Staples 2005 Annual Report Download - page 77

STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
B-3
We strive to maintain a balance between investing for our long-term growth and delivering strong current earnings
growth. For each of the past three years, we have chosen to make significant investments to drive sustainable earnings
growth by investing in productivity improvements and better processes in such areas as store labor, supply chain,
marketing and Staples brand products. We are expanding our market share by continuing to grow our existing businesses
as well as developing new growth ideas and strengthening our global presence. Initiatives to expand our existing
businesses include growing the copy and print center business, growing our Contract business and entering major new
geographic markets. New growth ideas include selling office products through other retail channels and developing
innovative products. To strengthen our global presence, we are investing in our existing businesses in Europe and making
targeted investments in emerging markets such as Asia and South America.
We expect additional operating income improvement to continue in fiscal 2006. As of the date of this filing, we
anticipate sales growth in fiscal 2006 to be in the low double digits, reflecting low single digit North American retail
comparable store sales. As of January 29, 2006, we adopted Financial Accounting Standards Board Statement No. 123
(revised 2004), “Share Based Payment” using the modified retrospective method, which will result in our restating our
fiscal 2005 net income to $1.05 per diluted share. After adjusting fiscal 2005 net income to $1.05 per diluted share, we
expect earnings per share growth of approximately 15% to 20% for fiscal 2006. As with all forward looking statements
made in this Annual Report on Form 10-K, we do not intend to update publicly any of the forward-looking statements in
this paragraph.
Sales: Sales increased 11.3% in fiscal 2005 and 11.4% in fiscal 2004. Excluding non-comparable sales from our
2004 acquisitions of $212 million in 2005 and $113 million in 2004 sales increased 9.8% in 2005 and 10.6% in 2004.
Comparable sales for our North American retail locations, which include stores open for more than one year, increased
3% in 2005 and 4% in 2004 and comparable sales for our International retail locations were flat in 2005 and decreased
1% in 2004. We had a net addition of 100 stores in 2005, a net addition of 121 stores in 2004, including the 59 Office
World stores that were acquired in August 2004 (of which 10 stores were subsequently closed during 2004 and 3 stores
were closed during 2005), and a net addition of 71 stores in 2003. North American Delivery sales increased 17.8% in
2005 and 13.4% in 2004. The increase in total sales also reflects the positive impact of foreign currency rates of
$104 million in 2005 and $265 million in 2004.
Our strong sales growth in both 2005 and 2004 reflects our performance in ink and toner, paper, computer
peripherals, portable computers, office machines, our copy and print center business and digital cameras. These
increases reflect our continued focus on customer service, strong execution, increased productivity of our expanded
Contract sales force, more efficient targeted marketing spend among our catalogs, web sites and retail stores as well as
the continued success of our customer acquisition and retention efforts resulting from improved service levels in our
North American delivery businesses.
Gross Profit: Gross profit as a percentage of sales was 28.5% for fiscal 2005, 28.4% for fiscal 2004 and 27.0% for
fiscal 2003. On a pro forma basis to reflect the retroactive application of Issue 02-16, gross profit was 27.7% for fiscal
2003. The increase in the gross profit rate for 2005 from the gross profit rate for 2004 and the increase in the gross profit
rate for 2004 from the pro forma gross profit rate for 2003 reflects the continued positive impact of targeting our product
mix and marketing at more profitable small businesses and home offices, our continued focus on higher margin Staples
brand products, strong results in our copy and print center business and supply chain initiatives which lower the cost of
moving product from our vendors to our customers. The improvements in our North American businesses in 2005 were
primarily offset by weakness in our International Operations segment.
Operating and Selling Expenses: Operating and selling expenses, which consist of payroll, advertising and other
operating expenses, were 16.3% of sales for fiscal 2005 and fiscal 2004 and 16.7% of sales for fiscal 2003. The flat
performance in 2005 and decrease in operating and selling expenses in fiscal 2004 reflects our continued focus on
expense management and leveraging of fixed expenses on higher sales. Our 2005 results were offset by declining
productivity and investments in our International Operations segment as well as planned investments for long-term
growth including labor and marketing to grow our copy and print center business and investments for our Chicago
market entry. In addition, the decrease in operating and selling expenses in 2004 reflects more efficient investments in
marketing partially offset by increased investments in our Contract sales force.