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

Staples, Inc.
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One Research Drive
P.O. Box 5114
Westborough, MA 01581-5114
(508) 370-8500
http://www.staples.com

UNION CITY, CA (March 11, 1997)/FOOLWIRE/ --- Staples, Inc. released their fourth quarter and fiscal year 1996 results on March 4th. Total sales increased 19% to $1.2 billion from $973 million in Q4 1995. Comparable store sales increased 11% for the quarter. Contract stationer sales increased approximately 10% for the quarter on a comparable warehouse basis. Sales by SBU (strategic business unit) broke down as follows: US stores were $790 million in Q4 1996 versus $650 million in Q4 1995. Business Depot stores were $121 million versus $101 million in Q4 1995. Direct sales were $122 million versus $102 million in Q4 1995. Contract sales were $131 million versus $123 million in Q4 1995.

GROSS PROFIT INCREASED. Gross profit rate increased 207 basis points for the quarter to 24.68% due to the much improved buying as their vendors have anticipated their merger and have improved their overall buying relationship. In addition, they have enjoyed an improvement in furniture margins of about 20 basis points largely because of an increase in their imports mix and savings in their distribution costs. Additionally, the decrease from 9% to 8% in their CPU category improved their margins by more than 100 basis points. This was particularly true at Business Depot where, in 1995, there was a dramatically poor margin in computer sales as a lot of low-end computers were replaced in 1996 by a branded computer strategy. The remainder of their improvement in gross margin related to the improved buying.

OPERATING & SELLING EXPENSES. Operating and selling expense increased about 86 basis points to 14.1% of sales, reflecting increased advertising as a percentage of sales as well as increased expenses related to their reset program, staffing, and training. There were also 7 store openings in the quarter and a bonus accrual for store-level associates. Store operating profit, as a result, rose 121 basis points over last year's rate to 10.57% of sales for the quarter and rose 47 basis points to 8.80%. This was an exceptional result and they wouldn't want to frame any new highs as what's possible. That certainly is well beyond the 8% range they once envisioned as what is possible. They are very pleased with that and hope they can sustain it and if they are lucky enough even grow it some day, but they wouldn't count on that necessarily. Store operating profit excludes G&A, goodwill, and pre-opening expenses.

PRE-OPENING/G&A EXPENSES. Pre-opening expenses decreased to $509,000 in 1996 from $1.494 million in 1995. On a per store basis, pre-opening expenses were $73,000 versus $57,000 last year. General and administrative expenses as a percentage of sales rose by 62 basis points in the quarter to 3.49% of sales, primarily as a result of additional costs associated with payroll and bonuses as well as investments in information systems architecture.

OPERATING PROFIT/INTEREST EXPENSE. Total company operating profit for the quarter rose 33% on a 19% increase in sales to $81 million or nearly 7% of sales, an improvement of 72 basis points in the quarter. Net interest expense rose $1.4 million year-over-year to approximately $5.3 million as lowered interest rates due to their convertible debentures versus the revolver were more than offset by increased total borrowings.

INTERNATIONAL PROFITABLE. Their foreign affiliates actually earned $189,000 in the fourth quarter versus a loss of $599,000 in the prior year. This is the first profitable quarter reported for these operations. They anticipated losses associated with this operation in 1997, particularly in Q2 when they will close on Kingfisher's interest in the joint ventures.

TAX RATE/EPS. Their tax rate remained the same at 38.5% of pre-tax income in both years. Net income increased 35% in the quarter to approximately $47 million or 4.03% of sales. Earnings per share grew 33% for the quarter to $0.28 per share from $0.21 per share in Q4 1995. Total shares used for earnings per share were 167.3 million and that includes 5.6 million option-equivalent shares following the Treasury stock method.

