<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: May 4, 1996
Commission File Number: 0-17586
STAPLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2896127
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Research Drive, Westborough, MA 01581
(Address of principal executive office and zip code)
508-370-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The registrant had 159,550,351 shares of Common Stock, par value $.0006,
outstanding as of May 28, 1996.
<PAGE> 2
FORM 10-Q
STAPLES, INC.
MAY 4, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Balance Sheets ............................................................................ 3
Consolidated Statements of Income ...................................................................... 4
Consolidated Statements of Cash Flows .................................................................. 5
Notes to Consolidated Financial Statements ............................................................. 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................................................. 7-11
Part II ................................................................................................ 12
Signature .............................................................................................. 13
</TABLE>
Page 2
<PAGE> 3
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
May 4,
1996 February 3,
(Unaudited) 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $93,258 $98,130
Short-term investments................................. 5,606 12,685
Merchandise inventories................................ 697,519 644,514
Receivables, net....................................... 138,167 122,453
Prepaid expenses and other current assets.............. 68,353 48,089
---------- ----------
TOTAL CURRENT ASSETS............................... 1,002,903 925,871
PROPERTY AND EQUIPMENT:
Land and buildings..................................... 28,283 24,364
Leasehold improvements................................. 185,359 168,588
Equipment.............................................. 148,011 144,857
Furniture and fixtures................................. 88,169 75,182
---------- ----------
TOTAL PROPERTY AND EQUIPMENT....................... 449,822 412,991
Less accumulated depreciation and amortization......... 137,955 120,496
---------- ----------
NET PROPERTY AND EQUIPMENT......................... 311,867 292,495
OTHER ASSETS:
Lease acquisition costs, net of amortization........... 39,552 40,338
Investment in affiliates............................... 31,861 32,940
Goodwill, net of amortization.......................... 82,694 80,361
Other.................................................. 37,439 30,770
---------- ----------
TOTAL OTHER ASSETS................................. 191,546 184,409
---------- ----------
$1,506,316 $1,402,775
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $326,381 $273,633
Accrued expenses and other current liabilities......... 143,716 139,641
Debt maturing within one year.......................... 16,951 8,267
---------- ----------
TOTAL CURRENT LIABILITIES.......................... 487,048 421,541
LONG-TERM DEBT........................................... 58,825 43,647
OTHER LONG-TERM OBLIGATIONS.............................. 29,963 26,171
CONVERTIBLE DEBENTURES................................... 300,000 300,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-authorized
5,000,000 shares; no shares issued..................... 0 0
Common stock, $.0006 par value-authorized
200,000,000 shares; issued
159,510,270 shares at May 4, 1996 and
158,366,604 shares at February 3, 1996................. 96 95
Additional paid-in capital............................. 472,840 466,684
Cumulative foreign currency translation adjustments.... (1,914) (2,054)
Unrealized gain on short-term investments.............. 28 32
Retained earnings...................................... 159,776 147,005
Less: 37,398 shares of treasury stock, at cost......... (346) (346)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY......................... 630,480 611,416
---------- ----------
$1,506,316 $1,402,775
========== ==========
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE> 4
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited)
13 Weeks Ended
--------------------------------
May 4, April 29,
1996 1995
-------------- ---------------
<S> <C> <C>
Sales......................................................... $916,800 $668,795
Cost of goods sold and occupancy costs........................ 708,227 518,413
-------------- ---------------
GROSS PROFIT.............................................. 208,573 150,382
Operating expenses:
Operating and selling....................................... 146,697 106,117
Pre-opening................................................. 1,788 962
General and administrative.................................. 30,629 23,281
Amortization of goodwill.................................... 560 372
-------------- ---------------
TOTAL OPERATING EXPENSES.................................. 179,674 130,732
-------------- ---------------
OPERATING INCOME ......................................... 28,899 19,650
Interest and other expense, net............................. (4,028) (3,986)
-------------- ---------------
INCOME BEFORE EQUITY IN LOSS OF
AFFILIATES AND INCOME TAXES............................. 24,871 15,664
Equity in loss of affiliates................................. (3,714) (2,752)
-------------- ---------------
INCOME BEFORE INCOME TAXES................................. 21,157 12,912
Income tax expense ........................................... 8,145 5,035
-------------- ---------------
