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 (May 16, 1997)/FOOLWIRE/ --- Staples released their first quarter 1997 earnings on May 15th after the market close. The success they have achieved this quarter, they believe, points out both the strength and the depth of their management team. They have established a tradition of consistent, strong, revenue growth. Their sales rose 26% to $1.15 billion from $917 million last year in the first quarter. Their comparable stores delivery sales rose 9% for the quarter, that result being among the best in retailing once again.

PAPER PRICING HAD A BIG IMPACT ON RESULTS. They are particularly proud of that given the kind of pressure they had on their comps in the paper category and the PC category. The paper effect alone depresses their total comps by some 300 basis points and there is another 100 basis points or so from the impact of the computer category. They are hopeful that, as the paper market stabilizes, they will get their comparable store performance back into double digits during the second quarter and nothing they have seen now would dissuade them from that. They think paper pricing has hit bottom. They have seen some indication in the marketplace, particularly in the Midwest, that some competitors are raising prices. There is talk in the industry that they would like to see a price increase to pull back on some mill capacity. Staples doesn't think prices will go any lower. Right now we are seeing 30% deflation year over year in computer and copy paper subcategories. So, getting back to the prior year's prices, even though it nets to zero, would be a huge improvement and would significantly augment their comp store performance.

REVENUE BY REGION. US stores did about $767 million in revenues. Business Depot stores did about $117 million in revenues. Their direct business did about $134 million in revenues. The contract business did about $137 million in revenues. Right now the revenue run rate for the European businesses would be in the vicinity of $275 million a year. They don't find Europe to be any more seasonal than what they see now with the US business.

GROSS PROFITS. The gross profits increased 52 basis points for the quarter to 23.27% due to the significant buying improvements year over year as a result of increased product costs from vendors offset by pricing reduction taken at stores and direct as well as some volume increases in Business Depot and Direct. Leverage on delivery was slightly offset by modest increases in occupancy and distribution. From a mix perspective, they are seeing more volume in software and cartridges which is having a positive influence on the rate.

OPERATING RESULTS. Their operating income rose 54% over the prior year in the first quarter, a very significant achievement on a 26% sales increase. Operating and selling expense remained flat as a percentage of sales as leverage on payroll costs were offset by increased investment in advertising which resulted from both an increased number of stores open year-over-year as well as increased television and circular advertising. As a result, the store operating profit rate, which excludes G&A, goodwill, and pre-openings, rose 52 basis points over last year's rate to 7.27% of sales for the quarter. Pre-opening expense for the quarter averaged $67,000 per store opening compared to $60,000 per store opening in the prior year's first quarter. General and administrative expenses as a percent of sales fell by 22 basis points in the quarter to 3.12% of sales primarily as a result of leverage on payroll, reduced hired services, and leverage on rent and depreciation. Total company operating profit for the quarter rose 54% on a 26% increase in sales. This is the second consecutive quarter of 70 basis point improvement in operating profit. However as they aggressively lower prices after the merger, it would be their anticipation that they would no longer enjoy that kind of lift but would go back to more normalized levels as they drive up market share. In the near term they will invest very heavily in driving market share and their financial models don't incorporate the kind of lift they saw in the first quarter and fourth quarter. Net interest expense rose slightly year-over-year to approximately $4.2 million from $4.0 million in the prior year as their average investment portfolio decreased year over year.

NON-RECURRING CHARGES. Due to the uncertainty of whether Staples and Office Depot will merge as a result of the lawsuit filed by the Federal Trade Commission, the company wrote off costs incurred to date in the merger transaction. The costs written off during the first quarter, which approximated $20.6 million consist primarily of legal fees and expert fees of about $6.7 million, deal-related costs of about $1.8 million, consulting expenses incurred in connection with their integration efforts of about $10.5 million, and cancellation fees in advertising costs of about $1.6 million. Because Staples absorbed the majority of integration and consulting costs and Office Depot was responsible for the retention costs associated with their employee base, they believe most of the expenses Staples should incur if the merger were not to close, with the exception of legal fees and other litigation costs, are largely behind them. If the merger does close, they expect there will be a significant one-time charge in line with what they have already discussed with they announced the merger.