BALANCE SHEET HIGHLIGHTS. Turning to the balance sheet, total store and delivery inventory rose 28% over Q4 of last year to approximately $779 million. On a net-owned basis, inventory per store actually declined 15% year-over-year as they have increased payables as a percentage of inventory from 40% of inventory in 1995 to 50% in 1996. With respect to liquidity, they ended the quarter with approximately $432 million in total liquidity. That includes cash and short-term investments of approximately $106 million and unused revolver and uncommitted lines of approximately $325 million. The company achieved an annualized 16% return on average equity this quarter versus 14.7% a year ago.

OPERATIONS REVIEW

RECORD SALES & EARNINGS. This was a quarter that capped a remarkable year in Staples' history, their tenth anniversary year. They found it particularly gratifying to report excellent results given some of the distractions their management team has faced in the quarter. They achieved record sales and earnings during the quarter.

NEW STORE OPENINGS. During the year they opened 115 new stores net in North America. They opened the first of the three new mega-centers they intend to service the Staples network of stores. It was a mixture of small markets (probably 40-50% of the mix), new markets (probably 25%), and the balance in their existing markets. Going forward in 1997, as they have previously announced, they will open 120 stores as a standalone company in North America and the mix just mentioned, percentage-wise, will be very similar in 1997 as it was in 1996 -- small markets, expansions in existing markts, and new market entries. The new merchandising programs they have put in place increased their fixturing costs for new stores about 10% in 1996 and it is stabilizing at that level.

BIG STUFF. They have reached agreement to acquire land for a new all-under-one-roof corporate headquarters building in Framingham Massachusetts. They have concluded an agreement to acquire the minority shares from Kingfisher PLC in their joint ventures in the UK and Germany. And, most significantly, they agreed to merge with Office Depot.

SALES FOR THE QUARTER. For the quarter, sales rose 19% to $1.2 billion from $976 million in the fourth quarter last year. They noted that this is a comparison between 13 weeks this year and 14 weeks in the 53-week prior year and, on an apples-to-apples basis, sales rose 28%. For the year, sales rose 29% to $4 billion from $3.1 billion in the prior year. Again, that was 52 weeks this year versus 53 weeks last year. Comparable store sales rose 11% for the quarter and 14% for the year. Once again, they led their industry and much of retailing with extraordinary comparable store sales growth in a very challenging sales environment for those companies that sell computers or paper.

GROSS MARGIN. On the gross margin line, they saluted the tremendous achievement that their team put behind them during the fourth quarter. First and foremost, the strong gross margin results speak to their focusing on the more profitable parts of their business, in particular backing out of computer sales and focusing on the more profitable consumable sales and business services sales. Secondly their fine team helped them raise reported gross profits by 207 basis points. Without a doubt this doesn't just speak to focus on more profitable parts of their business, there is simply good buying and it is fair to say that their vendor partners are most enthusiastic both about Staples' growth prospects and their growth achievements as well as the prospects of serving the new combined Staples/Office Depot in 1997 and beyond.

INCOME. Operating income rose 33% year over year in the fourth quarter, a significant achievement on top of a 19% sales increase. For the year, operating income rose 38%. Net income for the quarter rose 35% to $46.9 million from $34.9 million in the prior year fourth quarter. For the full fiscal year, net income rose 44% to over $106 million. Earnings per share were $0.28 per share compared with $0.21 per share in the prior year fourth quarter. For the year, they recorded earnings per share of $0.64, a 39% increase over last year's $0.46 per share.

NEW STORES/MARKETS & REMODELS. They opened 6 North American superstores in the Unites States and 1 in Canada during the fourth quarter. For the year, they opened 96 stores in the US and closed 1 for a net of 95 and 19 new stores in Canada where none were closed. They ended the year with 473 stores in the US and 84 stores in Canada for a total of 557. With respect to new markets, they entered the Spokane Washington market during the fourth quarter. They also completed two additional store remodels in the fourth quarter so that over 80% of their stores are either new stores or recently remodeled stores. There are only about 100 stores in their chain left to be remodeled to the Heartland prototype.

BUSINESS DEPOT'S STRONG RESULTS. They wanted to acknowledge the efforts of their team at Business Depot in Canada. They contributed very significantly to Staples' strong results with a tremendous profit improvement from essentially break-even in the prior year to very meaningful profitability in 1996.

