Staples 2003 Annual Report Download - page 57

STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
North American Retail: Sales increased 3.6% in fiscal 2002 and, excluding the additional week in fiscal 2000, sales
increased 0.8% in fiscal 2001. Comparable store sales in North America increased 1% in 2002 and decreased 5% in 2001.
Our sales increase in both years primarily reflects the net addition of 39 stores in 2002 and 113 stores in 2001.
Additionally, sales in 2002 were favorably impacted due to strong sales in our core office product categories that were
offset by weaknesses in our technology and furniture categories. The 2001 growth was offset by the effects of a weak
economy, a decrease in the Canadian exchange rate to the U.S. dollar from fiscal year 2000 and the impact of the events
of September 11th. The strong improvement in our bottom line, despite only modest sales growth in fiscal 2002, reflected
the impact of our Back to Brighton strategy which has shifted our customer mix to more profitable business customers
and power users and focused us on emphasizing multiple customer service initiatives, including expanding our training of
store associates, adding labor hours to certain departments and changing our bonus plan. In addition, we believe our
Dover format and reduced store size are significant competitive advantages that enable us to provide customers with a
better view of our products while permitting us to lower rent and occupancy costs.
North American Delivery: Excluding the acquisition of MAP in fiscal 2002, sales increased 9.3% in fiscal 2002 and,
excluding the additional week in fiscal 2000, sales increased 10.6% in fiscal 2001. The sales growth in both years reflects
the positive results of cross-channel marketing among our catalogs, websites and retail stores and increases in both
customer acquisition and customer retention rates in all of our delivery businesses. Our fiscal 2002 results also reflect the
expansion of our sales force and continued improvement in our customer service. In fiscal 2001, our sales growth was
achieved despite a weak economy and the events of September 11th. In fiscal 2002, an increase in the number of orders
placed electronically and an increase in average order size were the primary drivers of our bottom line improvement.
Going forward, there is further opportunity to improve operating margin in the Staples Business Delivery division while
continuing to increase our customer acquisition and retention rates in our contract stationer and Quill businesses.
European Operations: Excluding our European mail order acquisition, sales increased 13.2% in fiscal 2002 and,
excluding the additional week in fiscal 2000, sales increased 13.7% in 2001. Comparable store sales in Europe were flat in
2002 and increased 9% in 2001. The sales growth in both years primarily reflects the net increase of 13 stores in 2002 and
16 stores in 2001 and also includes an increase in sales in the delivery businesses. Sales in existing stores were flat in 2002
which reflects improvements in the UK, Netherlands and Portugal that were offset by weakness in our retail business in
Germany. The sales increase in 2002 also reflects the positive impact of an increase in European exchange rates against
the U.S. dollar. Our sales growth in fiscal 2001 reflects an increase in sales at existing stores in all countries offset by the
negative impact of a decrease in European exchange rates against the U.S. dollar from 2000. Our 2002 results of
European Operations reflect charges of $14.7 million relating to integration costs associated with our European mail
order acquisition, six store closures in Germany and severance relating to reorganizations of our European corporate
functions. Excluding these charges and the results of our European mail order acquisition, our business unit income
improved $9.4 million over 2001. Our European Operations showed improved profitability in fiscal 2002 despite a
challenging economic environment. We expect to see significantly improved performance in our European Operations
segment in fiscal 2003 due to our highly profitable European mail order acquired businesses, the positive impact of the
integration process on our existing delivery business and improved execution in our retail business.
Divested Business: Sales for Divested Businesses represents the sales for Staples Communications which was sold
on April 3, 2001.
Critical Accounting Policies
Our financial statements are based on the application of significant accounting policies, many of which require
management to make significant estimates and assumptions (see Note A to the consolidated financial statements). We
believe that the following are some of the more critical judgment areas in the application of our accounting policies that
currently affect our financial condition and results of operations.
Inventory: We record inventory at the lower of weighted-average cost or market value. We reserve for obsolescence
based on the difference between the weighted-average cost of the inventory and the estimated market value based on
assumptions of future demand and market conditions. If actual market conditions are less favorable than those projected
by management, additional reserves may be required.
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