FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Staples Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPLS)") else Response.Write("(NASDAQ: SPLS)") end if %>
One Research Drive
P.O. Box 5114
Westborough, MA 01581-5114
(508) 370-8500
http://www.staples.com/

UNION CITY, Ca., November 18, 1996/FOOLWIRE/ --- Staples reported their third quarter fiscal 1996 results on Thursday, November 14th. For the quarter, their sales rose 32% to $1.1 billion from $819 million last year. Once again, they led the office superstore industry in comparable store sales increases and achieved some of the best increases in all of retailing with a comp store performance of 12% in retail and delivery. They are particularly pleased to have achieved this kind of result in light of the fact that they are really going "up the down escalator." In the paper category, they are seeing significant deflation in retail selling prices which is hurting their comparable store performance by 200 to 300 basis points. Secondly, because of the industry-wide slowdown in personal computer sales, even against the second quarter of this year, on a relative basis they see a comparable store impact of some 400 basis points. So, despite these adversities, they were able to achieve very meaningful increases in comparable store sales and were one to adjust these to a more normalized environment, it would translate to a comp store performance in the very high teens. This is their 11th consecutive quarter of double-digit comps and, moreover, their contract stationer operations grew by 19% over the third quarter of last year. Their profitability increased as well. This is the 13th consecutive quarter in which they have meet or beat Street expectations with earnings per share of $0.19 compared to $0.13 per share last year.

EXPANSION & STORE COUNTS. During the quarter they opened 39 units, including 35 in the US and 4 in Canada. Year-to-date, they have opened 107 stores or some 90% of what they anticipated opening for the year. By contrast, the next fastest-growing chain (OfficeMax), has opened 49 stores or roughly 50% of what they announced they were going to open this year and less than half of what Staples has opened this year. Staples ended the third quarter with 550 stores -- 467 in the US and 83 in Canada. They announced they would open 115-120 stores this year. They are probably going to fine-tune that number to around 116 and it is primarily network considerations that is leading them to hold off a couple and add them to next year's growth plan. That is to say, if they had one store ready to open in a place like Spokane Washington, rather than open one store, they will wait until they have a couple of stores ready to go and get the advertising efficiencies from that.

NEW MARKETS. Staples remains very focused on making significant investments to accelerate their market share gains in the core businesses where they know there are proven returns. They entered a number of new markets in the third quarter. They added 15 new small markets in the United States including stores in 3 states for the first time -- Missouri, Montana, and Washington state. Similarly in Canada they entered Grand Prairie, Cappelano, Wealth, and Regina.

REMODELS. During the third quarter in addition to the openings, 18 stores were remodeled to the Heartland format. Of the 18 remodels, 11 saw an expansion of the sales area. They anticipate by the end of fiscal 1996 that approximately 4 out of 5 stores will be either new stores or will be recently remodeled to the new Heartland look. The results of their remodels continue to be very gratifying with double-digit sales improvements over control stores.

PRODUCTIVITY IMPROVEMENTS. They also showed continued strength in store sales thanks to better store execution that are in-stock, that are promotional displays, enhanced customer service, improved store format, and enhanced advertising. Sales per store week rose 2% in the third quarter against prior year and their new stores actually generated 12% higher sales per store week than the new stores of the prior year. They continue to maintain their focus on consumable products, those with the highest margins and most frequent purchase patterns. Consumables, by the way, represent some 84% of the SKUs that they stock in their stores. Their office supplies counts came in just below the chain average. Their business services comps were well above the chain average at 18%.

THE PC BUSINESS. The average selling price of computer systems is almost exactly even with the prior year, roughly $1450, because they haven't pursued going after promotional price points like other people. Computers and laptops grew 5% in the third quarter year-over-year. As a result, CPUs and laptops as a percentage of sales remained relatively flat at 8% of retail and direct in Q3 this year against last year. The entire department (software, peripherals, accessories) also grew 5% year over year, similar to that in CPUs per se, and again that is a number that was tracking around 25% in the second quarter and higher than that in the first quarter. So it is a noticeable acceleration, albeit with relatively little profit impact.

PC INVENTORY. The existing lineup of PCs at Staples consists of machines ranging from about 120mHz to 200mHz in speed with the bulk of the line at the 133mHz or 166mHz speeds. They are comfortable with their inventory position and remain guardedly optimistic that in the fourth quarter they can see some uptick in the sales trends, but they have been very cautious.

