Staples 2015 Annual Report Download - page 110

APPENDIX B
B-7 STAPLES Form 10-K
STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)
2014 Compared with 2013
Sales increased 2.8% for 2014 compared to 2013. The
increase was primarily due to increased sales of facilities
and breakroom supplies, furniture, business machines and
technology accessories, and promotional and print solutions.
This was partially offset by decreased sales of ink and toner and
a $35 million unfavorable impact from foreign exchange rates.
Business unit income as a percentage of sales decreased
to 6.9% for 2014 from 7.5% for 2013, primarily driven by
increased incentive compensation, pricing investments in
Quill, and investments in sales force. These declines were
partially offset by reduced marketing expense and leverage of
fixed expenses on increased sales.
International Operations
2015 Compared with 2014
Sales decreased by $613 million or 16.3% for 2015 compared
to 2014. The decrease was primarily driven by a $544 million
negative impact from foreign exchange rates. The remaining
decrease was due to an 8% decline in comparable store sales
in Europe, mainly driven by a decline in customer traffic, as
well as declines in our European delivery businesses. These
declines were partially offset by strong growth in China.
Business unit loss as a percentage of sales was 1.3% for
2015 compared to 0.6% for 2014. This increased loss was
primarily driven by the impact of lower sales on fixed expenses
in Europe and lower product margin rates in our European
contract business, partially offset by improved profitability in
Australia and China.
2014 Compared with 2013
Sales decreased 4.9% for 2014 compared to 2013. This
decrease was primarily driven by a $116 million unfavorable
impact from foreign exchange rates and weakness in our
European delivery businesses.
Business unit loss as a percentage of sales was 0.6% for
2014 compared to 0.4% for 2013. The business unit loss rate
for 2014 reflects a 30 basis point unfavorable impact from
foreign exchange rates; results for 2014 in local currency were
largely comparable to the prior year. In 2014 there was slight
improvement in our Australian business, with lower salary and
professional service costs more than offsetting the impact of
lower product margins. There was also improvement in Europe
driven by improved product margins as we continue to benefit
from pan-European assortment and pricing optimization,
partially offset by increased costs in Europe as we transition to
a more centralized pan-European business model.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT
ESTIMATES
Our financial statements have been prepared in accordance
with U.S. GAAP and are based on the application of significant
accounting policies (see Note A - Summary of Significant
Accounting Policies in the Notes to the Consolidated Financial
Statements). Preparation of these statements requires
management to make significant judgments and estimates.
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 obsolete,
overstocked and inactive inventory based on the difference
between the weighted-average cost of the inventory and the
estimated market value using assumptions of future demand
and market conditions. To estimate the required reserve, we
consider factors such as age of the inventory, the nature of
the products, the quantity of items on-hand relative to sales
trends, current market prices and trends in pricing, our ability
to use excess supply in another channel, historical write-offs,
expected residual values or other recoveries, contractual terms
related to and historical experience with returns to vendors, and
new product introductions and other developments in industry.
If actual demand or market conditions are less favorable than
those projected by management, additional reserves may be
required. However, past experience has shown little variability
in reserve estimates, and we do not believe that deviations
from our current estimates and assumptions will have a
material impact upon our financial statements in the future.
When developing estimates for reserves required for inventory
at stores that are closing, the key factors considered by
management include the extent to which inventory on-hand will
be discounted, transferred to other stores or distribution channels,
returned to vendors, or liquidated. These estimates require
judgment. However, we have a significant amount of experience
with managing inventory upon the closure or consolidation of
facilities, as well as in the context of making significant changes
to the merchandise assortment. Therefore, we do not believe our
estimates will yield material differences in the future.
Purchase and Advertising Rebates: We earn rebates from our
vendors, which are based on various quantitative contract
terms that can be complex and subject to interpretation.
Amounts expected to be received from vendors that relate to