SPLS Staples, Inc.

Staples, Inc. (Nasdaq: SPLS) (“Staples” or “the company”) announced today the results for its second quarter ended July 29, 2017. Total company sales for the second quarter of 2017 were $3.9 billion, a decrease of three percent compared to the second quarter of 2016. On a GAAP basis, the company reported net income from continuing operations of $63 million, or $0.10 per diluted share, for the second quarter of 2017. Second quarter 2017 results from continuing operations include pre-tax charges of $10 million primarily related to the proposed acquisition of the company by funds managed by Sycamore Partners.

Total company comparable sales for the second quarter of 2017 declined one percent compared to the second quarter of 2016. Excluding the impact of certain charges taken during the second quarter of 2017, the company reported non-GAAP net income from continuing operations of $76 million, or $0.12 per diluted share.

Second Quarter 2017 Financial Summary

                      Second Quarter (dollar amounts in millions, except per share data) 2017     2016     Change Total company sales $3,905 $4,032 -3.1% Total company comparable sales*^ -1.1%   GAAP operating income $106 ($167) $273 Non-GAAP operating income* $116 $136 -$20   GAAP operating income rate 2.7% -4.2% NM Non-GAAP operating income rate* 3.0% 3.4% -41 basis points   GAAP net income from continuing operations $63 ($107) $170 Non-GAAP net income from continuing operations* $76 $87 -$11   GAAP earnings per share from continuing operations $0.10 ($0.17) NM Non-GAAP earnings per diluted share from continuing operations*     $0.12     $0.13     -8%

*Indicates a non-GAAP measure. Refer to “Presentation of Non-GAAP Information” and the accompanying reconciliations for more detailed information about these non-GAAP measures.

^Total company comparable sales excludes the impact of acquisitions, divestitures, store closures and foreign currency translation.

Second Quarter 2017 Highlights

• Grew mid-market sales in Staples Business Advantage, the company’s North American contract business, by 11 percent year over year.
• Improved profitability in North American Retail with operating loss rate down 30 basis points year over year.
• Maintained total company non-GAAP gross profit rate year over year at 25.5 percent.
• Generated $279 million of cash provided by operating activities, and spent $89 million in capital expenditures, resulting in $190 million of free cash flow.
• Ended the second quarter of 2017 with $1.2 billion in cash and cash equivalents.

Presentation of Non-GAAP Information

This press release presents certain results with and without restructuring and related charges, long-lived asset impairment, gains and losses related to the sale of businesses and assets, and costs related to the proposed acquisition of Office Depot and the proposed acquisition of Staples by funds managed by Sycamore Partners. This press release also presents certain results with and without the impact of acquisitions, divestitures, store closures, and foreign currency translation. The presentation of these results, as well as the presentation of free cash flow, are non-GAAP financial measures that should be considered in addition to, and should not be considered superior to, or as a substitute for, the presentation of results determined in accordance with GAAP. Management believes that the non-GAAP financial measures assist management and investors to analyze the company’s performance by providing meaningful information that facilitates the comparability of underlying business results from period to period. Management uses these non-GAAP financial measures to evaluate the operating results of the company’s business against prior year results and its operating plan, and to forecast and analyze future periods. Management recognizes there are limitations associated with the use of non-GAAP financial measures as they may reduce comparability with other companies that use different methods to calculate similar non-GAAP measures. Management generally compensates for these limitations by considering GAAP as well as non-GAAP results. In addition, management provides a reconciliation to the most comparable GAAP financial measure.

About Staples, Inc.

Staples brings technology and people together in innovative ways to consistently deliver products, services and expertise that elevate and delight customers. Staples is in business with businesses and is passionate about empowering people to become true professionals at work. Headquartered outside of Boston, Mass., Staples, Inc. operates primarily in North America. More information about Staples (NASDAQ: SPLS) is available at www.staples.com.

