Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Staples (NASDAQ:SPLS)

Q4 2012 Earnings Call

March 06, 2013 8:00 am ET

Executives

Chris Powers

Ronald L. Sargent - Chairman, Chief Executive Officer and Chairman of Executive Committee

Christine T. Komola - Chief Financial Officer and Principal Accounting Officer

Demos Parneros - President of U.S. Stores

Joseph G. Doody - President of North American Delivery

John Wilson - President of Europe Operations

Analysts

Gary Balter - Crédit Suisse AG, Research Division

Gregory Hessler

Michael Lasser - UBS Investment Bank, Research Division

Christopher Horvers - JP Morgan Chase & Co, Research Division

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Gregory S. Melich - ISI Group Inc., Research Division

Daniel T. Binder - Jefferies & Company, Inc., Research Division

David Gober - Morgan Stanley, Research Division

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Denise Chai - BofA Merrill Lynch, Research Division

Helen Pan - Barclays Capital, Research Division

Kate McShane - Citigroup Inc, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 4 2012 Staples Inc. Earnings Conference Call. My name is Sheila, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Chris Powers, Director of Investor Relations. Please proceed, sir.

Chris Powers

Thanks, Sheila. Good morning, everyone, and thanks for joining us for our Fourth Quarter and Full Year 2012 Earnings Announcement.

During today's call, we will discuss certain non-GAAP metrics and comparable period measures, including or excluding the 53rd week in fiscal 2012 to provide investors with useful information about our financial performance.

I'd also like to point out that we realigned our reporting segments during the fourth quarter of 2012. We've restated our historical reporting segment results to reflect our new structure, and we'll refer to those restated numbers when comparing our 2012 results to the prior year. Please see the Financial Measures and Other Data section of the Investor Information portion of www.staples.com for an explanation and reconciliation of non-GAAP measures, other calculations of financial measures that we use to analyze our business and restated historical reporting segment results.

I'd also like to remind you that certain information discussed on this call constitutes forward-looking statements for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed or referenced under the heading Risk Factors and elsewhere in Staples' 10-K filed this morning.

Here to discuss Staples' Q4 and full year performance and business outlook are Ron Sargent, Chairman and Chief Executive Officer; and Christine Komola, Chief Financial Officer. Also joining us are Demos Parneros, President of North American Stores and Online; Joe Doody, President of North American Commercial; and John Wilson, President of Europe. Ron?

Ronald L. Sargent

Well, thanks, Chris, and good morning, everybody. Thanks for joining us today. This morning, we reported our results for the fourth quarter and for the full year of 2012, and I'll start with the headlines.

Total company sales for the fourth quarter increased 3% to $6.6 billion. Excluding $461 million of sales during the extra week in the quarter, total company sales were down 4% versus the prior year. We reported earnings of $0.14 per share from continuing operations on a GAAP basis. During the quarter, as you know, we incurred charges, which negatively impacted our Q4 results by about $0.32 per share. And if you exclude these items, non-GAAP earnings per share from continuing operations increased 12% to $0.46.

For the full year, we achieved total company sales of $24.4 billion. This reflects a 1% decline and a 3% decline on a 52-week basis compared to 2011. We reported a net loss of $0.24 per share from continuing operations on a GAAP basis during the year. Excluding charges, our non-GAAP earnings per share for the full year were $1.39, which was an increase of 1% versus last year.

Also during 2012, we remained committed to returning cash to shareholders. We repurchased about 5% of our shares outstanding and we returned a total of $743 million to shareholders through stock buybacks and dividends.

Before we get into segment results, I'd like to just take a minute to update you on the progress we're making on our reinvention plan. During 2012, we took several important steps to improve our business with the launch of a new strategic plan. As we've discussed in the past, our reinvention plan includes 4 growth platforms: expanding our assortment beyond office supplies, accelerating growth online, redefining the omni channel-experience and accelerating growth in our services business. I'm pleased to report that we're gaining momentum in each of these areas. And at the same time, we're taking action to reshape our business to fund the future while building on our core strengths to better serve our customers.

During the fourth quarter, we also realigned our structure to support our growth priorities and better address the changing needs of our customers. Under the new structure, our North American Retail stores and staples.com businesses will now be reported in the North American Stores and Online segment. Our North American Commercial segment includes all of our contract operations in North America, as well as our quill.com business. And the international segment includes all of our continuing operations outside the United States and Canada.

Our new vision is, "Every product your business needs to succeed." And we're confident that we can accelerate growth in categories beyond office products. A great example of this is our success selling facilities and breakroom supplies. During 2012, we had strong double-digit growth in North America and grew sales in this category by more than $200 million, ending the year with a $1.8 billion facilities and breakroom business.

We more than tripled our assortment on staples.com during the year, and we hit our goal of 100,000 SKUs offered by yearend. While we're still in the early innings of our assortment expansion, we see big opportunities in areas like technology products, medical supplies, safety supplies, mail and ship and office decor. We're also excited to report that we now offer Apple accessories on staples.com, and we'll have this assortment in our stores during the first quarter.

In terms of driving growth online. Staples.com sales were up about 3% for the year on a 52-week basis, and we have plans to accelerate the top line. Customers continue to take advantage of the new features we've added to the website. Our customer file has increased. And overall sales per customer are up, with sales of new categories more than offsetting softer trends in the core.

From an omni-channel perspective, we're making it easier for customers to shop us wherever and whenever they want. On bringing our North American Retail stores and our dot-com businesses together, we're providing our customers with a more consistent shopping experience across the channels. During Q4, we combined our retail and dot-com merchandising and marketing teams and introduced new compensation plans which incent associates to drive sales, both in our stores and on our website. We recently launched our new features like Reserve Online and pick up in store, and we're seeing a very strong response from our customers. And we've also revamped and launched a new website in Canada with significantly improved features and capabilities. And during the fourth quarter, we developed a new 12,000-square-foot omni-channel store with updated staples.com kiosk and an endless aisle shopping experience. We expect to open our first omni-channel store in Q1 and we're confident that we can retain the vast majority of our sales in this new format while also driving sales of an expanded online offering.

I'm also pleased to report that just last week, we announced a new Staples rewards program in the United States that significantly improves our value perception with customers. This program is free to customers and offers 5% back in rewards on all products and all services. It also provides free shipping on all staples.com orders. We believe that the reinvention of our rewards program will make shopping at Staples even more compelling for customers.

We also continue to build momentum in product-related services. Copy and print sales and EasyTech services in North American stores and online grew in the high single digits during Q4. Our traffic in our copy centers was up year-over-year, and we grew the top line by expanding our offering of instant products, improving quality and by increasing the productivity of our copy and print sales force. During the fourth quarter, we also implemented a new quoting process, which has improved our win rates on large customized jobs, and we are working with our larger contract customers to provide retail copy and print services to their mobile workforces.

