Staples 2005 Annual Report Download - page 80

STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
B-6
International Operations: Sales increased 8.7% in fiscal 2005 and 20.5% in fiscal 2004. Excluding our 2004
acquisitions and Staples China, sales decreased 2.2% in 2005 and increased 13.5% in 2004. Comparable store sales in
Europe were flat in 2005 and decreased 1% in 2004. The sales decrease in 2005 primarily reflects lower sales in our retail
business in the United Kingdom and our delivery business in France as well as a decrease in European exchange rates
against the U.S. dollar of $29 million. The sales increase in 2004 primarily reflects the positive impact of an increase in
European exchange rates against the U.S. dollar of $157 million combined with non-comparable store sales for the net
stores opened during 2004 and increased sales in our delivery businesses.
Business unit income decreased $56.3 million in fiscal 2005 and increased $3.6 million in fiscal 2004. The decrease in
business unit income in 2005 reflects lower sales in our retail business in the United Kingdom and our delivery business
in France as well as increased investments in our European delivery business during the first half of 2005 and the
continued costs associated with the integration of the Office World stores, which was completed in September 2005, and
our two delivery businesses in the United Kingdom. Our results for 2005 were also slightly impacted by the negative
effect of foreign exchange rates in 2005. The slight increase in business unit income in 2004 is the result of improved
performance during the first half of the year in our delivery businesses relating to the positive integration efforts in the
businesses acquired in 2002, improvements in our existing delivery businesses and improvements in our retail businesses
reflecting the implementation of our strategies that were successful in North America. Our business unit income also
benefited from the positive impact of foreign exchange rates in 2004. These results were primarily offset by the costs
associated with the integration of the Office World stores and the related impact of five planned Staples store closures in
the United Kingdom, the integration of our two delivery businesses in the United Kingdom, a slight decrease in sales in
our delivery businesses in France in the second half of the year compared to the prior year combined with increased
investments in marketing which did not yield the sales benefits that were anticipated. We believe that we have a
significant opportunity to grow our International business by expanding our multi-channel offering in our existing
European businesses and making targeted investments in emerging markets such as Asia and South America.
Critical Accounting Policies and Significant Estimates
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 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. If actual market conditions are less
favorable than those projected by management, additional reserves may be required.
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 relating
to the purchase of merchandise inventories and reimbursement of incremental costs, such as advertising, are recognized
as a reduction of inventory cost and realized as part of cost of goods sold as the merchandise is sold. Several controls are
in place, including direct confirmation with vendors, that we believe allow us to ensure that these amounts are recorded
in accordance with the terms of the contracts.
Impairment of Long-Lived Assets: We review our long-lived assets for impairment when indicators of impairment
are present and the undiscounted cash flow estimated to be generated by those assets is less than the assets’ carrying
amount. Our policy is to evaluate long-lived assets for impairment at a store level for retail operations and an operating
unit level for our other operations. Our retail stores typically take three years to prove their ability to achieve targeted
cash flows. If actual market conditions are less favorable than management’s projections, future write-offs may be
necessary.
Impairment of Goodwill and Indefinite Lived Intangible Assets: Statement of Financial Accounting Standards
No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”) requires that we annually review goodwill and other
intangible assets that have indefinite lives for impairment and when events or changes in circumstances indicate the