Staples Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPLS)") else Response.Write("(NASDAQ: SPLS)") end if %>

100 Pennsylvania Avenue

Framingham, MA 01701-9328

(508) 370-8500

http://www.staples.com/Welcome.html

UNION CITY, Ca., August 22, 1996/FOOLWIRE/ --- Staples reported Q2 1996 results on August 15th. Net sales for the quarter were up 34% from $605 million to $808 million. Earnings per share were $0.09 for the quarter, the 12th consecutive quarter where they have met or exceeded consensus estimates.

Staples celebrated their 10th Anniversary in May and are pleased to report that their strong momentum continued as a company. They feel this is the most dynamic sector in retailing and they are proud to continue to make progress relative to their peers in this highly dynamic sector.

Their comparable store increases for retail and direct grew 16% over a very strong 18% comp quarter last year. This constitutes the 8th consecutive quarter in which their comps were the strongest in their industry and among the best if not the best in all of retailing. They are particularly proud to have achieved that in light of the fact that lower paper pricing, particularly copy paper pricing depressed comps by 1.5-2% over the prior year. It is also the tenth consecutive quarter in which they have had double-digit comps. This strong double-digit comp performance extended across virtually all major markets and all major product lines. In the contract stationer arena their comparable warehouses grew 18% over the second quarter last year.

EXPANSION AND OTHER BUSINESS PLANS

In the North American superstores area, they opened 39 units in the quarter and closed 1. That is approximately the same number of stores that OfficeMax and Office Depot opened combined. Year-to-date, Staples has opened a net of 68 stores and that represents 20% more than Office Depot and OfficeMax combined. They entered the quarter with 511 stores in North America of which 432 are in the United States and 79 are in Canada. They have accelerated their store opening plans to open a total of 120 units in 1996 and they remain on track to achieve that projection. They refocused to make very significant investments to accelerate their share gains in their core business where they believe the returns are quite well proven. They are very pleased the job their team has done in meeting or beating their store opening plans.

Their sales per store week have grown very nicely in the high single-digit range as well for the new stores compared to last year. They entered a number of strategic markets during Q2. They opened their first store in the Sacramento California market, their first store in the Portland Oregon market, their first store in the Palm Beach Florida television marketplace. They will be opening 4 stores in that television market this year, none of them is intended to be in Palm Beach proper. They also opened their first stores in Chatanooga Tennessee and Nashville Tennessee. On top of that they entered scores of small markets throughout North America.

The company was asked about the impact of OfficeMax's recent openings in the Los Angeles market and to what extent the new Staples stores in Palm Beach Florida hit the Office Depot home market. The company answered that the Palm Beach expansion represents an extension of their small-town strategy. The four stores they intend to open in Palm Beach county, 3 in this year and one that will maybe slide into next year are in Jupiter, Ft. Pearce, Vero Beach, and Port St. Lucy will be the very first office superstore to open in every one of those markets. Only one of those stores has an Office Depot even within ten miles of it, the Jupiter store. There will be additional developments in the burgeoning Vero Beach market, but again, Staples looks at small towns wherever they are and found it pretty attractive to pick up 4 stores in a relatively small television marketplace all of which model very attractively and none of which as they open face competition. With regard to Los Angeles and the impact of the OfficeMax stores, they said that they wish they could comment and if they noticed any impact they would be glad to comment but they have not noticed any material impact from these openings. One or two stores maybe had a $5,000 to $10,000 impact, but beyond that they saw nothing. Pricing has always been aggressive in Los Angeles and it remains aggressive in Los Angeles and not much has changed there.

During Q2 30 stores were remodeled to the Heartland format, 29 of those in the United States. Of the 30 remodels, 9 were expansions. They were more fortunate than they thought they would be in terms of being able to achieve expansion space in stores, thus they may be holding off on a few remodels towards the end of the year because they think they can expand them. Next year they will probably end up remodeling in total 85-90 stores. They believe, by virtue of that, some 80% of their stores by the end of this year will either be brand new or very recently remodeled. The results from these remodeling efforts continue to be most incouraging with double-digit sales improvements even when they don't expand the store.

PRODUCT LINE DISCUSSION

Their strength in execution demonstrates itself time and time again in all of their financial results. In terms of the core office products business, they are somewhat different than their competitors in that they emphasize the consumable profitable areas of their mix perhaps more strongly than the others do vis a vis durable goods. Consumables represent about 86% of the SKUs stocked in their stores and they were very pleased that this very important category grew in double digits, over 10%, year-over-year, despite a very meaningful impact of paper deflation.

In terms of their PC business in North America, the CPU, software, and accessory sales remained quite strong despite the fact that the industry appears to be slowing a bit and that they went through a significant transition in their product line to higher power technology. CPUs and laptops increased 23% year over year on a comp store basis. As a result, as a percentage of retail and direct sales, they grew to about 6% of their mix and if you include the commercial business it is probably closer to 5% of their mix in total. The total computer department comps in North America were 22% in Q2, thus the peripherals grew very much with the hardware. The department really did not lift their total comp performance materially, all it contributed was about a 1% lift to total comps. They're happy with this result in as far as they really did not promote it very aggressively during Q2. Their new line of PCs range in speed from 120-200 mHz, with the bulk of the line around 156 mHz. From a brand point of view, they are proud that IBM rejoined Staples assortment joining Compaq, Hewlett-Packard, Packard Bell, and Apple. And they are particularly pleased with their computer strategy insofar as they are opportunistically selling CPUs while at the same time focusing their efforts on the more profitable consumables business.