Turning to funding the future activities. We made a lot of progress reducing retail square footage during 2012, and we remain extremely focused on increasing store productivity. In North America, we had a total of 31 net new store closures and an additional 30 relocations and downsizings for the year. All in, we took out over 1 million square feet or about 2% of our retail footprint, and we're on track to reduce our total North American Retail square footage by about 15% by 2015.

In Europe, we reduced exposure to our weakest business with 48 net retail store closures. 46 of those were closed in the fourth quarter. This represents a 15% decrease in our European store count in 2012. Beyond our store closures in Europe, we're also making progress on our other European restructuring efforts as we work to consolidate subscale delivery businesses, streamline our cost structure and improve profitability.

We've also simplified our business in India. During Q4, we concluded negotiations with our joint venture partner and terminated our existing agreement. Going forward, we've created a new franchising arrangement in India, which will allow us to continue to leverage the strength of our global brand and capitalize on future growth in this large and highly fragmented market.

Last quarter, we announced a plan to achieve $250 million in annual pretax savings in North America by 2015. And during Q4, we developed a very detailed cost savings roadmap for the coming year. In the near term, our biggest opportunities are in product cost, indirect procurement and store operations. We've completed more than half of our vendor negotiations, and we're already seeing significant savings.

We're also taking a fresh look at the $3 billion that we spend annually on indirect products and services that we use to run our business. And although it's early in the process, we've had success reducing cost in areas like printing and travel, temporary labor. If you put it all together, we have clear visibility to about $150 million of pretax cost savings in 2013.

So that's a summary of where we are with the reinvention efforts. Now I'd like to take a brief look at our Q4 results in each of our business units, and I'll start with North American Stores and Online.

Sales for the fourth quarter were $3.3 billion. That's up 3% compared to Q4 of last year. Excluding $221 million of sales during the extra week in the quarter, sales declined about 4% versus the prior year. Fourth quarter same-store sales for retail, which exclude staples.com sales, declined 5%. Lower customer traffic accounted for the entire comp decline in Q4, with average order size flat year-over-year. While we are disappointed certainly in our Q4 comp, there were a couple of key drivers worth calling out. Hurricane Sandy and a more competitive holiday season around Black Friday negatively impacted our Q4 comp by more than 200 basis points.

Excluding the extra week during the quarter, staples.com sales declined about 1% versus the prior year, as increased customer traffic was more than offset by lower average order size and about a 1% headwind from Hurricane Sandy for our staples.com business.

During the fourth quarter, we saw growth in tablets, e-readers, facilities and breakroom supplies and copy and print. This was more than offset by ongoing weakness in computers, digital cameras and software. While computers are -- certainly remain under pressure, we're building momentum in new technology hardware categories like tablets, e-readers and mobile phones. We expect continued growth in these categories to more than offset weakness in laptops and computers going forward.

During Q4, North American Stores and Online operating margin increased 37 basis points versus last year to end the quarter at 9.6%. This increase was driven by lower incentive compensation and marketing expense, partially offset by investments to drive growth in staples.com.

Taking a look at our early first quarter trends. We're pleased to report that the North American Retail comps in February showed improvement versus Q4, and staples.com sales for the month were up nicely compared to last year.

As I mentioned at the beginning of the call, we remain committed to improving productivity of our retail store network. Our plans call for 30 net store closures and another 45 combined downsizes and relocations during 2013. About half of the downsizes and relocations will be to our new 12,000-square-foot store format, and these actions will remove more than 1 million square feet from our North American store network for the year.

Moving on to North American Commercial. Here, sales for the fourth quarter were $2.5 billion. That was an increase of 7% compared to last year. If you exclude $159 million of sales during the extra week in the quarter, sales declined about 1% versus the prior year. We have a high concentration of contract customers in the Northeast, and as a result, our Q4 North American Commercial sales were also negatively impacted by the hurricane. We estimate that the storm had about a 1% drag on total commercial sales during the fourth quarter.

Top line growth remained strong in adjacent categories, like facilities and breakroom, which was once again up double digits during the fourth quarter. Excluding the extra week, furniture was also up nicely, with sales growth in the mid single digits. Core office supplies and paper were down in the low single digits.

Turning to profitability. North American Commercial operating margin for Q4 increased 31 basis points versus last year to 9.3%. This increase reflects lower incentive compensation, partially offset by reduced product margin.

In International Operations, sales for the fourth quarter were $1.2 billion. That was a decline of 4% in both local currency and U.S. dollars versus Q4 of last year. Excluding $81 million of sales during the extra week in the quarter, sales declined about 11% versus the prior year.

Top line trends in Europe and Australia remained weak. In Europe retail, same-store sales were down 9% during the fourth quarter, customer traffic decreased about 7% and average order size was down about 2% year-over-year. In our European delivery business, sales were down in the high single digits on a 52-week basis. And in Australia, the top line was down double digits versus the prior year.

During Q4, our international operating margin declined 215 basis points versus last year to 0.51%. Excluding $4 million of accelerated Australia tradename amortization, operating margin declined about 177 basis points to 0.89% for the fourth quarter. This decline was driven by lower product margins in Europe and deleverage of fixed expenses in Europe and Australia, and that was partially offset by savings related to headcount reductions in Europe and Australia.

While results in Europe remained tough, I'm very pleased with the progress that John Wilson and his team have made in a few short months. They've challenged our assumptions in Europe. They've significantly improved our forecasting accuracy and done a great job executing a very complex pan-European restructuring program. While we've still got a lot of restructuring to do over the next several months, John is developing a clear, long-term strategic plan with an increased focus on our delivery businesses and on simplifying our operations.

And with that, I'll turn it over to Christine to review our financial results.

Christine T. Komola

Thank you, Ron. Good morning, everyone.

During the fourth quarter, total company sales were $6.6 billion, an increase of 3% compared to the fourth quarter of 2011. Excluding $461 million of sales during the 53rd week in 2012, total company sales decreased 4% compared to Q4 of last year.

On a GAAP basis, we reported diluted earnings per share from continuing operations of $0.14. Our results for the fourth quarter of 2012 include $181 million of pretax charges related to our European store closures and restructuring, U.S. store closures and accelerated Australia tradename amortization. Q4 results also include a $57 million pretax charge related to the early extinguishment of debt, a $26 million pretax charge related to the termination of the company's existing joint venture agreement in India, as well as a pretax income of $83 million related to the week -- to the extra week in 2012. Excluding the impact of these charges we took during the fourth quarter, we reported non-GAAP diluted earnings per share from continuing operations of $0.46, up 12% compared to $0.41 per share achieved in the prior year.

On a GAAP basis, fourth quarter 2012 operating income rates decreased 257 basis points versus the prior year to 4.8%. Excluding the impact of the charges we took during the quarter, operating income rate improved 18 basis points to 7.5% compared to the fourth quarter of 2011. This reflects reduced incentive compensation and marketing expense, partially offset by lower product margin.

