsomethinglike2,400storesinofficeproductsindustryintheUS.I'mnotsurethat'sabadnumberatalltotellyouthetruth.

Whenyoulookattoday,IthinkOfficeDepotoperatesamaybe2,000stores,maybealittleless.WhenyoulookatStaplesthismorning,Ithinkwesaidthatwewereinthe1,280-1,300range.SodoIthinktherearetoomanystorestooclosetogether?Ido,andIthinkouropportunityisgoingtobetofocusonthedeliverybusinessandkindofrightsizeourstorenetwork.Butwewon'tbedoingthatalone,Ithinkwewillalsolookatcompetitiveclosingsaswell.


Soisthestrategyyoutalked--Ithink50morestoreclosuresthisyear?Soisthestrategytwofoldtowaitfortheleasestocomeup,andatthesametimeseehowaggressiveDepotbecomes?


Ithinkthestrategyistokindofoptimizeourretailnetworkinconjunctionwithotherpeopletryingto




optimizetheirretailnetwork.

IfyoulookathalfofOfficeDepotstoresarewithin5milesoftheStaplesstore.Ifyoulookat70to80%ofOfficeDepotstoresthey'rewithin10milesoftheStaplesstore.SoIthinkintermsofdensity,excludingtheNortheast,there'sprobablyadensityissuethatprobablyhastoberesolvedasanindustry,notjustbyus.


Makessense.

Andthenjusttofollowuponthegrossmargins--I'mnotsureifyoucoveredthis--thedegradationyearoveryearwasactuallymoresteepthisquarterthaninanpriorquarters,anditseemslikeitrolledoverabitlastquarter.Sowhat'sdrivingthatbecauseitdoesn'tsoundlikethemixhasreallychangedtablets--it'sstillbeendownalot,isthatthepaceofclosuresandintherentsavings--basicallyabating?


It'sactuallyprettymuchinlinewithwhatwe'veexpected.

Wedidhavesignificantimprovementslastyearandthisyearit'sbeenacombinationoftheplanthatwehavewithinareastoinvestinsomeofourprices.It'sdefinitelythede-leverageoffixedoverheadcostsinourretailbusinessinEuropeandintheUS.It'salmostproductmarginrateimproveinthestoresandintheEuropeanstoresaswellaswe'vebeenabletooptimizesomeofthosepromotionaloffersthatwe'vehad.

Soitisinlinewithourexpectationourplanningstrategyacrossthedifferentbusinessunits.SoIthinkthat'salittlebitofwhatIwouldputthecoloraroundthat.


Soaswethinkaboutthatgoingforward,doweannualizeoristheideatoinvestinprice,anddrivesales,andtakeoutcoststokeepEBITmarginsflattish?


Itwillvarybybusinessunits.SowearedefinitelyfocusedonmanagingasIsaid,growingearnings.Soyouwillseeitonthebottomlineandinsomebusinessunits,wewillinvestmoreinprice.

Ourstrategyonpriceistobefocusedonthebusinessunitsoroftheunitsandthevelocitythatcangrowthemost.We'realsoveryfocusedonmakingsurethattheotherlineitemswithinthatgrossmargin,includingleveragingoursupply-chainisstillanopportunityforus.


Thanksverymuch.

Operator :

KateMcShane,CitiResearch.

KateMcShane (Analyst-CitiResearch):

Goodmorning,thanksfortakingmyquestion.

IjusthadonequestionaboutEurope.IknowduringthemergerprocessthatIthinkyouwerelookingfor




interestedbuyersintheOfficeDepotpieceoftheEuropeanbusiness.Ijustwonderedintermsofinteresttotheextentthatyoucantalkaboutit,whatkindofinterestthatyoudidgetandhowwillthedynamicchangenowthatitseemslikebothEuropeanbusinessesareprobablyupforsale?


Christine?


SoweweredefinitelyworkingwiththeEuropeanCommissiononthesaleoftheOfficeDepotbusiness.Therewasinterest.

SoIthinkthattheofficesupplybusinessoverthereisveryfragmented,it'sverydispersedacrossallareas.Sotherewasinterest.