CONSULTING EXPENSES. The company was asked to discuss what the consulting expenses covered. They responded that they didn't want to go through the whole laundry list but gave the three biggest examples. They did an incredible amount of work with A.T. Carney on distribution logistics putting together an optimal distribution network for the combined new company. They did that both for the retail side of the business as well as for the contracting and commercial side of the business. A second multi-million-dollar type contract had to do with the work done by the Boston Consulting Group in evaluating every business that Staples or Office Depot participated in -- every joint venture, foreign operations, furniture works, images, expanded technology businesses, etc. Beyond that, they have done a tremendous amount of strategy work within the store. The most important thing for driving their share price going forward is how they optimize the profitability of their 25,000 square foot box. A number of strategies supported by a lot of consulting work related to optimization. Some had to do with their furniture strategy, the technology strategy, the business services strategy. They will be opening about 50 "copy supercenters" which offer vastly expanded information processing capability versus the normal Staples business center. Another major project is that they have loaded every single stock-keeping unit offered at every Staples and Office Depot business in North America into a "SKU central" so that they are all linked. It was a massive task and they used EDS to do that. This will give them complete volume information for their ordering and purchasing processes to cut costs.

TAX RATE. The tax rate for the quarter is at 39% which is up slightly from last year's 38.5% due primarily to some nondeductible goodwill on the European joint venture acquisition, higher tax rates in Canada than in the US and they have exhausted the net operating loss carryforwards they had left over from their acquisition of Work Place.

NET INCOME AND EPS. Thus, their net income without the merger charge increased 61% in the quarter to approximately $20.9 million or 1.81% of sales, compared to $13 million or 1.42% of sales in the prior year. After the charge it would be $8.4 million compared with $13 million. Before the charge, earnings per share grew 50% to $0.12 compared to $0.08 last year. After the charge it would have gone down to $0.05 from $0.08 per share last year. They expect the earnings per share to be a fully diluted computation beginning in Q3 this year and they also expect to adopt the new FASB standard for earnings per share in the fourth quarter which will have the same affect on EPS as the fully diluted calculation.

INVENTORY. Total store delivery inventory rose 23% over Q1 last year to approximately $796 million. Their owned inventory per store actually declined 15% year-over-year as they've increased payables as a percentage of their inventory from 46% of inventory in 1996 to 53% in 1997. They are also noticing that their inventory per store is decreasing as a result of some of the initiatives they put in place with their distribution network and software.

CASH/LIQUIDITY. They ended the quarter with approximately $430 million in total liquidity -- cash and short term investments of approximately $172 million and unused revolver and uncommitted lines of credit approximating $258 million. Because of their acquisition of Kingfisher PLC right after the end of the quarter, their cash balance includes the cash necessary to complete that transaction. With over $400 million in liquidity at year end, they are able to make the purchase of Kingfisher's stake in the European joint venture subsequent to the quarter end and still maintain sufficient liquidity to fund their expansion for at least the next 12 months.

THINGS LEARNED FROM MERGER PROCESS. They are extremely hopeful that the merger will go forward and that they will prevail in a court of law, but irrespective of whether the merger goes forward or not, they feel very good about the learning process they have gone through over the past 6-7 months. Through 15 task forces with Staples and Office Depot associates working side by side on how to best serve customers better over time and how to more efficiently move goods to those customers, they have learned a great deal that they hope they will put in place in the combined Staples The Office Depot. But if the merger doesn't go through it would still have tremendous value for Staples as a freestanding company. This includes things like their new technology strategy, their new furniture strategy, as well as a number of logistical things like having your own trucks and having the ability to do COD. Their customers are already benefitting. They achieved a lot of buying advantages in the fourth quarter and have begun to pass a number of those on to customers. They lowered some 150 prices in all markets and 300-odd prices in many markets around the country as well. They have seen a wide range of Staples associates take on challenges that tested their limits and Staples is proud of what they have achieved under that type of scrutiny. They look forward to continuing the challenge, completing the merger or taking them on on their own as the case may be. They are relieved they are moving towards clarity on that issue.