Our effective tax rate for the quarter was 53.3%. Excluding the impact of the charges we took during Q4, our effective tax rate for the quarter was 32.5%.

Capital expenditures for 2012 were $350 million compared to the $384 million we spent last year. Full year operating cash flow of $1.2 billion. We generated $870 million of free cash flow in 2012. Our free cash flow came in below our expectation of about $1 billion for the full year because as -- in early Q4, we built inventory in anticipation of stronger top line results. As sales came in below our expectations, we did pull back on inventory replenishments but we continued to pay down accounts payable. We pay our vendors a little bit faster than we turn our inventory, so this had a negative impact on working capital. Additionally, we came up short of our sales and earning goals for the year. And as a result, accruals for incentive compensation were lower than expected.

During the fourth quarter, we repurchased 7.4 million shares for $87 million, bringing our total share repurchase for 2012 to 34.8 million shares for $449 million. During Q4, we also issued $1 billion in debt, including $500 million of 5-year notes with a 2.75% coupon and $500 million of 10-year notes with a 4.375% coupon. We used proceeds from these offerings to tender $633 million of our $1.5 billion note due in January 2014. We do expect to repay this with cash for the remaining $867 million of the note upon maturity.

At the end of 2012, Staples had approximately $2.5 billion in liquidity, including cash and cash equivalents of about $1.3 billion and available lines of credit of about $1.2 billion. Based on our healthy cash flow and strong liquidity, this morning, we announced that our Board of Directors has declared a 9% increase in our quarterly cash dividend.

As Ron mentioned at the beginning of today's call, our strategic reinvention is on track. While our ultimate goal is to increase sales and earnings growth, there are a number of other key metrics that we're planning to track and planning to share with you each quarter. We believe that these are important indicators of our progress and closely align with our vision.

First, we're highly focused on driving sales in categories beyond office supply. This year, we have plans to drive meaningful acceleration here. Second, one of our top priorities is to hyper-grow online. In 2013, we have plans to accelerate growth throughout the year and achieve high-single-digit growth in staples.com. Third, we'll continue to rapidly expand our assortments. Today, we have more than 100,000 SKUs on staples.com, and by the end of 2013, we plan to more than triple that number. And finally, we'll continue to update you on our reshaping activities as we plan to make progress against our multiyear cost savings plan, our square footage reduction plan and our European restructuring efforts.

Turning to guidance. We expect full year 2013 sales to increase in the low single digits compared to 2012 sales on a 52-week basis of $23.9 billion. We expect full year 2013 diluted earnings per share from continuing operations to be in the range of $1.30 to $1.35 versus non-GAAP diluted earnings per share from continuing operations on a 52-week basis of $1.30 achieved in 2012. We expect to generate more than $900 million of free cash flow and plan to continue repurchasing common stock through open-market purchases during 2013.

Our strategic reinvention is focused on accelerating sales and earnings growth, and we expect momentum on the top and bottom lines to build throughout 2013. To achieve this, we need to make a number of investments. This year, we're planning to reinvest the majority of our savings -- our expense savings in sharper prices, increased investment in IT, expanded brand marketing, customer acquisitions and talent and associates to better serve the need of our customers. We're also wrapping up the final phases of our European restructuring program. While the associated costs won't be large enough to exclude from our GAAP earnings per share, they will be a headwind on the bottom line early in the year.

Thank you for your time this morning. And now I'll turn it back over to Ron for a quick wrap-up.

Ronald L. Sargent

Thanks, Christine.

We know we've got a lot of work ahead of us, but this isn't the first time we've transformed Staples to meet the needs of our customers. We started out as a cash-and-carry retailer. And when customers wanted more in the 1990s, we transformed into a multi-channel company and we became a power in the delivery space. When customers wanted online shopping, we transformed into one of the world's largest e-commerce companies. When customers around the world wanted to shop at Staples, we grew into a global organizations, with operations throughout North and South America, Europe, Australia and Asia. And when customers wanted to shop at Staples for more than office supplies, we expanded into new categories, things like facilities and breakroom. And today, we're once again responding to the changing needs of our customers by rapidly expanding our assortment in new categories and by making it easy to shop at Staples however and whenever they want.

All right, now I'd like to turn the call back over to our moderator for Q&A. Sheila?

Question-and-Answer Session

Operator

[Operator Instructions] Great, and the first question comes from the line of Gary Balter, Crédit Suisse.

Gary Balter - Crédit Suisse AG, Research Division

I just have a clarification or a numerical question, then I'll ask a strategic follow-up. Could you talk about -- like, you showed cash flow as going to be rising next year to 900, I think, from 8-something, and yet you've guided earnings lower. Could you talk about, what are the components of that? Is CapEx going down? I don't think you gave us what the CapEx projection is for next year.

Christine T. Komola

Gary, it's Christine. So yes, we do expect an increase. A couple of things: One is I think we should be able to have benefit from our accounts payable. We had a big headwind this year based on the timing of the working capital that I talked about in Q4, so that should benefit from us. The other benefit is we do plan to have a -- the -- an accrual related to the incentive compensation, so that should benefit as well. It'll be not significant improvement, as you can see, in over $900 million compared to the $870 million. We do plan to invest in inventories. So you're right. So I expect -- but I do expect some benefits to come through.

Gary Balter - Crédit Suisse AG, Research Division

Okay. And just I don't know if these -- I was -- I've been traveling while you're speaking so I may have missed this, but did you talk about the additional profitability without that 15th -- without that 13th week or 14th week, whatever it works out to mathematically in this quarter? Like, were divisional profits margins actually lower in the 3 divisions if you take out the benefits of the extra week?

Christine T. Komola

Yes, I think we didn't actually give the specifics by business unit. You can probably allocate it around the sales mix. But without the incentive compensation, yes, you're right, we are a little bit below last year.

Gary Balter - Crédit Suisse AG, Research Division

And then -- and here's the "little bit more strategic" question. First of all, you can stop me early, but are you going to not comment on the potential benefits of a combination in the sector?

Ronald L. Sargent

I guess the merger question is mine. And maybe I should by, first of all, saying congratulations to Neil and to Ravi and the Office Depot and OfficeMax teams. As I've said before, I believe the merger is going to be good for customers, and I think it's going to be good for our industry. But at this point, Gary, I think it's just way too premature to say much more given the Federal Trade Commission review and really, at this point, from my perspective, lacking any definitive details of the transaction.

Gary Balter - Crédit Suisse AG, Research Division

Okay. So given that, could you talk to, like, the guidance -- like, you said a lot of positive things during the call about the efforts that you're doing in how you're repositioning the company, and the expenses look like they had some nice control in the quarter. But the guidance for the year is lower. What -- like, I mean, one of the things we see in one of your competitors is they have all these initiatives to cut costs. And if you look at, I think it was, Slide 13 of their presentation that they never did, basically, all the cost savings were eaten up in lower sales. And the concern, I think, for people, for investors in your company, is we continue to see negative comps. So do you just trade basically lower sales and it offsets all the initiatives you have? How should we think about that? Like, how do we get back to a growth earnings portfolio for the company?