Moving on to the commercial businesses, their comparable warehouse sales were up 18% in Q2. They were particularly strong in this quarter in the Staples business vantage mid-market business. Some highlights of their integration efforts -- they merged selections between their contract businesses both acquired and self-generated as well as their catalog in 1995. All Staples National Advantage locations have now been converted to their new distribution systems. The new front-end systems (order entry and accounts receivable) is being introduced into all the SNA centers now. Their Staples Business Advantage Middle Market centers will be converted in the next 6-9 months. Toward the end of this year they will complete the task by merging Staples Direct selection as well as distribution with the contract entities and that then will constitute the end of what will have been a very thoughtful 2.5 year process. As far as sales initiatives in the Staples contract and commercial this year they have significantly increased both the number of catalogs that they are mailing as well as the number of sales representatives that they have on the road. They are continuing to expand both the markets willing to participate in these businesses as well as the type of products that they sell to their customers.

INTERNATIONAL BUSINESSES

In the UK the story is pretty much consistent with where they were at the end of the first quarter. They did open two stores and end this quarter with 35 units. Their comparable store performance seems to have stabilized with a 2% comparable store decline in Q2. The trend seems to be stabilizing and gradually moving back towards the positive. They remain optimistic about the market but must confess that there are tremendous challenges of execution and management particularly given the very difficult joint-venture structure in which they operate in the UK. They remain hopeful that they will turn the UK around but given some of the challenges they face there they would expect the UK to continue to underperform during the balance of the year.

In Germany there is a much better story. Their comparable store performance is nothing short of remarkable. Comparable stores were up 31% in Germany for the quarter. They opened two stores there to end the quarter with 16 open stores. Operating results continue to improve. They have begun to accelerate prospective expansion. They believe the operating will reach break-even sometime in 1997 and they are generally very pleased with how that business is progressing.

DETAILED FINANCIAL HIGHLIGHTS

From an annualized perspective, retail and delivery sales per store in the quarter grew to $6.8 million from $6.6 million last year. Retail-only sales per store also rose to $5.7 million from $5.5 million last year. In terms of sales by business units, North American store sales in total approached $600 million in the quarter, up from about $440 million in Q2 last year. And the direct business approached $100 million, up from $75 million last year, with the balance of the contract stationer business a little over $115 million in the quarter, up from $90 million in Q2 1995.

In terms of gross profits, the overall rate increased year-over-year by some 60 basis points to 23.65% of sales and this reflects product margin declines in US stores due to mix and a modest decline in the contract stationer segment which are more than offset by improved product margins at Business Depot, reflecting combined buying power with the US and improved mix at Business Depot and improved delivery margins due to better margins on paper and increases in furniture sales, which have a higher margin than the overall average. The overall improvement in their product margins despite increased computer sales is a credit to their strong merchandising and buying team. The company also achieved significant leverage of occupancy and distribution costs and higher volumes. And, as mentioned, for the quarter computer hardware (CPUs and laptops) rose to about 6% of sales from a little over 5% in Q2 last year.

Operating and selling expenses increased during the quarter by 17 basis points to 15.52% of sales reflecting increases in advertising as a percentage of sales as well as increased expenses related to their refit program and the 39 store openings during the quarter which were only partially offset by increased leverage on payroll and other store costs as volume per store increased. Consequently store operating profit which excludes G&A, goodwill, and pre-opening rose 43 basis points over last year to 8.13% of sales for the quarter and for the six months it increased 25 basis points to 7.39% of sales. Pre-opening expense in the quarter was $3.3 million or some $85,000 per store an increase over the $61,000 per store last year reflecting more new markets and marketing expense for improved marketing programs that help lauch their stores more effectively year over year. G&A expenses as a percentage of sales improved by 26 basis points in the quarter to 3.57% of sales as they leveraged their G&A costs across all functions with the only significant negative being in systems that were planned related to the contract integration as well as their new headquarter expansion cost.

Total company operating profit for the quarter rose 51% on a 34% increase in sales to $33 million or 4.08% of sales, an improvement of nearly 50 basis points for the quarter on a year-over-year basis.

Net interest expense expanded 10% year-over-year to approximately $5.2 million as the lower interest rates due to the convertible debenture versus revolver borrowing last year were more than offset by increased total volume of borrowing. Equity and loss of affiliates rose to $4 million in the quarter from $2.6 million in the prior year period due primarily to continued below expectation performance of Staples UK. As discussed last quarter and again earlier, performance in the UK could continue below plan for the balance of the year.

The tax rate for the quarter were at 38.5% and net income for the quarter increased 62% to approximately $15 million or 1.81% of sales. EPS grew 50% in the quarter from $0.06 per share to $0.09 per share. The total number of shares used in their EPS calculation were 166.4 million which includes 6.6 million option-equivalent shares using the Treasury method.

BALANCE SHEET HIGHLIGHTS

Total store and delivery inventory rose 35% over Q2 of last year to approximatly $722 million. On a per store basis their inventory was $1.4 million per store with accounts payable representing about 50% of that inventory. So, it is an inventory per store increase of only 2% year over year reflecting their expansion of product offerings, their continued commitment to in-stock, and improvements in their overall merchandise replenishment capabilities.

From a capital and liquidity perspective, they found a number of things to improve their liquidity and their revolver. They negotiated a new five-year committed facility during the quarter which expanded the line to $350 million and they ended the quarter with approximately $350 million of total liquidity which includes cash and short term investments of approximately $50 million and unused revolver and committed lines of approximately $300 million.

They improved their returns year over year as well as returns now are consistently yielding results in the mid-teens from a return on average equity perspective and they are very pleased with that progress.

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* 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.

(c) Copyright 1996, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

Transmitted: 8/22/96

Copyright 1996, The Motley Fool
All Rights Reserved. This material is for personal use only.
Republication and redissemination, including posting to news groups,
is expressly prohibited without the prior written consent of The Motley Fool.