NET INCOME ................................................ $13,012 $7,877
============== ===============
Net income per common share................................... $0.08 $0.05
============== ===============
Number of shares used in computing net
income per common share............................. 165,438,542 147,241,346
================= ================
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE> 5
STAPLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
13 Weeks Ended
--------------------------------
May 4, April 29,
1996 1995
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................ $13,012 $7,877
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization..................................... 18,846 10,894
Equity in loss of affiliates...................................... 3,714 2,752
Increase in assets:
Merchandise inventories ......................................... (53,283) (45,513)
Receivables ..................................................... (15,744) (12,033)
Prepaid expenses and other assets................................ (29,856) (2,129)
Increase in accounts payable, accrued
expenses and other current liabilities........................... 57,399 8,081
Increase in other long-term obligations........................... 3,808 1,044
-------------- ---------------
(15,116) (36,904)
-------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES.............................. (2,104) (29,027)
INVESTING ACTIVITIES:
Acquisition of property and equipment.............................. (37,052) (17,412)
Proceeds from sales and maturities of short-term investments....... 7,078 0
Investment in affiliates........................................... (3,069) (7,244)
Other ............................................................. 1,684 (652)
-------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES.............................. (31,359) (25,308)
FINANCING ACTIVITIES:
Proceeds from sale of capital stock................................ 4,798 2,858
Proceeds from borrowings........................................... 38,704 465,000
Payments on borrowings............................................. (14,823) (414,346)
-------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......................... 28,679 53,512
Effect of exchange rate changes on cash............................ (88) 910
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ (4,872) 87
Cash and cash equivalents at beginning of period.................... 98,130 41,810
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $93,258 $41,897
============== ===============
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE> 6
STAPLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying interim unaudited consolidated financial statements include the
accounts of Staples, Inc. and its wholly owned subsidiaries (the "Company"). All
intercompany accounts and transactions are eliminated in consolidation.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, such interim statements reflect all adjustments (consisting of
normal recurring accruals) necessary to present fairly the financial position
and the results of operations and cash flows for the interim periods presented.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year. These financial statements
should be read in conjunction with the audited consolidated financial statements
and footnotes included in the Company's Annual Report on Form 10-K dated
April 11, 1996 for the year ended February 3, 1996.
Note 2 - Computation of Earnings Per Share
On June 29, 1995, and March 5, 1996 the Board of Directors approved a
three-for-two stock split of the Company's common stock to be effected in the
form of a 50% dividend. These distributions were made on July 24, 1995 and March
25, 1996, respectively, and were payable to shareholders of record as of July
14, 1995 and March 15, 1996, respectively. The number of shares used in the
earnings per share computation for the quarter ended April 29, 1995 as
previously reported has been retroactively adjusted to reflect these stock
splits.
Average common and common equivalent shares used in computing earnings per share
include approximately 6,586,000 and 5,573,000 shares for the quarters ended May
4, 1996 and April 29, 1995, respectively, as a result of applying the treasury
stock method to outstanding stock options.
Page 6
<PAGE> 7
STAPLES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales. Sales increased 37% to $916,800,000 in the quarter ended May 4, 1996 from
$668,795,000 in the quarter ended April 29, 1995. This growth is attributable to
an increase in the number of open stores, increased sales in existing stores and
increased sales through both internal growth and acquisitions in the delivery
and contract stationer segments. In addition, the quarter ended May 4, 1996
includes the results of operations of Macauley's Business Resources, Inc.
("Macauley's"), which was acquired under the purchase method of accounting
during the year ended February 3, 1996. Due to the date of acquisition, the
results of operations of Macauley's are not included in the consolidated results
for the quarter ended April 29, 1995. Comparable store and delivery hub sales
(which represent a comparison of sales between corresponding full months in the
periods compared) for the quarter ended May 4, 1996 increased 18% over the
quarter ended April 29, 1995. Comparable sales for the Company's contract
stationer business segment increased 18% for the quarter ended May 4, 1996
versus the quarter ended April 29, 1995. The Company had 473 stores open as of
May 4, 1996 compared to 368 stores as of April 29,1995 and 443 stores open as of
February 3, 1996.