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Millions, Except Share Data) (Unaudited)

    July 29, 2017     January 28, 2017 ASSETS Current assets: Cash and cash equivalents $ 1,199 $ 1,137 Receivables, net 1,342 1,337 Merchandise inventories, net 1,870 1,644 Prepaid expenses and other current assets 189 236 Current assets of discontinued operations 154   912   Total current assets 4,754 5,266   Property and equipment, net 1,057 1,121 Intangible assets, net of accumulated amortization 163 181 Goodwill 1,294 1,290 Other assets 398 401 Noncurrent assets of discontinued operations —   12   Total assets $ 7,666   $ 8,271     LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,732 $ 1,528 Accrued expenses and other current liabilities 941 974 Debt maturing within one year 524 519 Current liabilities of discontinued operations 119   636   Total current liabilities 3,316 3,657   Long-term debt 524 528 Other long-term obligations 431 390   Stockholders’ equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued — — Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued and outstanding 957,954,510 and 656,713,321 at July 29, 2017 and 953,711,270 and 652,470,081 shares at January 28, 2017 1 1 Additional paid-in capital 5,102 5,067 Accumulated other comprehensive loss (471 ) (1,053 ) Retained earnings 4,174 5,092 Less: Treasury stock at cost, 301,241,189 shares at July 29, 2017 and January 28, 2017 (5,419 ) (5,419 ) Total Staples, Inc. stockholders’ equity 3,387 3,688 Noncontrolling interests 8   8   Total stockholders’ equity 3,395   3,696   Total liabilities and stockholders’ equity $ 7,666   $ 8,271    

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Amounts in Millions, Except Per Share Data) (Unaudited)

    13 Weeks Ended     26 Weeks Ended July 29, 2017     July 30, 2016 July 29, 2017     July 30, 2016 Sales $ 3,905 $ 4,032 $ 8,055 $ 8,394 Cost of goods sold and occupancy costs 2,908   3,007   5,979   6,257   Gross profit 997 1,025 2,076 2,137 Operating expenses: Selling, general and administrative 881 900 1,779 1,836 Merger termination fee — 250 — 250 Impairment of long-lived assets 1 15 3 15 Restructuring charges 2 1 6 12 Amortization of intangibles 11   10   21   20   Total operating expenses 895   1,176   1,809   2,133     Gain (loss) on sale of businesses and assets, net 4   (16 ) 3   (49 )   Operating income (loss) 106 (167 ) 270 (45 )   Other income (expense): Interest income 2 1 3 3 Interest expense (10 ) (18 ) (21 ) (60 ) Loss on early extinguishment of debt — (26 ) — (26 ) Other income, net 4   5   8   8   Income (loss) from continuing operations before income taxes 102 (205 ) 260 (120 ) Income tax expense (benefit) 39   (98 ) 92   (73 ) Income (loss) from continuing operations 63 (107 ) 168 (47 ) Discontinued operations: Pretax loss of discontinued operations (8 ) (658 ) (12 ) (674 ) Loss recognized on classification as held for sale — — (5 ) — Loss on sale —   —   (908 ) —   Total pretax loss of discontinued operations (8 ) (658 ) (925 ) (674 ) Income tax expense —   1   3   4   Loss from discontinued operations, net of income taxes (8 ) (659 ) (928 ) (678 )   Net income (loss) $ 55   $ (766 ) $ (760 ) $ (725 )   Basic Earnings per share Continuing operations $ 0.10 $ (0.17 ) $ 0.26 $ (0.07 ) Discontinued operations (0.02 ) (1.01 ) (1.42 ) (1.05 ) Consolidated operations $ 0.08   $ (1.18 ) $ (1.16 ) $ (1.12 ) Diluted Earnings per share Continuing operations $ 0.10 $ (0.17 ) $ 0.26 $ (0.07 ) Discontinued operations (0.02 ) (1.01 ) (1.41 ) (1.05 ) Consolidated operations $ 0.08   $ (1.18 ) $ (1.15 ) $ (1.12 )   Dividends declared per common share $ 0.12 $ 0.12 $ 0.24 $ 0.24   Comprehensive income (loss) $ 81 $ (852 ) $ (178 ) $ (677 )  