Christine T. Komola

So Gary, just to kind of clarify: So our guidance is sales to increase on a 52-week basis and earnings to increase slightly on a 52-week basis. What we're doing is really making sure that we can invest to grow even quicker over time, and I think you'll see every quarter sales momentum and some earnings momentum as we go throughout 2012. We do want to make sure that we preserve of -- investment opportunity. And as we look at the business and need to invest in our IT, our infrastructure, customer acquisition on staples.com, we're getting a lot of great momentum. We want to take advantage of that and be able to invest in it. So it is a balance of being able to invest and drive momentum this year. I -- and -- but I do think, over the each quarter, you'll see improvement.

Ronald L. Sargent

And I think the cost-reduction initiatives are in place, and we should -- you should feel very comfortable that we're going to get those costs that we talked about this morning.

Operator

And the next question comes from the line of Greg Hessler.

Gregory Hessler

I wanted to ask you, I just want to make sure I heard the comments correctly. For the 2014 notes, for that stuff that remains outstanding, it's the balance is $867 million. Do you intend to use cash on hand to repay that debt?

Christine T. Komola

Yes, that's our intention, Greg.

Gregory Hessler

And then my second question will just be in terms of the overall credit rating, the overall commitment. Has anything changed with regards to that? Do you still target a mid-BBB credit rating? And is paying down that debt, is that kind of an action that you see as justified towards maybe moving you up to a higher rating? Or is mid BBB where you're comfortable?

Christine T. Komola

So mid-BBB is where we're comfortable. We'll have some kind of wiggle room in that if we -- as we do pay down the debt, but I think we'll continue to work with our credit rating agencies. But mid BBB is where we like the flexibility and it is -- continues to be the right target for us.

Ronald L. Sargent

And it's not just the balance sheet. I -- from my perspective, it's not just balance sheet. We have to show that we can grow the top and bottom lines. I think that's the other messaging for the rating agencies.

Gregory Hessler

Okay. And then just maybe one follow-up for me. As you look at the balance sheet, is there sort of a minimum cash balance that you'd typically like to manage to? I'm just wondering if you get in a situation where maybe free cash flow comes in a little bit below where you had expected, whether or not potential debt pay down plans could change? Or any comments that you have on that.

Christine T. Komola

Sure, sure. So Greg, as we look at our kind of minimum cash hold threshold,, that's probably between $500 million, $600 million. But we do have seasonal dips that we -- that happen as we buy, for example, in back-to-school time. In general, we can use CP in and out if we need to. But on average, it's probably $500 million, $600 million.

Operator

The next question comes from the line of Michael Lasser, UBS.

Michael Lasser - UBS Investment Bank, Research Division

What I -- what it sounds like is that you're generating the cost savings, you have a pretty visible plan to achieve that. But some of that, a good portion of it is going to be reinvested in price. Could you give us some indication on where you think you are today in terms of how competitively priced you are versus perhaps where you need to be and what the margin implications of getting there will be?

Ronald L. Sargent

Yes, I think you can look at each segment of the business. And I think, in general, the headline is I think we're competitively priced given what our customers are looking for. I think, if you look at our pricing strategy, it's really to maximize margin dollars. And the way we're going to do that is by accelerating our top line. And that may mean the gross margin rate will see a modest decline. But I should note that our value proposition is not just about the price. I mean, our customers want service. Our customers attach great benefits to the rewards program. And the announcement of that you can walk in our store and, if you're a rewards member, you're going to get 5% back everyday on every item in every service in the store, I think, helps us a lot in terms of value. Free next-day delivery, that's big news. Before we had a minimum delivery charge, it had to be $50 in order to get free delivery. Our free delivery doesn't require an annual fee or a monthly fee or any fee. And I think customers are looking for assortment, and we're certainly responding there. And I think they're looking for an easy shopping experience. So I think -- I'm not as focused on pricing pennies as I am on value equation for our customers. And I think, in many cases, we were getting a net [ph] from some of the online players on certain items. And we have taken aggressive action over the last 6 months and I think you'll see more of that over the next few months as we try to make sure that our customers don't have any reason to shop anywhere else.

Michael Lasser - UBS Investment Bank, Research Division

So -- and I think this is important, so I don't mean to pick on it, but it -- so it sounds like you think you're closer to where you need to be but not fully there yet.

Ronald L. Sargent

Well, no, I think many of the actions we make today, I think, the 5% off and the free delivery, I think, gets us a lot closer, not to say that there's not going to be SKUs that we're going to be higher priced on or lower priced on. But I think the value proposition is a little different than online. I mean, first of all, our customer base is a lot more business than it is maybe consumer. I think the free next-day delivery is something that our customers attach value. We have customized pricing for 3,000 -- 3,000 sales reps go out and negotiate prices, and I think, in that case, we're probably the low-price leader, certainly on the contract side. We deliver on our own trucks. We've got 25 million rewards members. We've got relationships with about 10 million SMB customers. And I think, to me, the omni-channel equation is important. I mean, we've got 1,900 stores in North America, and we've got people there, we've got service there. We've got same-day offering, if that's what a customer wants. And having said all that, I mean, we're constantly evolving the model to make us even more competitive.

Michael Lasser - UBS Investment Bank, Research Division

That's very helpful. My follow-up question is on the omni-channel store. It sounds like you developed that late last year. What opportunity have you had to test it? And perhaps you could provide a little more detail on what it looks like and how scalable it'll be to the rest of the fleet.

Ronald L. Sargent

Let me ask Demos to respond. He and his team have done a great job in pulling the store together. And right now, we haven't tested it because it exists in a lab. But Demos?

Demos Parneros

Thanks, Ron. We're really excited about the 12,000-square-foot omni store. One thing I should begin with is that we have over 200 stores in our network today that are below 14,000 square feet. So we have a lot of experience in operating small stores and urban stores and have a high skill in dealing with space management. What we've done with the 12K is to really transform the store experience completely. And so you can imagine that we've gone through a very thorough process to get the right SKUs in the store. We've used different techniques to be more space efficient. We have featured our services, which are a huge part of our growth initiatives. We have reduced unproductive categories that we've been talking about over the last year or so, so the stores have been rightsized. We have a completely different operating model in the store where our associates are trained completely differently and are equipped to help every customer with every need the way they want to shop. So we're very excited about this. We have several stores that are in construction mode as we speak, and we'll have some up and running in the first quarter.

Operator

Your next question comes from the line of Chris Horvers, JPMorgan.