Ican'tgointodetailsaroundthatpointintime,forourbusinessorfortheirbusiness,it'sstilltooearly.ButIthinkthatthekeypointis,itisafragmentedmarketoverthere.OurbusinessisgettingstrongerandstrongerwiththeleadershipthatismanagedwithJohnandhisteam.Sowe'llseeandkeepyouallupdatedastheprocesscontinues.


Andhowlongareyoutogivetheprocess,again,totheextentthatyoucandiscussitbeforeyouknow,maybepursuingkeepingEuropeaspartofthebusinessandcontinuingtoeitherre-strategizeorreformulatethebusiness?


It'sstillearlyinourthinkingandthere'sdefinitelyavarietyofwaystomanagethealternativesthatwe'vegot.

SoIthinkit'sstilltooearlytoputadefinitivetimelineandspecificsoutthereatthispoint.


Okaygreat.

AndthenifIcouldaskanunrelatedquestiontothosetwo--Iknowit'sbeentalkedalittlebitalready,butwithpriceinvestments,canyoutellusabouthowyou'rethinkingabout--howmuchfurtheryouhavetogo?Howmuchmoreworkneedstobedoneandultimatelydoyouthinkyouhavetobetheabsolutelowestpriceinordertosucceedinhowyou'rebalancethat?


Yes,Ithinkitrelatestoknowwhatsegmentofthebusinessweretalkingabout.

IfyoulookatyouknowsomelargestcompaniesinAmerica,they'realreadybuyingveryverywell.Whenyoulookattheouronlinebusiness.orourretailbusiness,Ithinktherearesomeitemsthatare--youknow,weareremaintoohighat.

Onlineacoupleweeksago,weannouncedverysignificantreductionsinthepricesoninkandtoner,whichisthemostprice-sensitiveitemoroneofthemostprice-sensitiveitemsforcustomers.SoIthinkourgoalistogetasclosetoanybodyoutthereintheprice-sensitiveitems.Notsayingyouhavetobetheabsolutelowestbutthinkyouhavegottobewithinshoutingdistance.Particularly,whenyouthinkaboutsomeofthethingsthatretailoffers,therearesomeadvantagesofretailthatthemaybecustomersdon't




quiteexpectyoutobetheabsolutelowest,buttheotherthingsthattheretailoffersthatallowsyoutobeamaybeslightlyhigher.

Ithinkwelookatpricinglikeeverybodyelsedoes.Welookatpricesofitemswouldlookatintheelasticityofthose.Welookatthingsthatarekindofmedium,andwelookatthingsthatarenotelasticatall.ButIthinkingeneraloverthelastthreeyears,partoftheinvestmentsthatwe'vemadeasresultofthecosttakeout,hasbeentolowerprices.Ithinkwestillhaveawaystogo.

Andthenfinally,onceyougetintothecontractarea,you'renegotiatingyourpricesitembyitemintermsofoffcontractoroncontract.I'mnotsurethere'salotmoretobedonebecausewe'reprettyaggressivelypricedinthecontractsideofourbusinessalready.


Thankyou.

Operator :

GregMelich,EvercoreISI.

GregMelich (Analyst-EvercoreISI):

Ihaveacoupleofquestionsreallythinkaboutthelonger-termplanofgettingthe80%from60%ofthecommercialsideofthebusiness.

ThewayyouframeditRon,was"2,400storesfortheofficeproductindustry."Whatdoyouthinkisthereasonablenumberforyouasyoulookoutnow?


Yes,I'mnotgoingtogetintothat.I'mnotsendingoutcompetitivemessagesaboutwhatwethinkournumberisme.Wetalkedabouttheclosing50storesthisyearIthinkwetalkedafewyearsagobyclosing300,andIthinkwiththese50we'llbeaboutatthat300.

Wedon'thavealotofstoresthatlosealotofmoney.Wearetryingtomakesurethatourleaseobligationisgettingaslowaspossible,sowedohaveflexibilitygoingforward.Butintermsofournumberstores,we'renotgetinthere.