BUSINESS STRONG. From a sales perspective, business remained quite strong despite the fact that the PC business was not terribly robust, particularly at the latter half of the year, and that the paper pricing was quite depressed and thus depressed comparable store sales and overall sales. Despite these challenges, sales per store week rose 4% over the prior year and that is a very strong achievement as is the fact that new stores generated 10% higher sales per store week than those a year ago.

FURNITURE. In comparable store sales by product area, furniture was the strongest area with comparable store growth of over 20%. They suggest that this is more a reflection of the great job their buyers did as opposed to anything going on in the industry. What they have done is not try to be all things to all people but focused on a limited selection that has enough turnover to allow for profitability and has enough profit to allow for profitability built into it. They have also focused on execution and being in-stock, so the customer can buy what they want when they want to buy it. There are also some good merchandise decisions, bringing in some attractive items and getting rid of some unattractive ones. Contrasted with competitors, they historically had probably not done as good a job as they could have and they have played catch-up extremely well and done an excellent job implementing new programs in the stores.

BUSINESS SERVICES. Business services was very strong as well, with growth in the high teens on a comparable store basis. Business machines were growing at about the mid-teens. Office supplies were just a little below that at 11%.

COMPUTERS. Computers and accessories came in at single digits, only after rebounding the last few weeks of the quarter. Specifically, in CPUs, they actually had negative 4% comparable store growth in the fourth quarter. Thus, CPUs depressed their comps. Without the CPU business, comps would have been a percent or more higher. They also managed to tighten down their computer inventories by about 19% in Q4 versus Q3, recognizing some of the challenges of selling computers. Average retail selling price of PCs was just under $1500 in the fourth quarter which is down slightly from last year, not a material change. MMX chips have moved into the almost 30% range of their mix. They are not going to get into the promotional price-point game. They think the market may naturally go down there, but taking no-name brands and selling them at low prices is not a strategy they are going to follow. Exactly where they are going on technology products has been a major focal point of their integration task forces. They do not want to divulge the results of the work completed so far at this time. It isn't all completed. But they will say that their efforts will lead them to focus on the more profitable or profit-possible segments of this business and will not lead them to necessarily be big players, for example, in trying to go after the entry-level home PC business, but will be focused on more of a business user and on being complete and broad in peripherals, accessories, software, etc. On a market-by-market basis, sales growth was quite uniform across every major market.

CATEGORY MIX OF SALES. As far as category mix of sales, about 35% (versus 37% last year) of their total sales mix is in their traditional office supplies category, the business machines categories are about 24% of the total mix, furniture has grown to 10% (versus 9% last year) with the computer category at a total of about 26% (that includes accessories, software, printers, and other consumables). The CPU category is at about 8% (versus 9% last year). Business services is in the 5% (versus 4% last year) range. Going forward they think they will continue to see growth in the business services area and that the computer area overall will continue to grow, but it will be skewed very heavily toward the non-CPU pieces of the computer sales. They think office supplies should stabilize roughly where they are, though in time as more and more people turn towards computer solutions versus manual solutions it could sink a little more over time. They are doing the best they can to arrest that and turn it around. They believe they need to become more aggressive in pricing and merchandising of the core office supplies categories. That is their game plan and they are sort of fighting somewhat of an uphill battle there, but they are going to fight it very hard. Longer term, they see retail remaining a huge part of their business and maintaining its share of their business if not growing over time. They believe the direct business is a very fast-growing business and should grow over time. They believe the contract business, because the contract consumer base is not growing as fast as the small business base, probably will do well to maintain its share of their business.

COPY CENTERS. They have two expanded copy centers currently in operation, one in New Jersey and one in Ontario. They are extremely excited about the topline results there and said that we should not be too terribly surprised to see them expand the presence of these centers in their chain and shouldn't be surprised to see as many as 50 of them open during 1997.