BUSINESS UNITS. In the contracting and commercial business, as they mentioned their comp sales were up 19% over the prior year and with particular strength in the Staples Business Advantage (the regional contract stationer segment of that marketplace). The Staples Direct sales grew 35% year over year. Some of that was buoyed by some new experiments with specialty catalogs including a technology catalog and a facilities and furniture catalog. They have also been very gratified with similar results up in Canada and have signed a lease for their new distribution center to service their direct business in Canada.

INTERNAL INFORMATION SYSTEMS CONVERSION & PROGRESS ON UNION-FREE STATUS. At Staples National Advantage they are making progress working their way through the IS conversion and they think they are getting most of the issues they've had with billing and EDI order transmission straightened out. They are particularly gratified that, on the final pass on the union vote in Monroe New Jersey, Staples managed to finally de-certify the Teamsters Union by a 4-to-1 margin. Certainly all of the associates at Staples are very proud of that achievement in moving further towards a union-free environment.

CONTRACT STATIONER OPERATIONS. In terms of Staples Business Advantage, that led the contract stationer side of operations with sales growth greater than 20%. They are actually seeing significant double-digit operating profit before G&A in these businesses and feel very good about their contract stationer operations as they service regional accounts. They are also seeing gratifying results in the Greenfields contract stationer operations which they have initiated in the New York and Washington DC marketplaces as well as with their recent initiatives with the government.

GSA CERTIFICATION. They are now serving government agencies and have been named an authorized supplier by the GSA. They anticipate several million dollars of business from that if not more in 1997. The government has changed its buying practices. Now, as opposed to trying to buy everything direct and distribute it direct, the government has authorized a number of suppliers to sell to all parts of the government. Staples was one of several suppliers awarded that certification and they are now pursuing the decentralized branches of government. The response from various branches of government to their sales efforts has been most encouraging.

INTERNATIONAL. Staples UK continues to disappoint from an earnings perspective. They did have some improvement in comp store sales, moving up to 23%, but they would be cautious about looking at that number because it is largely due to the fact that last year they were essentially out of the computer business and this year they have gotten back into the computer business and see a lift there, but the profit implications of that are not terribly exciting. They did not open any stores in the UK during Q3 and ended the quarter with 34 stores. One of those stores has been closed due to a fire.In Germany they see continued strength. Comps were up 34%. They ended the quarter with 16 stores. Their results continue to improve and they remain optimistic that this operation will break even by the end of next year. They are continuing to work with their European partner Kingfisher to resolve issues regarding ownership of their European operations. While they have nothing to report today, they are guardedly optimistic that they are moving towards a solution. They have been working very hard in resolving the ownership structure for Europe. Respectively, all things being equal, their first choice would be to own all of it so that no matter what the losses would be, they would own 100% as opposed to 50% of those losses. It is fair to say that their internal long-range planning, they have assumed that Staples Inc would bear 100% of the losses beginning in the second quarter of 1997, so be mindful of the fact that if the losses are flat with this year, that is because they owned all of it for 2-3 quarters of next year as opposed to half of it as they did for all of this year. For Q4 they anticipate that the losses are going to be substantially reduced and they will be right around a break-even in Q4 as sales have improved there and there has been a lot of expense controls and some of the concerns they had about closing stores in Germany have dissipated.

FINANCIAL RESULTS DETAILS. Total sales increased 32%. Comparable store and delivery sales increased 12% for the quarter. Comparable contract stationery sales increased 19% for the quarter. Annualized retail and delivery sales per store in Q3 grew to $6.9 million from $6.8 million in 1995. Retail only sales per store in the quarter remained flat at $5.9 million. The gross profit rate increased 48 basis points for the quarter to 23.86% of sales due to the leverage on distribution costs on higher volumes as well as better margins on paper, lower sales of personal computers, and an increase in the furniture sales mix.

SALES MIX. For the quarter, computer hardware (CPUs and laptops) remained flat at 8% of retail and direct sales compared top Q3 1995. Office supplies categories were 38% of sales. Business machines were about 23% of sales. Furniture was about 10% of sales. Computer accessories was about 16% of sales. And business services was about 6% of sales. Paper prices affect a wide range of categories that they have. As a result they have had to compute the impact of paper on several different categories. But, the direct paper categories represent in the vicinity of 10% of their sales. They think they have seen stability in paper pricing. There was one price increase that was recently rescinded by the industry. They expect to see single-digit price increases for paper over the next 12 months with no more decrease in average price point.