EXPANSION AND PER STORE PERFORMANCE. In North American superstores, they didn't just post good financial results, they had exceptionally strong growth as well. They opened 43 stores in the quarter. That is as many office superstores as any chain has ever opened in a quarter. They ended the quarter with 512 stores in the US and 87 in Canada for a total of 599 stores. They are still on track to open 120 new stores this year and it could be more aggressive than that; 130 stores is possible. They entered new markets in South Carolina, North Carolina, Iowa (Iowa City and Sioux City), Indiana (Indianapolis - first store), and Idaho (first store). They opened stores in four small towns surrounding Cleveland Ohio as well as their first store in Helena, Montana and they opened their first Express store in Philadelphia and a store in Quebec. The towns surrounding Cleveland have been extraordinarily welcoming to the Staples proposition and they have been most gratified by the results there. Small towns like that are a major growth area for Staples. They additionally remodeled 21 stores in the US and virtually all of their stores will have been remodeled to the Heartland format by the end of this year. Sales per store week also rose against the prior year.

PRODUCTIVITY. In terms of the retail productivity of their units, as they continued to enlarge their stores, they fully expected to have some decline in the productivity of their units. Clearly that decline has been accentuated a bit by the extremely rapid rate of store openings in the first quarter. They nevertheless achieved sales per square foot of $336 in the first quarter on an annualized basis. That is down from $356 per square foot last year, but they are hopeful that will climb back up again, perhaps not all the way to $356. On a sales per store basis, including delivery, their stores averaged about $7.2 million in the quarter. Their new stores are generating 5% higher sales per week than they did in the prior year and that resulted in a significant increase over the year before that.

COMP RESULTS BY PRODUCT CATEGORY. By department, the furniture area was the strongest area of comparable store sales with achievement in the mid-teens. That strength was bolstered by improved assortment in their Canadian stores and very strong results in the direct business. Both business machines and business services had comps in the mid-teens as well.

OFFICE SUPPLIES AND PAPER. Office supplies and paper were significantly damaged by the paper depression. The impact which was 300 basis points on a total store basis in this sub-category depressed their comparable results by 8-9% so that the low single-digit comp they achieved there would have been a meaningful double-digit comp without the paper deflation.

COMPUTERS AND ACCESSORIES BUSINESS. The computers and accessories business overall comped in the high single digits after rebounding in the last few weeks in the quarter, with particular strength in the software category and the peripherals category offsetting lower average selling prices in CPUs and printers. The printers and CPUs themselves actually comped in the very low single digits. The first part of the quarter was very strong, it softened up in March and came back nicely in April which gave them a good overall quarter. Their computer department margin increased over 150 basis points. It was driven by the mix in the department to printers and software and peripherals. The average computer inventory is up modestly in the first quarter over the fourth quarter.

NEW TECHNOLOGY STRATEGY. They have decided that their assortment in the computer business should be heavily skewed towards computer consumables as opposed to hardware per se. Second, their target market for the PC business is the small business customer versus the home personal buyer so they will stress more business-oriented configurations of computers. Three, they would probably participate in the personal segment in the smaller towns where there are fewer players competing for that business. Finally, there is a very strong interest in a program that has had tremendous success in Canada -- they put in place in all stores a concept called TechnoCenters whereby the associates in the store who sell computers are also trained to be, at least at the rudimentary level, computer technicians. This has cut the rate of returns on computers by over 50%. The associates can diagnose simple problems, do simple upgrades, software loading, etc. and Staples is looking to incorporate a variant of that in their stores in the US as well as trying to commit themselves to some new technology categories. It is a multi-pronged effort and is being tested now and it remains to be seen exactly how it will be rolled out although they are extremely excited about various aspects of it.