Gross Profit. Gross profit as a percentage of sales was 22.8% for the three
months ended May 4, 1996 as compared to 22.5% for the same period in the prior
year. The increase in gross profit rate for the three months ended May 4, 1996
was primarily due to the leveraging of fixed occupancy and distribution center
costs over a larger sales base, improved margins in the delivery business
segment as well as lower product costs from vendors as a result of increased
purchase volume discounts. This was partially offset by a decrease in
merchandise margin rate in the retail segment, as sales of computers and other
capital goods items, which generate a lower margin rate than other categories,
increased as a percentage of total sales for the three months ended May 4, 1996
versus the prior year. Total computer sales constituted approximately 8% of
total store and delivery hub sales during the three months ended May 4, 1996
versus 6% of sales in the same period of the prior year.
Operating and Selling Expenses. Operating and selling expenses, which consist of
payroll, advertising and other store operating costs, increased as a percentage
of sales in the three months ended May 4, 1996 to 16.0%, as compared to 15.9%
for the same period in the prior year. The increase is primarily due to
increased advertising as well as increased costs incurred for the Company's
store remodel program in which significant investments have been made in store
layouts and signing to improve shopability and enhance customer service. This
increase was partially offset by increased leveraging of fixed store payroll
expenses and other fixed store operating costs as store sales have increased.
Page 7
<PAGE> 8
While most store expenses vary proportionately with sales, there is a fixed cost
component. Because new stores typically generate lower sales than the Company
average, the fixed cost component results in higher store operating and selling
expenses as a percentage of sales in these stores. During periods when new store
openings as a percentage of the base are higher, store operating and selling
expenses as a percentage of sales may increase. In addition, as the store base
matures, the fixed cost component of operating expenses is leveraged over an
increased level of sales, resulting in a decrease in store operating and selling
expenses as a percentage of sales. The Company's strategy of saturating markets
results in some new stores attracting sales away from existing stores. This also
has the effect of detracting from the expected leveraging of the fixed cost
component.
Pre-opening Expenses. Pre-opening expenses relating to new store openings, which
consist primarily of salaries, supplies, marketing and occupancy costs, are
expensed by the Company as incurred and, therefore, fluctuate from period to
period depending on the timing and number of new store openings. Pre-opening
expenses averaged $60,000 per store for the three months ended May 4, 1996 as
compared to $52,000 per store for the same period in the prior year.
General and Administrative Expenses. General and administrative expenses for the
three months ended May 4, 1996 decreased as a percentage of sales to 3.3% as
compared to 3.5% for the same period in the prior year. This decrease was
primarily due to the Company's ability to increase sales without proportionately
increasing overhead expenses in its core retail business. The acquisitions of
contract stationers, which historically operated with much higher overhead as a
percentage of sales, has partially offset this leveraging. The Company has
continued to make significant investments in its information systems staffing
and infrastructure, which the Company believes will reduce costs in future
years, without increasing total general and administrative expenses as a
percentage of sales. The Company expects general and administrative expenses to
decrease as a percentage of sales in the future, as these expenses are expected
to increase more slowly than revenues. The Company has consolidated certain
general and administrative functions at the recently acquired contract
stationers which should further reduce these expenses as a percentage of sales.
Interest and Other Expense, Net. Net interest and other expense for the three
months ended May 4, 1996 was $4,028,000 as compared to $3,986,000 for the same
period in the prior year. The increase in net interest expense is primarily due
to the issuance of $300,000,000 of 4 1/2% Convertible Subordinated Debentures on
October 5, 1995 which funded the increase in store inventories related to new
store openings, expanded product assortments, and improvements in in-stock
levels; the acquisition of fixed assets for new stores opened and remodeled; and
additional investments in joint venture affiliates.