EXPENSES & OPERATING PROFIT. Operating and selling expenses increased 29 basis points to 14.71% of sales reflecting increased advertising as a percentage of sales as well as increased expenses related to their reset program staffing and training and the 39 store openings in the quarter which were only partially offset by leverage on other store costs. As a result, store operating profit rate, which excludes G&A, goodwill, and pre-opening rose 19 basis points over last year's rate to 9.15% of sales for the quarter and rose 23 basis points to 8.8% for the nine months. On the G&A line, expenses as a percentage of sales rose by 9 basis points to 3.22% as a result of additional costs associated with their headquarters expansion, investments in information systems, and a change in the methodology of booking bonuses to be more in line with earnings. Therefore, on a total company basis their operating profit for the quarter rose 35% on a 32% increase in sales to $61 million or 5.64% of sales, an improvement of about 12 basis points for the quarter. Net interest expense rose $2 million year over year to approximately $5.4 million as the lower interest rates due to the convertible debenture versus the revolving credit agreement borrowings were more than offset by increased total borrowings.

RESERVES. Equity in the loss of their affiliates fell to $3.5 million in the current period from $6.2 million in the prior year. The prior year included a $2.5 million reserve established for stores to be closed in Germany and because of the enormous progress they have made in Germany in the past year, no stores have been closed to date. The $3.5 million loss recorded in Q3 this year was greater than anticipated due to the continued underperformance of Staples UK.

TAX RATE & NET INCOME. Their tax rate remains at their targeted rate of 38.5% which is the same as it was last year and in prior quarters this year. As a result, their net income improved by 45 basis points on a quarter to quarter basis and earnings per share grew 46% for the quarter to $0.19 per share from the $0.13 per share reported in Q3 last year. The total shares used for earnings per share were 157.4 million and that includes 6.6 million option equivalent shares following the treasury stock method.

BALANCE SHEET. Total store and delivery inventory rose 17% over Q3 last year to approximately $778 million. However, net owned inventory per store actually declined 20% year over year as they have raised payables as a percentage of inventory from 46% in 1995 to 52% in 1996. They ended the quarter with approximately $352 million in cash and short term investments ($76 million) and unused revolver and uncommitted lines of credit ($276 million). The company achieved an annualized 15% return on average equity for the first time this quarter.

UPDATE ON MERGER WITH OFFICE DEPOT. During the third quarter they announced their prospective merger with Office Depot. They have received a second request for information from the Federal Trade Commission. Both Staples and Office Depot are in the process of responding to this request. They would characterize it as a standard request. What is standard for the FTC can be quite voluminous and it will take Staples at least a few weeks to respond. Once they have satisfied the FTC that they have substantially complied with their request, the FTC will have 20 days to act. Staples has also made the required filings with the Canadian authorities and are in the process of gaining their approval. Finally, the SEC registration statement is now public. Copies of the S-4 can be retained directly from the SEC. Staples will be seeking shareholder approval of the transactions once all the regulatory approvals have been obtained.

INTEGRATION WORK BEGUN. As they work through the approval process, they have also begun the task of integration. They have formed 15 task forces which will position them for rapid integration as they bring the two companies together. Though, candidly, they are somewhat constrained by the law. That is to say, they are not permitted today to share costs or do anything that might even imply the sharing of customers. So, in many cases, for example in the case of costs they are putting together all of their information, providing it to a third party (in this case EDS). They are collating and assembling it and have signed non-disclosure agreements so neither party will get access to the results of their analysis until after the merger has been approved by regulatory authorities. Yet, once the merger has been approved, they will have the data ranked, sorted, and ready to act upon extremely quickly.

ONGOING GOAL OF MERGER. Their challenge in doing all of this is to migrate the two industry leaders into one even greater company. Their effort is to create simply the best -- the best practices, the best systems, and the best people for each job. In that context they announced in most areas, not all, all appointments in the new company down to the Vice President level as of last Monday. Staples feels that this merger represents a tremendous opportunity to capitalize on the combined strength of the two companies to bring lower costs to their customers, broader distribution for their vendors, growth opportunities for their associates, and even better returns for their shareholders.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.