Staples 2014 Annual Report Download - page 126

APPENDIX B
B-8 STAPLES Form 10-K
STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)
International Operations
2014 Compared with 2013
Sales decreased 4.9% for 2014 compared to 2013. This
decrease was primarily driven by a $115.5 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.
2013 Compared with 2012
Sales decreased 10.7% for 2013 compared to 2012. Sales for
2013 include $80.8 million of revenue related to the additional
week in 2012. Excluding the 53rd week, sales decreased
9% for 2013 compared to 2012. This decrease was primarily
driven by weakness in our European delivery businesses,
an approximate 2% decrease in sales from store closures in
Europe related to the 2012 restructuring plan, and weakness
in our Australian business. The decrease was also driven by
a $31.8 million unfavorable impact from foreign exchange
rates, and a 3% decline in comparable store sales in Europe,
primarily due to lower traffic.
Business unit loss as a percentage of sales was (0.4)% for
2013 compared to 0.0% for 2012. This change was driven
by reduced marketing spend, savings related to headcount
reductions in our European and Australian businesses, as well
as a favorable comparison to 2012 which included severance
and the settlement of a contractual dispute. In addition, to
a lesser extent, we experienced improved profitability in our
European retail business as a result of closing underperforming
stores in 2012. These factors were mostly offset by the
negative impact of fixed costs on lower sales in Australia and
in our European delivery businesses.
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.
In 2014, we recorded $26.3 million of inventory write-downs
related to our initiatives to improve efficiencies in our delivery
fulfillment operations and the closure of North American retail
stores. The key factors considered by management when
developing the underlying estimates 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 required 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 significant changes to the merchandise
assortment. In addition, with respect to the write-downs related
to the store closure plan, many of the stores have already
closed during 2014, allowing us to corroborate the accuracy
of our earlier estimates. 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
the purchase of merchandise inventories are recognized as
a reduction of inventory cost and realized as part of cost of