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Amounts in Millions) (Unaudited)

    26 Weeks Ended July 29, 2017     July 30, 2016 Operating Activities: Net loss $ (760 ) $ (725 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 155 193 Amortization of intangibles 21 30 Loss on sale of businesses and assets, net 904 49 Interest and fees paid from restricted cash account, net — 66 Impairment of goodwill and long-lived assets 11 660 Stock-based compensation 24 33 Deferred income tax expense 14 18 Other 7 4 Changes in assets and liabilities: (Increase) decrease in receivables (17 ) 57 Increase in merchandise inventories (215 ) (196 ) Increase in prepaid expenses and other assets — (132 ) Increase in accounts payable 194 155 Decrease in accrued expenses and other liabilities (63 ) (218 ) Increase (decrease) in other long-term obligations 4   (5 ) Net cash provided by (used in) operating activities 279 (11 )   Investing Activities: Acquisition of property and equipment (89 ) (102 ) Proceeds from the sale of property and equipment 23 — Sale of businesses, net 6 83 Increase in restricted cash — (66 ) Acquisition of businesses, net of cash acquired (7 ) —   Net cash used in investing activities (67 ) (85 )   Financing Activities: Proceeds from the sale of stock under employee stock purchase plans 13 16 Proceeds from borrowings 7 182 Payments on borrowings, including payment of deferred financing fees and capital lease obligations (8 ) (190 ) Proceeds from issuance of commercial paper, net of repayments — 188 Cash dividends paid (157 ) (155 ) Repurchase of common stock (3 ) (12 ) Net cash (used in) provided by financing activities (148 ) 29 Effect of exchange rate changes on cash and cash equivalents (2 ) 17   Net increase (decrease) in cash and cash equivalents 62 (50 ) Cash and cash equivalents at beginning of period 1,137   825   Cash and cash equivalents at the end of the period $ 1,199   $ 775    

STAPLES, INC. AND SUBSIDIARIES

Reconciliation of GAAP to Non-GAAP Income Statement Disclosures

(Dollar Amounts in Millions, Except Per Share Data)

(Unaudited)

 

For the non-GAAP measures related to results of operations, reconciliations to the most directly comparable GAAP measures are shown below for the second quarter of 2017 and second quarter of 2016 (amounts in millions, except per share data):

    13 Weeks Ended July 29, 2017 GAAP     Adjustments 1     Non-GAAP   Operating income $ 106 $ 10 $ 116 Interest and other expense, net 4   — 4   Income before income taxes 102 112   Income tax expense 39 39 Adjustments2 —   (3 ) Adjusted income tax expense 39 36     Income from continuing operations $ 63   $ 76     Effective tax rate 38.0 % 32.0 %   Income from continuing operations per share: Diluted earnings per common share $ 0.10 $ 0.12  

1. Includes $13 million of costs related to our strategic initiatives ($11 million of which is included in Selling, general and administrative expenses and $2 million of which is included in Restructuring charges) and $1 million for impairment of long-lived assets, partly offset by a $4 million gain on the sale of property and equipment.

2. Includes $5 million of non-cash income tax expense related to the impact of tax deficiencies associated with share-based payment awards, and which relates to the adoption of a new accounting pronouncement in the first quarter of 2017 that was not applied retrospectively. This expense was partly offset by $2 million of income tax benefit associated with the adjustments referred to in footnote 1.