CONTRACT AND COMMERCIAL BUSINESS. In Staples contract and commercial sales increased nearly 30% on a comparable basis in the first quarter. The contract stationers were up 13% in the first quarter. They closed on $50 million of annualized new business in Q1 in the contract business. They developed a channel measurement plan that will enhance their sales productivity in the contract and commercial business. A number of small contract accounts are being transitioned to the direct business. They have discontinued commissions on accounts under a certain dollar threshold, consistent with their strategy of moving those to a direct format. They have completed design and the planning stages of a customer profitability tool also known as Advantage that will roll out later this Summer. It is intended to give Staples a true measurement of each accounts profitability to determine if the pricing on that account is sustainable or not.

REACTION TO COMPETITIVE STRATEGIES. When asked about competitors' strategies of taking on businesses outside the core focus of contract stationers they responded that they believe in focusing their growth on areas that can really make a difference from a sales and profit point of view. As a standalone company, they would be a $10 billion company by the end of the century. As a merged company they'd be a $20 billion company by the turn of the century and they will only pursue opportunities that could meaningfully move the needle for a company of that scale and it is unlikely that the businesses their competitors are pursuing could be sufficiently large or profitable to meet that criteria. They don't know that with certainty, but that's there take at this point.

DISTRIBUTION & CALL CENTER CHANGES. They opened a new distribution center and a call center in Toronto and they closed their original call center in Westborough, near their corporate offices. They made the decision to operate their own trucks in markets where it is economically viable and planning is underway to implement that change.

KINGFISHER JV SHARE ACQUISITION IN EUROPE. In early May, they acquired their joint venture partner's interests in Staples UK and in Maxi Papier for $57 million. From the second quarter forward, these results will be consolidated for the first time from a revenue perspective with Staples own operations. In the UK they opened 6 stores during the quarter to end with 40 stores. The comp store base in the UK was up 29% over the prior year. At Maxi Papier in Germany, they opened the quarter as they ended it, with 16 stores and comparable store sales performance was 25% for the quarter, again giving them further encouragement for the future. They are seeing sales of more than $5 million per store in both the UK and Germany. The British pound is relatively strong against the dollar so it doesn't really have the kind of impact people have seen in the German market, but currency impact is relatively insignificant for Staples anyway.

PERFORMANCE OF EUROPEAN BUSINESSES. Their foreign affiliates lost $6.0 million in the first quarter versus a loss of $3.7 million in the first quarter last year. From a financial standpoint they have put in place a number of initiatives to try and anticipate the takeover of the remaining interests in Europe and they have accrued a little bit of severance costs, looked at some of the costs of duplicate information systems, etc. A small piece of the revenue shortfall represents the business costs associated with making the transition to their own ownership. The remaining amount reflects the fact that the relatively high cost structure in Europe has not yet come up with a model that they like. They have tried a lot of things and wound up having some failures.

OUTLOOK FOR EUROPE. They are very committed to building a strong direct business in Europe. They already, in many ways, have one. It is approaching the percentage of sales of their American business even though it is far less mature. As they organize their business, they think it will be very clear that a significant part of the growth they foresee is in the direct marketing business and the organization will be structured to reflect that. They anticipate losses associated with this operation in 1997 with significant impact on Q2 which will include some acquisition-related costs as they complete the purchase of Kingfisher's interest in their joint ventures. They are implementing significant change in the organization. They anticipate by the end of Q2 that the initial components of the plan will be underway and they will be able to share their plans to achieve profitability in this division. They remain very excited about their opportunities abroad and believe that this represents a tremendous growth platform for the future.

COMPETITORS. In terms of competition and new competition, they stated that especially Wal-Mart in particular has been extremely aggressive in the office supplies business. They have really snuck up on Staples, added a tremendous amount of stock in the US during the past year. Their pricing has gone from an era where discount stores were actually charging more than list price to today where Wal-Mart is a much more formidible competitor from a pricing perspective and they are down in the same range as the office superstores, fighting for every sales dollar. This is important as the home office segment of the market grows.

HEARING ON MERGER. Monday, May 19th, they begin their 5-day hearing in Washington's Federal Court to determine whether the Federal Trade Commission will be granted a preliminary injunction to block their merger with Office Depot. They look forward to the fact that the court has promised them a decision by mid-to-late June and they hope that decision will be favorable.

* 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.