Iguessonthatoftheleaseobligation,Ithinktherentexpensenow,isaround$700million.CouldyouletusknowhowmuchthatisinNorthAmericaversustheEurope,giventhatyou'reconsideringleavingtheirstrategicoptions?Also,myguessistheEuropeanleasetermsarelongerthanNorthAmerica,isthattrue,theaveragelease?


Yes,theaverageleaseisalittlelonger,John.It'sjustunderfiveyearsinEuroperightnowistheaverageleaseandtheUSisinthemid-threeyears.


Andoftherentexpense,isEuropehigheronaverageperfoot?





Yes,perfoot,definitely.


Last,ontheother$300millionofcostreductionyouguyshaveoutlined,whatactualcostswouldtherebeexecutingonthose?


I'msorry,whatwasthatquestionagain,Greg?


Whatcashcostswouldtherebe,ifany,toactexecutingonthenext$300millioncostreductionplanthatyouannounced?


Wehaven'tgonetothatlevelofdetail,butIwouldn'texpecttoasignificantchangeinthatofwhatwe'vedone.


Sotheratiowouldbesimilartowhatwesawonthefirstplan?


Yes,maybeevenalittlebitless.


Okay,fairenough,goodluck.


Thankyou.

Operator :

DanielBinder,Jefferies.

DanielBinder (Analyst-Jefferies):

Thankyou.

Ijustwantedtogobacktotheinitiativeintermsofyoumid-market.Obviously,adding1,000newsalespeopleandfocusedonthatpartofthemarketsquarelyfocusesontheindependentchannel,andIwaswonderingifyoucouldjustgiveussortofthestated,theindustryupdateontheindependenceasyouseeit?Andwhetheryouthinkit'sgoingtorequirejustsheerbruteforceintermsofputtingsalespeopleoutthereorincrementalpriceinvestmentversushowyoupricethatsegmenttoday?


SoIthinkitisbothofferingtothecustomerandhowweapproachthecustomers.

Soitisexpandingourproductsandservices,sowereallycanofferthemfullrangeofwhattheywant.ContinuingourcompetitivepricingasRonsaid,becausewearecompetitiveinthisareaandthedeliver.




Formid-market,actuallyOmnihassomevalue.Theyliketopickitupandstore,timesofsamedayshippingwillbeleveragingourretailnetworkaswellasthingslikeprintingthesamedaysatisfactionthatisvaluabletothem.

Andthenthesecretsauceisreallytheexpertisethatwebringtothemid-marketcustomers,andthat'swherethecombinationofsalesforce,andyes,wewillbeadding1,000people.Butreallycombiningthemandempoweringthemwithdataanddigitalasset,andit'sreallyinthatmixthatwethinkwecangainshareverycosteffectivelyanddifferentiateourselvesfromtheothercompetitorsinthemarket.


Yes,thoseindependentshavelargelybeensuccessfulwithwhatIwouldprobablydescribeasfanaticalcustomerserviceandstaplesbeingabigorganization,hasgoodcustomerservice--butIsuspectsomeofthemom-and-popbusinessesouttherehavetheselong-termrelationshipswithindependents,sohowdoyoudoyouovercomethat?Howdoyoureallydistinguishyourservicelevelsversusthatmom-and-popplayer?


Ithinkwedistinguishourserviceslevelswithourexecutionofit.

Youknowoursupplychainisreallygoingstrongonservicelevelandbyaddingthesalespeople.Thatdoesenableamoreoftheonetoonepersonaltouchthatsometimesitdoestaketodifferentiatefromit.

ThefinalpiecethatIwouldaddtoit,isthatincreasinglyourcustomerbaseischangingaswellandtheyarebecomingmoredigitallyastute,they'reusedtobuyingonline,andthereforeourdigitalcapabilitywhichfaroutpacetheindependentfeelers.Weseetimeandtimeagainisreallybeingalevertogrowtheirshare.


IfIcouldjustfollowupononeotherquestion?