Christopher Horvers - JP Morgan Chase & Co, Research Division

So I wanted to follow up on the price investment question. Can you talk about, on the North American contract side, are -- the investments in price, are they the same ones that emerged in the second quarter? And was the pace of that investment stepped up in 4Q versus the pace that you saw in the second and third quarters?

Ronald L. Sargent

Joe?

Joseph G. Doody

I think it's -- from a pricing standpoint there, we've -- we clearly have been in a mode of ensuring that we're maintaining our base of business. And there's been some pressure throughout the year in terms of bids and tenders to hold onto that base. So I wouldn't say there's been any change in the trajectory of pricing within the contract area. We clearly tested the marketplace out there, continues to be -- most of the pressure is in enterprise-type accounts. And the team has done a great job of ensuring that as we move forward that we are going to be getting price back in the case of cost increases that are passed on, but we see less pressure there from our vendors. So I think I wouldn't say there's any change in trajectory there, Chris, as we look throughout the year. And I'd say potentially less pressure as we look into 2013 and beyond.

Ronald L. Sargent

And I guess, just a factoid is, like, looking at the Office Depot and the OfficeMax contract gross margins, both of them improved their gross margins by over 60 basis points during the fourth quarter, which would kind of reinforce Joe's comments.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Fair enough. And then on the $150 million of targeted savings, also a follow-up. I'm not sure you're willing to come out and say, "Hey, you know what? $75 million of that is going to flow to the bottom line." But could you put some guidepost around how you think about how much of the $150 million needs to be reinvested back in the business versus what, perhaps, can help drive the EBIT margins?

Christine T. Komola

Sure. Chris, it's Christine. So we plan to probably invest the majority of it back into the business. That is going to be important as we look at the various levers that we have to make sure that we grow the top line, and I think you'll see it invested back in margin. You'll see it invested back in operating expenses to drive with marketing expense. So you'll -- we'll drop some of it as we go throughout the year. You'll see the improvement, but in general, the majority will be driving sales.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Yes. And then finally, just curious on the store overlap that you see with Office Depot and OfficeMax. Can you talk about maybe the top 100 MSAs, where you overlap with them, how many overlap and how many don't? And maybe how many stores could be potentially up for you to look at if the transaction goes through?

Ronald L. Sargent

Yes. Again, I can't really even begin to speculate on kind of what merger scenario it would be. I can tell you that the facts are that we don't operate in markets like Alaska; Hawaii; St. Louis; New Orleans; Buffalo, New York. And I think, pretty much every other kind of market in the 50 states, we do compete with both of them. But those are the markets that we don't have a single store and both of them compete, I believe. But that's a...

Christopher Horvers - JP Morgan Chase & Co, Research Division

So that's a -- it sounds like a pretty small number overall.

Ronald L. Sargent

In terms of -- yes. In terms of where we don't compete with them, yes.

Operator

Your next question comes from the line of Brian Nagel, Oppenheimer.

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

So I want to -- my question I wanted to ask about, on Europe, your International Operations. You called out in your press release saying you closed some stores in Europe. And Ron, you made a comment in your prepared remarks about some of the progress you're beginning to make there. As we followed the issues in Europe for Staples, one of the things that keeps on coming up is the tough time you've had in really rationalizing the infrastructure, particularly on the retail side. Is something beginning to change? That's my question: Is something beginning to change? Are we starting to see more opportunity to start maybe taking some of the -- some capacity out of that division, which should eventually lead to better growth, better operating margins down the road?

Ronald L. Sargent

Sure. I was, like, there just 2 weeks ago, and I'm feeling better about our business in Europe. And I think it all starts with the strong leadership and a strong plan. And I think John and his team have made a lot of progress in a very short amount of time. Having said all that, and I'll let John comment, but the European economic situation shows no sign of improving in 2013. So with that, let me ask John to kind of weigh in. He's on the phone.

John Wilson

Yes, Brian, in addition to what Ron just said about the challenging macro environment, I do believe there's definitely an opportunity for us to streamline our business operations here and reduce our complexity. That's the focus that I've been looking at over the last 4 or 5 months. I have been putting together a plan, as Ron mentioned as well, to really help us guide our future thinking here, but there's certainly opportunity for us to rationalize beyond retail and looking at moving to a more harmonized and more streamlined overhead throughout our 3 channels in Europe. We have very complex -- overly complex systems, overly complex assortments and very different business processes across the markets. And we've been working very hard to come up with a plan to harmonize those processes and streamline our overhead and to move to a more common business model across all the channels. Certainly, retail is a big part of that, but it is about 1/3 of the business, and we're looking at improving the operations across all of our channels.

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Okay. So we -- at some point in the not-too-distant future, will you be able to articulate maybe operating margins? The -- for a long time, Staples has talked about longer-term operating margin targets for Europe and the international businesses. Will you be able to, so to say, update us on that guidance?

Christine T. Komola

Brian, it's Christine. We probably -- over time, we'll do that, but right now, we're really focused on just what does it take to fix the business. We don't expect to update that guidance or change it anytime soon.

Operator

Your next question comes from the line of Matt Fassler, Goldman Sachs.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Ron, first question. So in the fourth quarter, your revenue run rates were kind of flat to down across your businesses when you back out the impact for Sandy, and you're guiding to a low-single-digit improvement. You talked about February being a little bit better in retail specifically. What's the path through the year for revenue recovery? And if you look across your 3 businesses, how would you assess the revenue outlooks segment by segment?

Ronald L. Sargent

Well, I mean, I think, certainly, given all the investments that we're making early in the year, that will bode well for the -- later in the year. So I think you'll see a slow build throughout the year. In terms of segments, I would say that our contract business has recently comped some losses, maybe about 16, 18 months ago. So we should see a better contract sales, certainly starting in the first quarter. I think our dot-com investments should -- we should see some positive growth in that business in the first quarter. We, I think, have a little ways to go in our retail business because of all the other changes we've made. And I think -- John, you may want to weigh in on this, but I think international business, certainly Europe, would be kind of a continuation of the current trend. Hopefully, it will get better throughout the year. And I'm sure hoping that Australia starts to show some real improvement this year as well.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Okay. And John, were you going to say something? I'm sorry.

John Wilson

Yes. I was -- just to add to that. I would see, as Ron mentioned, the trends continuing in Europe on a sales or top line basis getting moderately better towards the latter half the year. But we're also consciously making some decisions, particularly, I think, in the online business, to refocus our marketing efforts and to spend more energy on retention than new customer acquisition as we look at the margin economics of that business. Then we may intentionally reshape our P&L and trade off some top line that has been uneconomic for better bottom line results, not short-term but long-term thinking. So there may be a bit of a headwind there as we reshape our business in the online.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Okay, my second question, probably for Christine, relates to the magnitude of the decline in incentive comp in the fourth quarter. And I'm curious, in that context, did you accrue extra [ph] levels throughout the year and only backed it off in Q4? Or did that accrual change over the course of 2012?

