Staples 2006 Annual Report Download - page 82

12
products sold; pricing actions of competitors; the level of advertising and promotional expenses; extreme weather-related
disruptions; and seasonality, primarily because the sales and profitability of our stores are typically slightly lower in the
first and second quarter of the fiscal year than in other quarters. Most of our operating expenses, such as rent expense,
advertising expense and employee salaries, do not vary directly with the amount of sales and are difficult to adjust in the
short term. As a result, if sales in a particular quarter are below expectations for that quarter, we may not
proportionately reduce operating expenses for that quarter, and therefore such a sales shortfall would have a
disproportionate effect on our net income for the quarter.
Our expanding international operations expose us to the unique risks inherent in foreign operations.
As of February 3, 2007, we had operations in 19 countries in Europe, South America and Asia and a significant
presence in Canada. As evidenced by our recent entry into the South American and Asian markets, we may also seek to
expand further into other international markets. Our foreign operations encounter risks similar to those faced by our
U.S. operations, as well as risks inherent in foreign operations, such as local customs and regulatory constraints, foreign
trade policies, competitive conditions, foreign currency fluctuations and unstable political and economic conditions.
Further, our recent acquisitions in Europe and South America and our investments in Asia have increased our exposure
to these foreign operating risks, which could have an adverse impact on our international income and worldwide
profitability.
Our business may be adversely affected by the actions of and risks associated with our third party vendors.
The products we sell are sourced from a wide variety of third party vendors. We cannot control the supply, design,
function or cost of many of the products that we offer for sale and are dependent on the availability and pricing of key
products, including, without limitation, paper, ink, toner and technology products. Disruptions in the availability of raw
materials used in production of these products may adversely affect our sales and result in customer dissatisfaction. In
addition, global sourcing of many of the products we sell is an important factor in our financial performance. Our ability
to find qualified vendors and access products in a timely and efficient manner is a significant challenge, especially with
respect to goods sourced outside the United States. Political instability, the financial instability of suppliers, merchandise
quality issues, trade restrictions, tariffs, foreign currency exchange rates, transport capacity and costs, inflation and other
factors relating to foreign trade are beyond our control. These and other issues affecting our vendors could adversely
affect our business and financial performance.
Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to
product liability claims.
Our product offering includes Staples, Quill and other proprietary branded products which represented
approximately 20% of our total sales in fiscal 2006. While we have focused on the quality of our proprietary branded
products, we rely on third party manufacturers for these products. Such third party manufacturers may prove to be
unreliable, or the quality of our globally sourced products may not meet our expectations. Furthermore, economic and
political conditions in areas of the world where we source such products may adversely affect the availability and cost of
such products. In addition, our proprietary branded products compete with other manufacturers’ branded items that we
offer. As we continue to increase the number and types of proprietary branded products that we sell, we may adversely
affect our relationships with our vendors, who may decide to reduce their product offerings through Staples and increase
their product offerings through our competitors. Finally, if any of our customers are harmed by our proprietary branded
products, they may bring product liability and other claims against us. Any of these circumstances could have an adverse
effect on our business and financial performance.
Our debt level and operating lease commitments could impact our ability to obtain future financing and continue our growth
strategy.
Our consolidated debt and operating lease obligations may have the effect generally of restricting our flexibility in
responding to changing market conditions and could make us more vulnerable in the event of a downturn in our
business. In addition, our level of indebtedness may have other important consequences, including: restricting our
growth; making it more difficult for us to satisfy our obligations; limiting our ability to borrow additional amounts for
working capital, capital expenditures, debt service requirements, future acquisitions or other corporate purposes; and
limiting our ability to use operating cash flow in other areas of our business. In such a situation, additional funds may not
be available on satisfactory terms when needed, or at all, whether in the next twelve months or thereafter.