Staples 2007 Annual Report Download - page 103

STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
for 2006 primarily reflects increased sales in higher margin categories, including copy and print services, office supplies
and Staples brand products, as well as supply chain initiatives, expense management and leveraging of fixed expenses on
higher sales including the added leverage from the 53rd week of sales. Our 2006 results were partially offset by planned
investments in marketing. We also benefited from the positive impact of foreign exchange rates in both 2007 and 2006.
We expect to continue to drive improvements in North American Retail through delivering on our ‘‘Easy’’ brand
promise, focusing on our Staples brand products, expanding our copy and print center business, entering new geographic
markets, and continuing to develop innovative products.
North American Delivery: Sales increased 11.9% in fiscal 2007 and 19.0% in fiscal 2006. Sales for 2006 include $
129.6 million related to the additional week in 2006. Excluding the additional week in fiscal 2006, sales increased 14.4%
in 2007 and 16.3% in 2006. The sales growth in 2007 reflects the continued success of our customer acquisition and
retention efforts, increased penetration of existing customers, non-comparable sales from our recent acquisitions and
more effective marketing spend. The sales growth in 2006 reflects the continued success of our customer acquisition and
retention efforts, increased penetration of existing customers, and more effective marketing spend.
Business unit income as a percentage of sales increased to 10.8% in 2007 from 10.6% in 2006 and 10.2% in 2005.
The increase in 2007 primarily reflects improvement in our supply chain and more efficient and effective marketing
spend to acquire and retain customers, partially offset by our investments in growth initiatives. The increase in 2006
primarily reflects more efficient and effective marketing spend, our continued focus on higher margin Staples brand
products, and our supply chain efforts focused on improving our perfect order metric and decreasing the number of trips
per order. During 2008, we plan to focus on growing sales in all of our delivery businesses through our customer
acquisition, product penetration, and customer retention initiatives. We plan to focus on continuing to drive profit
improvements through our supply chain programs, service improvements and our own brand initiatives.
International Operations: Sales increased 16.1% in fiscal 2007 and 12.6% in fiscal 2006. Sales for 2006 include
$31.1 million related to the additional week in 2006. Excluding the additional week in fiscal 2006, sales increased 17.6%
in 2007 and 11.1% in 2006. Comparable store sales in Europe increased 2% in 2007 and 3% in 2006. The sales growth in
2007 reflects the positive impact of foreign exchange rates to the U.S. dollar of $222 million, growth in local currency in
our International delivery businesses, the increase in comparable store sales as well as non-comparable store sales for
stores opened in 2007. The sales growth in 2006 reflects growth in local currency in our International delivery businesses,
the positive impact of foreign exchange rates to the U.S. dollar of $61 million, the increase in comparable store sales as
well as non-comparable store sales for stores opened in 2006.
Business unit income increased $47.5 million in fiscal 2007 and increased $36.9 million in fiscal 2006. The increase in
2007 primarily reflects sales growth and improvement in product margin rates due to mix, better buying and own brand
penetration in our European retail business, along with our continued focus on expense control. The improvement for
2006 reflects 2005 costs associated with the integration of the Office World stores and the integration of our two delivery
businesses in the United Kingdom, which reduced business unit income for 2005, as well as improved sales and focus on
expense management across our international businesses. 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 growing our
businesses in high potential markets in Asia and South America.
Stock-Based Compensation: Stock-based compensation, excluding the charge recorded in fiscal 2006 for the
correction of measurement dates used to calculate prior years’ stock-based compensation (see Note H in the Notes to the
Consolidated Financial Statements), increased to $173.3 million in fiscal 2007 from $157.9 million in fiscal 2006 and
$129.8 million in fiscal 2005. Stock-based compensation includes expenses associated with our employee stock purchase
plans, the issuance of stock options, restricted shares, performance share awards, as well as the company match in the
employee 401(k) savings plan. The increase in this expense for 2007 and 2006 is primarily related to changes in the mix of
equity awards granted.
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 in the Notes to the Consolidated Financial
B-5