Christine T. Komola

Matt, yes, we did actually accrue it throughout the year but a little bit less every quarter as -- but the substantial reversal was in Q4 when we realized that our sales were going to miss, as well as...

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Can you quantify that?

Christine T. Komola

We actually haven't specifically quantified it. We don't want to get into that level of detail.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Okay. And then a final kind of more strategic question. You made some changes to the loyalty program, which looks like you're giving a lot to your customers. Can you talk about the economics of the new program and perhaps some of the break-even points that you'll need to achieve to make that work?

Demos Parneros

I'll give you the highlights -- it's Demos. Matt, we're excited about the program. It's a much simpler program from a store-exclusive [ph] standpoint. It's a much simpler program from a customer standpoint. It's not limited to key categories. Although we expect a huge ramp in new customers getting onto the program, the economics needed to break even are very manageable in our mind. We've got our field team fully committed behind it. And as we mentioned before, the combination of the rewards program, 5% back on all products and all services, in combination with free delivery, we feel like will more than cover the bulk cost to launch the program.

Ronald L. Sargent

And certainly, part of the funding is kind of maybe -- in many cases, we have been incredibly well priced because of promotional efforts, and I think we're going to be kind of tweaking promotional efforts in order to pay for that. And in terms of the delivery cost, it's interesting, but a lot, in fact, probably most of our deliveries were being delivered free anyway because they pass the $50 threshold. So we figured, if 98% were going free anyway, why don't we just tell the world we're free and take credit for it and get the marketing pop out of it?

Operator

Your next question comes from the line of Greg Melich, ISI.

Gregory S. Melich - ISI Group Inc., Research Division

Two questions, one on the cash flow again, and then online. Christine, you mentioned before the cash flow of $900 million, a bit of a buildup there. Could you just give us the number for CapEx, what you budgeted for this year versus last year, and also what the cash cost of restructuring ended up being in 2012 and what you think they'll be in 2013?

Christine T. Komola

So for capital, we probably will be about the same, maybe slightly higher in 2013. In terms of the cash cost for the restructuring, that's the bulk of it. It'll probably be -- it was a little bit less than $50 million in Q4. The remaining amount, which will be more significant throughout 2013, is probably about $100 million, if you look at the severance that has to get paid out and the lease payments that happens throughout the year.

Ronald L. Sargent

That's [indiscernible] part of the P&L this year.

Gregory S. Melich - ISI Group Inc., Research Division

Got it. And that's for the charge you've already taken out for anything in additional that you might decide to do.

Christine T. Komola

No, that's not anything incremental.

Gregory S. Melich - ISI Group Inc., Research Division

Got it, got it. And then second, the online assortment expansion, up to 100,000 SKUs and going to 300,000. Is that -- how many of those SKUs will be from your own DCs and fulfillment? And how should we think about that from a working capital and sort of logistics perspective as to how that links some of the rest of the business?

Ronald L. Sargent

Going to ask Joe to...

Joseph G. Doody

Yes, Greg, Joe here. Heavily, we'll be dropship and working with our key wholesalers that we have relationships with today. So you shouldn't think of it as really much being added to our current inventories. Now obviously, throughout the process, we continue to look at the type of velocity on those SKUs that we had, and as they would build to the point that would justify, we would bring them in. And then we continually go through this process in all of our buildings to destock and restock those SKUs that are the high runners, with others that are low runners and take those out and rely on wholesalers for those. So it would be a process, somewhat, that we followed in the past. But for the most part, the vast majority of what we're adding now is dropship or in relationships with our existing wholesalers.

Gregory S. Melich - ISI Group Inc., Research Division

Great. And maybe just as a follow-up there, could you remind us right now roughly how many SKUs you carry in your own DCs? Is still around 20,000-ish?

Joseph G. Doody

Yes. Yes, that's a good number. Varies, obviously, based on the size of our buildings out there, but that's a good number.

Gregory S. Melich - ISI Group Inc., Research Division

Okay, great. And then lastly, on the -- and this could be, I guess, for any part of the business, but probably Demos. Where do we sit now with getting the technology and the smartphone products into the stores? And how is particularly smartphones helping the gross margin, if at all?

Demos Parneros

Greg, so today we have 500 stores in the U.S. that carry mobile phones. We have the 3-carrier model. It's been the build over the last 1.5 years. We've actually transitioned from a partner relationship to our own staffed departments, which we like to operate better. It's been a little bit below where we expect. Obviously, we set fairly aggressive goals but building very nicely. And really, it's a function of what's hot in the marketplace. There have been some hot phones out there this past quarter, and we've definitely enjoyed a lot of that success. So our plans over the next couple of quarters is to continue to expand the store count, eventually getting to roughly 1,000 stores for mobile phones. So we expect it to be a more meaningful contributor. From a margin standpoint, it's a much better margin play than, say, computers but clearly not to the level of some of the consumables like ink.

Operator

Your next question comes from the line of Dan Binder, Jefferies & Company.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

A couple of questions. First, I was curious, when you went through the integration with Corporate Express, what base assumptions did you have for customer attrition given sort of the natural disruption that occurs with integration and customer choices that are being made?

Ronald L. Sargent

Yes, where we had customer attrition was really only in the U.S. And Joe?

Joseph G. Doody

Yes, as far as target, did you say, Dan...

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Yes. So what were you planning on at the beginning of the process? And what did you ultimately realize once you got through it?

Joseph G. Doody

Yes, less than 10%. And we are within that range.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Right. Okay, great. Also on the follow-on to that endless aisle SKU expansion online. Can you give us a little bit of the math behind the contribution from those incremental SKUs? In other words, if you look at the -- I realize it's still ramping, but if you look at that incremental SKU assortment that's been added, how much of the sales have -- did it actually generate? And is it favorable from a margin perspective?

Ronald L. Sargent

Yes, I mean, certainly, as we're ramping now, it's a pretty small percentage. And I don't want to share the actual sales for competitive reasons, but obviously it's doing well enough that we think we can expand and grow from here. In terms of margin, it's a lower margin rate. It's certainly incremental margin dollars. And from a return on invested capital or a RONA basis, it's terrific. It's a model that I think Amazon has done a great job with, and credit to them, I think, for kind of showing us the way a bit.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

And then finally, I was wondering if you could comment on same-account sales in contracts. I think they were under some pressure for several quarters. Just curious if that's changed at all.

Joseph G. Doody

Yes, the fourth quarter, Dan, they were still under some pressure there, so down modestly, I would say, in the quarter. And I think some of that too was -- we saw some reluctance, I think you can say, as a result of the fiscal cliff. So, but down modestly as far as existing.

Operator

Your next question comes from the line of David Gober, Morgan Stanley.