Equity in Loss of Affiliates. The Company's equity in loss of affiliates
increased to $3,714,000 for the three months ended May 4, 1996 as compared to
$2,752,000 for the same period in the prior year. The increase in the equity in
loss of affiliates is primarily due to the increase in the number of open stores
from 30 as of April 29, 1995 to 47 as of May 4, 1996. The initial investments in
overhead, labor and advertising, combined with the fact that new stores
typically generate lower sales than mature stores, cause new stores to be
unprofitable initially. The Company's joint ventures in Europe are at an early
stage of development and there can be no assurance that they will become
profitable.
Page 8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended May 4, 1996, cash and cash equivalents decreased
by $4,872,000. This decrease was attributable to cash used in investing
activities of $31,359,000, which includes capital expenditures of $37,052,000
primarily incurred in connection with the opening of 30 new stores, and cash
used in operating activities of $2,104,000, which primarily reflects increases
in merchandise inventories related to new store openings, expanded product
assortments, and improvements in in-stock levels. This was partially offset by
cash flow from financing activities of $28,679,000 which primarily represents
borrowing under the existing revolving credit and term loan facility.
The Company opened 30 stores in North America during the three months ended May
4, 1996, and expects to open approximately 90 additional stores in the last
three quarters of fiscal 1996. Management estimates that the Company's cash
requirements, including pre-opening expenses, will be approximately $1,400,000
for each new store (excluding the cost of any acquisitions of lease rights).
Accordingly, the Company expects to use in excess of $126,000,000 for store
openings during this period. In addition, the Company will continue to make
investments in information systems, distribution centers and store remodels to
improve operational efficiencies and customer service, and may expend additional
funds to acquire businesses or lease rights from tenants occupying retail space
that is suitable for a Staples store.
On October 25, 1995, the Company reduced its commitment on its five-year
revolving credit and term loan facility with a syndicate of banks, established
on February 14, 1995, from $300,000,000 to $225,000,000. Borrowings made
pursuant to this facility bear interest at either the lead bank's prime rate,
the federal funds rate plus 0.50%, the LIBOR rate plus a percentage spread based
on certain defined ratios, or a competitive bid rate. Borrowings outstanding at
February 14, 1998 automatically convert into a term loan, payable in eight
installments due on the last day of each calendar quarter. Term loan borrowings
bear interest at either the lead bank's base rate plus 0.25% or the Eurodollar
lending rate plus 0.25%. This agreement, among other conditions, contains
certain restrictive covenants including net worth maintenance, minimum interest
coverage and limitations on indebtedness, sales of assets, and dividends. As of
May 4, 1996, borrowing availability under the revolving credit facility totaled
$203,000,000; total cash, short-term investments and available revolving credit
amounts totaled $301,864,000.
The Company expects that its current cash and cash equivalents, funds
anticipated to be generated from operations, and funds available under its
revolving credit and term loan facility will be sufficient to fund its planned
store openings and other recurring operational cash needs for at least the
remainder of the fiscal year. The Company is currently in negotiations to
increase its borrowing capability under its revolving credit facility and is
actively exploring implementation of an asset-backed borrowing facility, which
the Company expects will fund its recurring operational cash needs through the
end of fiscal 1997. The Company is continually evaluating financing
possibilities, and it may seek to raise additional funds through any one or a
combination of public or private debt offerings dependent upon market
conditions, or through additional commercial bank debt arrangements.
Page 9
<PAGE> 10
FUTURE OPERATING RESULTS
This quarterly report on Form 10-Q contains a number of forward-looking
statements. There are a number of important factors that could cause the
Company's results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, the
following:
The Company operates in a highly competitive marketplace, in which it competes
with a variety of retailers, dealers and distributors. The Company competes in
most of its geographic markets with other high-volume office supply chains that
are similar in concept to the Company in terms of store format, pricing strategy
and product selection, such as Office Depot and OfficeMax. Moreover, the Company
believes that it will face increased competition from such chains in the future
as both the Company and these chains continue to expand their operations. Some
of the Company's current and potential competitors in the office products
industry are larger than the Company and have substantially greater financial
resources. No assurance can be given that competition will not have an adverse
effect on the Company's business. In addition, if any of the Company's major
competitors were to seek to gain or retain market share by reducing prices, the
Company may be compelled to reduce its prices and thereby reduce its gross
margin and profitability.