    26 Weeks Ended July 29, 2017 GAAP     Adjustments 1     Non-GAAP   Operating income $ 270 $ 18 $ 288 Interest and other expense, net 10   — 10   Income from continuing operations before income taxes 260 278   Income tax expense 92 92 Adjustments2 —   (3 ) Adjusted income tax expense 92 89     Income from continuing operations $ 168   $ 189     Effective tax rate 35.3 % 32.0 %   Income from continuing operations per common share: Diluted earnings per common share $ 0.26 $ 0.29  

1. Includes $18 million of costs related to our strategic initiatives ($12 million of which is included in Selling, general and administrative expenses and $6 million of which is included in Restructuring charges) and $3 million for impairment of long-lived assets offset by a net $3 million gain on the sale of property and equipment.

2. Includes $8 million of non-cash income tax expense related to the impact of tax deficiencies associated with share-based payment awards, and which relates to the adoption of a new accounting pronouncement in the first quarter of 2017 that was not applied retrospectively. This expense was partly offset by $5 million of income tax benefit associated with the adjustments referred to in footnote 1.

    13 Weeks Ended July 30, 2016 GAAP     Impairment of long-lived assets     Merger-related costs     Loss on sale of businesses and assets, net     Litigation     Costs related to restructuring and strategic plans     Non-GAAP Gross Profit $ 1,025 $ —   $ —   $ —   $ — $ 4   $ 1,029   Operating (loss) income (167 ) 15 250 16 16 6 136 Interest and other expense, net 12 — (7 ) — — — 5 Loss on early extinguishment of debt 26   — (26 ) — — — —   (Loss) income before income taxes (205 ) 131   Income tax benefit (98 ) (98 ) Adjustments —   142   Adjusted income tax (benefit) expense (98 ) 44     Loss (income) from continuing operations $ (107 ) $ 87     Effective tax rate 47.8 % 33.1 %   Income from continuing operations per common share: Diluted earnings per common share $ (0.17 ) $ 0.13     26 Weeks Ended July 30, 2016 GAAP     Impairment of long-lived assets     Merger-related costs     Loss on sale of businesses and assets, net     Litigation     Costs related to restructuring and strategic plans     Non-GAAP Gross Profit $ 2,137 $ —   $ — $ — $ — $ 4   $ 2,141   Operating (loss) income (45 ) 15 272 49 16 17 324 Interest and other expense, net 49 — (37 ) — — — 12 Loss on early extinguishment of debt 26   — (26 ) — — — —   (Loss) income before income taxes (120 ) 312   Income tax benefit (73 ) (73 ) Adjustments —   177   Adjusted income tax (benefit) expense (73 ) 104     Loss (income) from continuing operations $ (47 ) $ 208     Effective tax rate 60.6 % 33.1 %   Income from continuing operations per common share: Diluted earnings per common share $ (0.07 ) $ 0.32

Note that certain percentage figures shown in the tables above may not recalculate due to rounding.

STAPLES, INC. AND SUBSIDIARIES

Reconciliation of GAAP to Non-GAAP Sales Growth

(Unaudited)

Total Company Comparable Sales Growth   Second quarter of Fiscal 2017 GAAP sales growth (3.1 )% Impact of foreign exchange (0.3 )% Impact of store closures (0.9 )% Impact of acquisitions and divestitures (0.8 )% Comparable sales growth (1.1 )%  

STAPLES, INC. AND SUBSIDIARIES

Reconciliation of Free Cash Flow Disclosures

(Amounts in Millions)

(Unaudited)

  26 Weeks Ended July 29, 2017 Net cash provided by operating activities $ 279 Acquisition of property and equipment (89 ) Free cash flow $ 190    

Free cash flow is not defined under U.S. GAAP. Therefore, it should not be considered a substitute for income or cash flow data prepared in accordance with GAAP and may not be comparable to similarly titled measures used by other companies. The company defines free cash flow as net cash provided by operating activities less capital expenditures. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The company believes free cash flow is a useful measure of performance and uses this measure as an indication of the company's ability to generate cash and invest in its business.

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Staples, Inc.Media Contact:Bill Durling, 508-253-2882orInvestor Contact:Scott Tilghman, 508-253-1487