Staples Inc.(Nasdaq: SPLS) announced today the results for its second quarter ended July 31, 2010. Total company sales of $5.5 billion for the second quarter of 2010 were flat compared to the second quarter of 2009. Net income for the second quarter of 2010 increased 40 percent year over year to $130 million, and diluted earnings per share, on a GAAP basis, increased 38 percent to $0.18 from the $0.13 achieved in the second quarter of 2009.


Adjusted diluted earnings per share of $0.20 for the second quarter of 2010 increased 25 percent compared to adjusted diluted earnings per share of $0.16 achieved in the second quarter of 2009. These adjusted results exclude pre-tax integration and restructuring expense of $22 million during the second quarter of 2010 and $30 million during the second quarter of 2009.

"Staples continues to deliver strong earnings growth in a challenging sales environment," said Ron Sargent, Staples' chairman and chief executive officer. "We're seeing good progress in our initiatives to grow technology, copy and print, and facilities supplies."

On a GAAP basis, second quarter 2010 operating income rate increased 112 basis points to 4.85 percent compared to the second quarter of 2009. Excluding the impact of integration and restructuring expense, second quarter 2010 operating income rate increased 97 basis points to 5.24 percent. This increase primarily reflects improved product margins, lower stock based compensation expense, as well as reduced amortization and delivery and distribution expense.

The company's effective tax rate for the second quarter of 2010 was 37.5 percent, compared to 34.5 percent for the second quarter of 2009. The increase in the effective tax rate was due to the expiration of tax provisions this year that allow for the deferral of income tax on certain foreign earnings.

The company generated year to date free cash flow of $95 million after $151 million in capital expenditures, ending the second quarter of 2010 with approximately $2.2 billion in liquidity, including $872 million in cash and cash equivalents. The company resumed its share repurchase program during the second quarter of 2010, and repurchased 5.1 million shares of common stock for $102 million.

North American Delivery

North American Delivery sales for the second quarter of 2010 were $2.4 billion, an increase of two percent in US dollars and one percent in local currency compared to the second quarter of 2009. In addition to the favorable impact of foreign exchange rates, the top line benefitted from strong customer acquisition, offset by lower spend from existing customers. Operating income rate increased 79 basis points to 8.75 percent compared to the second quarter of 2009. This increase primarily reflects better buying, a favorable product mix, as well as reduced amortization expense, offset by investments in growth initiatives.

North American Retail

North American Retail sales for the second quarter of 2010 were $2.0 billion, an increase of two percent in US dollars and flat in local currency compared to the second quarter of 2009. Comparable store sales for the second quarter of 2010 were flat versus the second quarter of 2009, reflecting increased customer traffic, offset by lower average order size. Operating income rate increased slightly to 5.26 percent compared to the second quarter of 2009. This improvement primarily reflects increased product margins, as well as reduced depreciation, distribution and marketing expense, offset by investments in growth initiatives. North American Retail opened two stores and closed two stores, ending the second quarter of 2010 with 1,888 stores in North America.

International

International sales for the second quarter of 2010 were $1.2 billion, a decrease of six percent in US dollars and two percent in local currency compared to the second quarter of 2009. Top line growth in local currency in the European Catalog and Contract businesses was more than offset by a nine percent decrease in comparable store sales in Europe versus the second quarter of 2009. Operating income rate increased 86 basis points to 1.16 percent compared to the second quarter of 2009. This increase primarily reflects supply chain improvements, reduced amortization, as well as reduced losses in China, somewhat offset by deleverage of rent and labor expense on lower sales in European Retail. European Retail opened one store, closed two stores, and acquired nine stores during the second quarter of 2010. The International business ended the second quarter of 2010 with 376 stores.

Outlook

The company no longer anticipates that prior to the end of fiscal year 2010 the US Congress will extend the provisions that allow for the deferral of income tax on certain foreign earnings. As a result, the company anticipates that its effective tax rate for the third quarter and fiscal year 2010 will be 37.5 percent versus its previous guidance of 34.5 percent for the fiscal year 2010. The company expects this change to impact fiscal year 2010 diluted earnings per share by approximately $0.06. The company expects its effective tax rate to return to 34.5 percent for 2011, assuming no other changes to tax laws.

The company's outlook assumes a modest economic recovery during the second half of 2010. For the third quarter of 2010, the company expects sales to increase in the low single-digits compared to the third quarter of 2009. The company expects to achieve diluted earnings per share, on a GAAP basis, in the range of $0.38 to $0.40 for the third quarter of 2010. Excluding approximately $10 million of pre-tax integration and restructuring expense, or approximately $0.01 per share, the company expects to achieve adjusted diluted earnings per share for the third quarter of 2010 in the range of $0.39 to $0.41.

For the full year 2010, the company expects total company sales to increase in the low single-digits compared to the full year 2009. Including the impact of the higher tax rate, the company expects to achieve diluted earnings per share, on a GAAP basis, in the range of $1.20 to $1.24 for the full year 2010. Excluding approximately $55 million to $60 million of pre-tax integration and restructuring expense, or approximately $0.05 per share, the company expects to achieve adjusted diluted earnings per share for the full year 2010 in the range of $1.25 to $1.29.

The company expects to incur the following expenses during the third quarter and full year 2010.
Approximate Dollar Amounts in Millions
Q3 2010 FY 2010

Depreciation Expense $120 - 130 $480 - 490
Amortization of Intangibles 15 - 20 65 - 70
Integration and Restructuring Expense ~10 55 - 60
Net Interest Expense 50 - 55 215 - 220

Presentation of Non-GAAP Information

This press release presents certain results both with and without integration and restructuring expense associated with Corporate Express. This press release also presents certain results both with and without the impact of fluctuations in foreign currency exchange rates. The presentation of results that exclude these items 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. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are provided below. Management believes that the non-GAAP financial measures presented provide a better comparison to prior periods because the adjustments do not affect the on-going operations of the combined businesses. 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 the limitations resulting from the exclusion of these items by considering the impact of these items separately according to GAAP as well as non-GAAP results and outlook, and in addition, in this press release, by presenting the most comparable GAAP measures ahead of non-GAAP measures and providing a reconciliation that indicates and describes the adjustments made.