David Gober - Morgan Stanley, Research Division

Just curious on the staples.com business. Obviously, you've been investing there for the last 2 or 3 quarters or so, and 4Q looked like it was down slightly and, I guess, flat if you exclude Sandy and some other impacts. But just curious if you could talk a little bit about the product mix there and what drove the softness in the dot-com business. Was that also technology similar to the stores business?

Ronald L. Sargent

Okay, Demos?

Demos Parneros

Yes. Dave, a very short answer: technology. I mean, that was really it. And while there were some positives along the way, the overwhelming negatives in technology drove it down. What we're excited about is what we're working on right now. The other thing I should mention is that we -- the similar hit that we took in the heart of our sort of Northeast store networks also affected our customers who shop staples.com. But a lot of the things that we've been talking about, the expanded assortment, the customer acquisition efforts, have really been ramped up. And really, the [indiscernible] continue to unlock by putting our stores and online teams together both in merchandising and marketing, really making it much easier for customers and make the relationships with our vendors much more meaningful. So we're excited about getting out of the challenges of Q4 and moving forward with our plan.

David Gober - Morgan Stanley, Research Division

Got you. And just a quick clarification on the Apple side. I know you've launched Apple accessories. Is there anything in the agreement about actually selling hardware in the future? Is that the extent of where you guys are today?

Demos Parneros

At this point, I'm really excited about the work that our team has done. We've had a very nice partnership with Apple. I should mention that Apple products -- we've previously sold in Staples Canada and many places around the world. And now in the U.S., we're selling accessories on staples.com, also in our commercial group, and we'll be in stores in a few weeks. So no word on hardware at the moment, but we're excited about the rollout. And early few weeks already, we're encouraged by what we see and hope to discuss this in future calls.

David Gober - Morgan Stanley, Research Division

Okay. And for Christine, I was wondering if you could dig a little bit into capital allocation and maybe kind of the philosophical thought process behind increasing the dividend and maybe helping us to try to size the share repurchases for 2013. Obviously, you have the maturity this year. You've got a little bit more of a commitment from the dividend. Should we expect buybacks to be relatively flat year-over-year?

Christine T. Komola

Sure. So as you know, our goal is to continue to remain BBB -- in the BBB range. Mid 2s is kind of our debt-to-EBITDA -- adjusted debt-to-EBITDA ratio that we're looking at. We do have a big outlay with our final payment of those bonds that we've got, almost $900 million. So as we think about our cash flow, we think about our flexibility. We did want to give some back to the shareholders, which is why we did and the board approved the increase in our share -- in our dividend program. And as we look forward, the buyback program, it is going to be down from this year. We haven't given a precise number because we want to make sure that we have as not -- as much flexibility as we can throughout the year. But we definitely plan to make sure that continues to be part of our plan for 2013. And as we go forward, we'll continue to let you know how that progresses, but I think we need to make sure that we preserve flexibility this year as we invest in the business and as we plan to pay back the remaining of the $1.5 billion bond.

Operator

Your next question comes from the line of Colin McGranahan, Sanford Bernstein.

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Most of my questions have been asked, but first question is just on Australia. Clearly, it continued negative double-digit top line, a little surprising. What's the outlook there? And what's the prognosis for that business to turn the corner?

Ronald L. Sargent

Well, let me ask Joe Doody, who -- Australia now reports to Joe because it's a contract business and Joe is our contract expert. And even more importantly, Joe was down there last week. So Joe?

Joseph G. Doody

Yes. Thanks, Colin. Well, we're in the rebuilding stage there in that business. There's no doubt about it. I think we've got to -- we've had to rebuild the team. It's needed and gotten a new country leadership, sales management leadership. We've replaced pretty much all of our line of business heads down there over the last 12 months. I see a path going forward that's certainly much brighter and on the uptick from where we've been. We stabilized the business and it's becoming more predictable now in terms of being able to hit their numbers, but it's going to -- it takes a while to recapture business, lost business in some cases, and build up a new book of business. So they've gone aggressively after cost and taking cost out. So I'm looking for a strong year-over-year improvement but mostly geared towards the second half of the year.

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And then with Australia, it sounds like making progress but still obviously a long road. On Europe, Ron, I think you said no real improvement expected in '13 and you're closing stores. So getting to the low-single-digit top line growth now but it's dependent on positive comps and some positive growth in North America and commercial.

Ronald L. Sargent

Yes, we certainly think North America is our big opportunity in 2013 and '14...

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

If you struggle to get there, what else can you do on the cost side this year in excess of the $150 million of kind of line-of-sight cost you've already identified?

Ronald L. Sargent

Well, I think we're pretty good at kind of managing cost and managing expenses, and we'll continue to do that. And obviously, we're going to be aggressive on the cost-takeout side. We have a plan that, I think, all hangs together. In the event that we have to make mid-course corrections, we're always prepared to do that, and we do that every year. I mean, if somebody had told me that we were going to have negative 5 comps and we were also going to generate $0.46 of earnings, I would have kind of wondered how we're going to pull that off. And I think we're pretty good at kind of managing as we go, and we'll do that in '13 as well.

Operator

Your next question comes from the line of Anthony Chukumba, BBT Capital Markets.

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Most of my questions have been answered, but I did have a question a little bit about technology. I mean, you did the 5 -- negative 5% comp. It sounds like technology, aside from Hurricane Sandy, was a big part of that. I mean, is it fair to say that Windows 8 has been disappointing for you guys? And do you expect Windows 8 to catch on at all in fiscal year '13? Or is it just more the secular shift away from PCs and towards tablets?

Ronald L. Sargent

Yes, Anthony. Demos?

Demos Parneros

Anthony, a couple of thoughts on technology for Q4. One is, as we mentioned before, Black Friday has changed, I think, forever as far as stores are concerned. Our -- Black Friday used to be 1 day, as we knew it, and today, it's more a Black Friday week. And in fact, even the weekend before and the weekend after and the online play is completely different. That -- all that said, it's just changed the nature of that business. And for us, it was better online, worse stores. In terms of the specifics, what happened in technology, a couple of quick thoughts: One, consumer tech continues to just suffer, and I'm talking about categories like digital cameras, software, peripherals, GPS devices, et cetera, all those things. You need to go into decline as they eventually go away and customers move on to the tablets and mobile phones. Specifically with respect to PCs, PCs were under pressure in Q4. There was a lot of anticipation and build for Windows 8, as you mentioned, and that really slowed sales down, that in combination with people moving to tablets. And then the Windows 8 release, honestly, was below what we expected. One of the products was introduced. The pro model was introduced just recently to reasonably good reviews and decent sales but definitely below expectations. I would also say that touch product, which really makes Windows 8 a better experience, was scarce in the quarter. And also mobile phones, which integrate the tablet, the PC and phone experience together into really a new platform and a new ecosystem were also slow to be introduced. So we believe in Windows 8, we're excited about it. I like the recent things that we've seen. But it's got to build a little faster.

Operator

Your next question comes from the line of Denise Chai, Bank of America Merrill Lynch.