Welltwoactually,one,couldyoujustcommentonthecadenceofthequarter?IknowtherearesomeretailersouttherethathavetalkedaboutaslowdowninApril.Someareattributabletoweatherwhichwouldnotaffectyou,butsomemoremacrotypecommentary?Soifyoucancommentonthat?

Andthenthelastonewasjustregardingthesebosscategoriesyou'veobviouslyoutlinedfromthatyou'repursuingtoday.I'mjustcuriousifthere'sanysetofnewcategoriesthatyouwouldbewillingtosharewithustodaythatarecominguponyourradar?


Sointermsofthecadenceofthequarter,we'reoneoftheluckyretailersthatintheFebruary,March,Aprilquarter--soEasteristypicallyalwaysinourquarter.Sometimesit'slateinthequartersometimesitsearlyquarter.SointermsofthecadencewewereaffectedbytheEastershiftanditcamebacktousthefollowingmonth.

Intermsoftheabosscategories,Shira?


Iwouldsaywehaveaverybroadofferingtodaywhenyouthinkabouteverythingfromfacilities,toprint,promo,text,furniture.Butonecategorythatwe'reparticularlyexcitedaboutandisleadingthepackingrowthrateis(snack).Andthatisactuallypartofcopyatthecore,butthenanythingthatsurrounds




copy,includingfoodandsnacksetc,andthat'sarealgrowtharea.Overall,Ithinkascompaniesusebreakroomasawaytoattracttalent,andbuildculture,andit'sarealopportunityforusthat'spayingoff

Operator :

AnthonyC.Chukumba,BB&T.

AnthonyC.Chukumba(Analyst-BB&T):

Goodmorningandthanksfortakingmyquestion.

Iguessmyfirstquestion,canyougiveusaquickupdateintermsofsalestransferratesfromclosedstores?


Sure,letmejustgiveyouabigpicture.

Whenwecloseastore,about70%ofitaffectsanotherstore,andit'sabout30%ofthetimewherewedon'thaveastoreanywhereclose,sothere'snotransferthere,whenyoulookatthe70%,whetherit'satransfer,it'stheroughly20%.AndIunderstandthattheOfficeDepotisgettingahighertransferrate,butmyguessisthestoresthatthey'reclosingtheOfficeMax,OfficeDepotstoresthatareclosertogether.Soitrunsaround20%.

Forthestoreswherewedohavecompetition,ifyouputthose30%inwherewedon'thaveanystorescloseby,itwouldprobablyinthe15%to17%.


Gotit.That'shelpful.

Mylastquestionwasrelatedto--Iguess--thisnewLaborDepartmentregulationwherethey'reincreasingthethresholdforfirstsalaryforemployeesthatareeligibleforovertime.IguessI'mjustwonderingandmaybeit'stooearly--firstoff,doyouseethisishavinganimpactatallinyourNorthAmericanretailstores,andwhatstepsyoutaketofurtheroffsetthat?


Obviously,it'sveryearlydays,soyouknow,wehaven'tdoneanymath.ButIcansaythatwewerekindofveryearlyonthisonebecauseweoperatealotofstoresinCalifornia.

Severalyearsago,wereclassifiedsomeofthosequote,"assistantmanagers"tohourlyjustbecauseofthisissue.SoIthinkwe'reprettyfaraheadontheissue.Andthenyouknowmostofourmanager'swork--ourassistantmanagersarekindofworkingsimilartokindofourstoremanagers.Wedon'thavealotof80hourweekmanagertypeslikeyoumighthaveheardaboutinthepress.


Gotit,thankyouforansweringmyquestion,that'shelpful.


ThanksAnthony.

Operator :

ThankyouandIwillnowliketoturnthecallovertoMr.RonSargeantforanyclosingremarks.





I'lljustwrapbysayingthanksforjoiningusonthecallthismorning.Welookforwardtospeakingtoallofyouagainverysoon.

Operator :

Ladiesandgentlemen,thankyouforyourparticipationontoday'sconference.Thisconcludesyourprogram.Youmaynowdisconnec

t.Everyonehaveagreatday.

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