An important part of the Company's business plan is an aggressive store growth
strategy. The Company opened 94 stores in the United States and Canada in fiscal
1995 and plans to open approximately 120 new stores in fiscal 1996. There can be
no assurance that the Company will be able to identify and lease favorable store
sites, hire, train and integrate employees, and adapt its management and
operational systems to the extent necessary to fulfill its expansion plans. The
failure to open new stores in accordance with its growth plans could have a
material adverse impact on the Company's future sales and profits. Moreover, the
Company's expansion strategy is based in part on the saturation of its suburban
store network in existing markets to take advantage of economies of scale in
marketing, distribution and supervision costs; however, this can result in the
"cannibalization" of sales of existing stores. In addition, there can be no
assurance that the new stores opened by the Company will achieve sales or profit
levels commensurate with those of the Company's existing stores, particularly as
the Company enters new markets in which it has less experience or faces more
competition.
The Company has experienced and may experience in the future fluctuations in its
quarterly operating results. Factors such as the number of new store openings
(pre-opening expenses are expensed as incurred, and newer stores are less
profitable than mature stores), the extent to which new stores "cannibalize"
sales of existing stores, the mix of products sold, pricing actions of
competitors, the level of advertising and promotional expenses, seasonality, and
one-time charges associated with acquisitions or other events could contribute
to this quarterly variability. In addition, the Company's expense levels are
based in part on expectations of future sales levels, and a shortfall in
expected sales could therefore result in a disproportionate decrease in the
Company's net income.
The Company's business, including sales, number of stores and number of
employees, has grown dramatically over the past several years. In addition, the
Company has consummated a number of significant acquisitions in the last few
years, and may make additional acquisitions in the future. This internal growth,
together with the acquisitions made by the Company, have placed significant
demand on the management and operational systems of the Company. To manage its
growth effectively, the Company will be required to continue to upgrade its
operational and financial systems, expand its management team and increase and
manage its employee base.
Page 10
<PAGE> 11
The Company has a presence in international markets through joint ventures with
locally-based companies in Germany and the United Kingdom, and may seek to
expand into other international markets in the future. The Company's operations
in foreign markets are subject to risks similar to those affecting its North
American stores in addition to a number of risks inherent to these joint
ventures, including lack of complete operating control and foreign currency
fluctuations.
The Company currently expects that its current cash and cash equivalents and
funds available under its revolving credit and term loan facility will be
sufficient to fund its planned store openings and other operating cash needs for
at least the remainder of the fiscal year. However, there can be no assurance
that the Company will not require additional sources of financing prior to such
time, as a result of unanticipated cash needs or opportunities, an expanded
growth strategy or disappointing operating results. There also can be no
assurance that the additional funds required by the Company, whether within the
next twelve months or thereafter, will be available to the Company on
satisfactory terms.
Page 11
<PAGE> 12
PART II -- OTHER INFORMATION
Items 1-6 - Not applicable.
Page 12
<PAGE> 13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 11, 1996 /s/ James E. Flavin
-------------------- ----------------------
James E. Flavin
Senior Vice President-
Corporate Controller
and Chief Accounting
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Staples, Inc. for the three months ended May 4, 1996,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-3-1996
<PERIOD-START> FEB-4-1996
<PERIOD-END> MAY-4-1996
<CASH> 93,258
<SECURITIES> 5,606
<RECEIVABLES> 139,648
<ALLOWANCES> 1,481
<INVENTORY> 697,519
<CURRENT-ASSETS> 1,002,903
<PP&E> 449,822
<DEPRECIATION> 137,955
<TOTAL-ASSETS> 1,506,316
<CURRENT-LIABILITIES> 487,048
<BONDS> 358,825
0
0
<COMMON> 96
<OTHER-SE> 630,384
<TOTAL-LIABILITY-AND-EQUITY> 1,506,316
<SALES> 916,800
<TOTAL-REVENUES> 916,800
<CGS> 708,227
<TOTAL-COSTS> 854,924
<OTHER-EXPENSES> 37,005
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,028
<INCOME-PRETAX> 21,157
<INCOME-TAX> 8,145
<INCOME-CONTINUING> 13,012
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,012
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