CONTRACTING/COMMERCIAL BUSINESS. Staples Direct increased sale by over 30% on a comparable basis in the fourth quarter and over 35% for the year. The contract stationer group sales rose 10% for the fourth quarter and approximately 17% for the year. Specifically worth noting in the Staples Direct business, they added a fourth special catalog in the quarter, one focusing on presentation materials. They have experimented with a number of new prospecting approaches and their delivery reliability to their customers as measured by in-stock continues to improve and they are running close to 98% fill rate. In the contract area, they are particularly gratified by how some of their new sales channels are doing. Their great fields efforts in New York and Washington are doing quite well. Their initiative servicing educational institutions and other institutions is performing quite well. And, they have been very pleasantly surprised by early results in what used to be Staples Texas. They have reduced their inventory levels in their national accounts business despite meaningful year-over-year sales increases. Their strongest sales growth has been within their regional stationer business.

OUTLOOK FOR INTERNATIONAL UNITS. They publicly announced on December 11th that they will effectively, at the beginning of May, take over full control of the joint ventures in Germany and England. Comps were up 27% in the UK in the fourth quarter and 16% for the year. They opened no new stores there in the quarter so they ended the year with 34 stores. At Maxi-Papier in Germany comps were 24% for the quarter and 26% for the year. They ended the quarter and the year with 16 stores, no new stores. No longer being in a particularly explosive growth pattern has allowed their people in these countries to focus on getting in-stock, getting pricing right, getting costs right, getting inventory mix correct, and so on. The fourth quarter was a very good quarter. They wouldn't necessarily count on the international units to be profitable in Q1 and Q2, because it is highly likely they will not be. In the international markets, the businesses are very different. In Germany, for example, they currently sell no PCs and very little in the way of computer peripherals and accessories and software. England, on the other hand, probably at least in 1995 was over-exposed to PCs and in early 1996 they brought that back into a better balance. Going forward, they will tend to run a pan-European program with more uniformity between the respective countries they operate in and they expect, over time, the mix will very much resemble that in the US. They are doing direct business in Europe and have grown well in both countries, but particularly well in Germany in the direct business -- over 100% roughly in direct comparables year-over-year. They see tremendous opportunities there and they hope to exploit those opportunities very aggressively.

UPDATE ON MERGER WITH OFFICE DEPOT. They have extended, by vote of their board and the Office Depot Board, the actual timeframe of the merger through May 31st. They have extended their Hart-Scott-Rodino waiting period with the Federal Trade Commission through Thursday, March 13th. They continue to believe that this merger with Office Depot is pro-competitive and should lead to lower prices for their customers. They also remain highly confident that this merger will be completed in one fashion or another. If there is anything more to report of any materiality, they will do so in the formal press releases as those developments occur and they will not be giving ad lib commentary as the process goes on.

SYNERGIES RELATED TO THE MERGER. It is fair to say today that they would anticipate that the synergies available to the company would be greater than earlier anticipated. It is their proactive game plan to pass the majority of these synergies on to their customers in the form of lower prices so as to build market share. This is particularly true in the consumable parts of their business where their relative advantage over a whole cluster of competitors ranging from the Wal-Marts and Targets to the contract/commercial stationers, the mail-order stationers have narrowed, they view this as an opportunity to once again open up a significant pricing advantage for themselves and the merged company. They would not anticipate anything beyond the 110 basis points or so that they talked about earlier flowing to the shareholders. The only indirect benefit would be increased revenues and market share resulting from their stepped-up pricing activities and that is hard to quantify at this point.

OFFICE DEPOT RESULTS. They would also say that while Office Depot's results were not in line with some of the analyst numbers, at least to date they have been in line with Staples' expectations for Office Depot and thus they do not see any impact on their results going forward. They have set as a goal, a revenue growth of about 20% per year on the topline and would expect to get some improvement in their square footage productivity as a component of that. They have talked about adding, on a merged basis, about 150 stores per year which will increase to 200 in 1998 and, as a result, they expect to keep the square footage growing at the rate of about 3 million square feet of selling area plus per year, which means that with comps in the high single digits they expect to be able to get the 20% growth rate.

* 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.