Staples 2006 Annual Report Download - page 3

Fellow shareholders:
Looking back, 2006 was another strong year for Staples. We celebrated our 20th anniversary, and our best year
on record. In some ways, a lot has changed at Staples over the years, but the things that are most important to
At the beginning of 2006, we announced that we’d drive strong sales and earnings growth, remain focused on
execution, and invest in long-term profitable growth ideas. We delivered on each of these promises, and achieved
record sales and earnings for our shareholders.
For the year, we drove both top- and bottom-line growth, with sales up 13% to $18 billion, and earnings per
share up 27%. Our net income was $974 million, up 24% versus the previous year. These results, combined
with consistent capital discipline, translated into return on net assets well above our long-term cost of capital.
We generated $637 million in free cash flow after investing $528 million in capital to grow our business, and
continued to return value to our shareholders through share repurchases and an annual dividend. During 2006,
we bought back about 30 million shares of Staples stock, and we recently announced a $0.29 per share annual
cash dividend for 2007, a 32% increase compared to the $0.22 per share annual dividend we paid in 2006.
We have big goals at Staples, and our vision is to be the world’s best office products company. To get there, we
need to execute better than anyone else in the industry and differentiate ourselves from the competition. Core to
our strategy to differentiate Staples is our brand promise, “We make buying office products easy.” We’ve been
working hard over the past few years to develop initiatives that make it easy for our customers to shop with us in
all our channels. Examples include our EASY service model, which sets clear service standards for our store
associates, our Easy Rebates program that takes the hassle out of the rebate process, and easy-to-use websites.
These efforts are enhanced by our innovative advertising campaign, featuring the Staples® Easy Button™, which
has become a powerful brand icon. Our research shows that Staples is widening the gap between us and our
competitors in customers’ perception that we truly do make things easy for them.
Another way we are differentiating ourselves is with Staples brand products. Staples brand products offer high
quality and great value to our customers, drive brand loyalty, and are more profitable. They’re also a great way
to provide innovative solutions to customers. We launched more than 600 new Staples brand products in 2006,
including hundreds of back to school products, an LCD computer monitor, and innovative shredders. Most
notably, Staples launched the MailMate shredder, a breakthrough product designed to shred junk mail in the
kitchen. We’ve already sold hundreds of thousands of MailMates and today Staples is the largest reseller of
shredders in the world. And the great news is we still have plenty of room to grow. In 2006, 20% of our sales
came from Staples brand products, and we expect to increase brand penetration to 30% over the next several
years. Sourcing more of the products we sell directly from factories will further increase the profitability of
Staples brand products. We significantly increased our direct sourcing in 2006 and benefited from the growing
capabilities of our buying office in Shenzhen, China.
By focusing on driving profitable growth, the Staples team delivered excellent results in each of our three
business units: North American Retail, North American Delivery, and International Operations.
North American Retail
Our North American Retail business represented 55% of our sales and 59% of our business unit income, leading
the industry in sales and profitability in 2006. Sales grew 10% to $9.9 billion, with an operating income margin of
9.6%. Same store sales for the year were a healthy 3%, driven by strong customer traffic.
Excellent real estate locations and strong store networks have long been a competitive advantage for Staples.
We opened 99 stores in 2006, closing the year with 1,620 stores in North America. After successfully entering
the Chicago market in 2005, we entered the South Florida market in 2006, and we’re off to a great start. We plan
to repeat these successes with our 2007 entry into Denver and future market launches in 10 other major cities in
America where Staples currently has no retail presence. More than 40% of our stores feature the easy-to-shop
“Dover” format, and we’ve kept our entire portfolio fresh with a strong remodel program.
us - making it easy for our customers and running our business well - have not.