Denise Chai - BofA Merrill Lynch, Research Division

I just want to know, for the stores that you've closed, have you seen any benefit to sales at nearby stores?

Ronald L. Sargent

Demos?

Demos Parneros

In terms of the store closures, many of the store closures have come late in the year. So the specific list of stores, I'd say, it's too soon to tell. Our experience with store closure as we go through a very careful and thoughtful process is to benefit our stores. Particularly, these are stores that we closed that are end of lease. And obviously, we closed them because we feel like there's a benefit to the network. And so our experience on sales transfer and profit dollar transfer, I would say, has been pretty much right on target to this point. So we're encouraged by our real estate repositioning plan. And our square footage reduction, we feel like we're reducing the square footage that we don't want and it makes our overall network more efficient. That, coupled with our new store format, makes the stores more productive from a margin dollar standpoint. So I'd say it's right on plan at this point.

Denise Chai - BofA Merrill Lynch, Research Division

Okay. So for the stores that you're downsizing this year to 12,000 square feet, what are your expectations for sales retention?

Demos Parneros

Sales retention should be around 95% of what the prior number was, off by a point or 2. That's been our experience. The exciting thing about those stores, though, is that as we take out unproductive areas and obviously reduce rent substantially, that our profit dollars increase in the process.

Denise Chai - BofA Merrill Lynch, Research Division

And just one follow-up. I know you've been asked on dot-com several times now, but I just want to know, what gives you confidence in your high-single-digit guidance in 2013 given that you've already tripled your SKUs and, actually, we saw momentum kind of maybe slowing or really not going anywhere last year?

Ronald L. Sargent

Well, certainly, the start of the new year shows that momentum is growing again. And obviously, we're investing heavily in -- to grow the top line. So I feel like, if we've got a growth engine for the company in 2013, it's really going to be around our delivery business and primarily dot-com, given the trends we're seeing, the customers we're acquiring and the growth we're seeing in the SKU expansion.

Demos Parneros

The only thing I'd add to that is that, with our omni-channel efforts, every single store associate in the country is essentially a salesperson for our expanded assortment. And really, there's no reason for any customer to walk out of a Staples store without the purchase they want, whether they buy it in the store or online now that we've got the availability of the new assortment.

Ronald L. Sargent

And as I mentioned earlier, I mean, our store managers are now incented to drive sales in their trade area, not just in their retail store. So obviously, dot-com's increasingly important. And that's, I think, one of the great values of putting the 2 businesses together and combining incentive plans. So we're -- we feel like our store network team is really going to get behind this thing and drive it this year.

Operator

Your next question comes from the line of Helen Pan, Barclays.

Helen Pan - Barclays Capital, Research Division

Just a quick question on the $150 million in cost cuts for '13. How much of that is coming from vendor negotiations and direct procurement and other buckets?

Christine T. Komola

We haven't delineated specifically, but there is a substantial -- the substantial part that's related to the product cost on -- but the rest, actually, is sprinkled kind of throughout the P&L and it -- and that includes indirect procurement, but it includes things that Demos is doing on the store labor model that he's got within the smaller format. It includes marketing more effectively and efficiently in a lot of places. So it really does kind of fall throughout the P&L.

Helen Pan - Barclays Capital, Research Division

Okay. And then looking out into '14 and '15, do you plan to reinvest all of the cost savings back into the business, as you alluded to for '13?

Christine T. Komola

No. Helen, it's still too early to determine that. We really are focused on making sure we understand what's working, what's not this year. Part of that will be contingent on how things work with all of the different initiatives that we've got going on. But we'll get more clarity as we see this year unfold.

Helen Pan - Barclays Capital, Research Division

Okay. And just a really quick question on the smaller-format stores. You mentioned that you have 200 currently. Do you have a longer-term target for that?

Ronald L. Sargent

So the 200 stores that I mentioned are stores that are just smaller stores. So they're not just new transformational 12K omni-store. Often, we read about retailers going to smaller stores. And I was just mentioning that, based on where our stores are and our experience in multiple formats, that we have become good at this. Our plans are to deploy this model in as many places as we can and, overall, to continue to move towards square footage productivity in any store we have. So whether it's just a straight reduction or a store that we relocate, we want to go with our best practice, which is we believe this omni 12,000 store.

Operator

Your final question comes from the line of Katherine McShane, Citigroup.

Kate McShane - Citigroup Inc, Research Division

I know Europe has been talked about a lot on the call today. And I just wondered, with regards to the store closure strategy, if -- were any of the stores closed at the end of their leases? Or is that really not an option when it comes to Europe? Because I know they're at longer lease times. And going forward, is private label and private brand still part of the equation to bring that to be a more prevalent program in Europe?

Ronald L. Sargent

Well, let me ask Christine talk to the first one. And a few of those were kind of near the lease term, but basically, we tried to get rid out of -- rid of bad stores, is the answer. But let me let Christine answer that one. And then maybe John can talk about his plans in the private label side in Europe.

Christine T. Komola

Great. So yes, Kate, most of those leases are long term. It is hard to get out of them. They have -- the bulk of it is in the U.K., which is the over 6 years on average. And then there are some stores that we actually own that we'll sublease and get rid of. But most of them are long-lease terms, difficult to get out of without taking this right off now. We will, as we go throughout the next couple of years, look as we tighten the lease life, see if we can continue to get out of them. But hopefully, that answers your question. John, do you [indiscernible]?

John Wilson

Yes, with respect to private label, we're going through a major assortment harmonization project across Europe retail, online and contract. And a significant part of that effort is to expand our online offering. Today, that's in the mid 20s to -- on the channel but the mid 20s as a percentage of our sales. And we think there's significant opportunity to expand that. And we're looking at a number of vehicles for that, not just the Staples brand but potentially even a fighter [ph] line and expanding the assortment to adjacent categories, with some of the other private label names we've used in the U.S., Brighton and so forth. So private label will be a significant focus for us going forward.

Kate McShane - Citigroup Inc, Research Division

Okay, that's great. And my last question is, with regards to the free shipping and the 5% off, is that a global program? Are you also initiating a contract in Europe?

Joseph G. Doody

No, [indiscernible]

Ronald L. Sargent

Yes, virtually, all of our contract business ships free anyway because the average order size is -- it's -- tends to be large, and that's part of the negotiated agreement with the customer. This is in the U.S. today. We're looking to see if it makes sense to expand it to Canada and then we'll look to see if it makes sense to expand it to Europe.

Operator

I would now like to turn the call over to Ron Sargent for closing remarks.

Ronald L. Sargent

Well, my remarks are brief. We've done a pretty good job kind of managing expenses over the last few years in a pretty tough economic climate, and now I think it's all about getting the top line going and generating gross margin dollars.

So thanks for joining us on the call this morning. And we look forward to speaking to all of you again very soon.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect, and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Staples Management Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts