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Executives

Ron Sargent – CEO

Christine Komola – CFO

Analyst

Matt Fassler – Goldman Sachs

Staples, Inc. (SPLS) Staples, Inc. at Goldman Sachs Global Retailing Conference September 11, 2013 8:05 AM ET

Matt Fassler – Goldman Sachs

Good morning, everyone. We’re about to get started. Those of you who are outside, if you could just come in and take your seats.

I’m Matt Fassler from Goldman Sachs. It is my pleasure today to kick off the second day of our 20th Annual Global Retailing Conference. We had a good day yesterday. I think we’ll have as good of the day today. We feel very good about the lineup of large, important retailers, quite frankly, that we have at the conference throughout the morning and afternoon.

It’s my pleasure, of course, to introduce to you members of the senior management team of Staples. Sitting directly to my left, Ron Sargent, who’s the Chairman and Chief Executive Officer of the Company. He has been the CEO of Staples for 11 years. And sitting to his left, Christine Komola. Christine is the CFO of the Company. She has been at Staples now for 16 years.

Staples, as you know, is the nation's preeminent office superstore and really the world's preeminent distributor of office supplies and related products. I think its competitive standing is more differentiated today than it has ever been. This is an industry that is currently in a state of flux. The demand drivers are very much evolving and the competitive drivers are very much evolving.

Obviously, there is a merger proposed and underway from the Company's two primary specialty domestic competitors. I would argue that it has many competitors, for better, for worse. And obviously, there is a lot of moving pieces in the industry. And this, along with many other topics, I think we will discuss in our fireside chat. I think Christine has a comment or two before we kick that off, at which point I will begin our conversation.

Christine Komola

I just want to make sure everybody takes note of the Safe Harbor on the screen right now, and then I will turn it back to Matt.

Ron Sargent

Maybe I should start while, Matt, you are looking for your questions.

Matt Fassler

While I try to find my questions, absolutely. That would be – here we go. I could wing it, I think, after 20 years, but will – I don't want to take that chance.

So, I want to start off by talking about the retail business. In my view, you have taken one of the more realistic approaches to the world of thinking about price transparency and trading some short-term profitability to protect long-term market share. And I guess the question there is how far along are you in that adjustment process?

Ron Sargent

Well, I mean, when you look at the Company – and by the way thanks for having us here and thanks all of you for being here today. When you look at our Company, if you were trying to distill our strategy into just a few words, it would be kind of onward to online.

We have been a retailer from the very beginning. We have 1900 stores. Those stores are very profitable with high return. And we think it they are an asset compared to the strictly online players.

At the same time, we are seeing shifts in the business, and whether that’s a paper-based products evolving to technology-based products, whether that’s old technology, like probably PCs, GPS devices, digital cameras evolving to new technology, like tablets and mobile phones, smartphones and others. And at the same time, we’re seeing a channel shift from the retail side of the business to the online side of the business.

So, we have been very aggressive at taking square footage out of our retail footprint. We took about 1 million square feet out of retail space last year. We’ll take another 1 million out of this year. That’s about 3% of our square footage. So, I think there is two things we are doing.

One, we’re closing anything that is remotely marginal. We are downsizing stores aggressively as they come up for lease renewal, and we get about 225 stores come up for lease renewal every year. We don't own any of our stores. And I think that is a direction we’re heading on the retail side.

At the same time, we have those 1900 stores. We are trying to certainly in our online efforts make those stores much more kind of customer-centric. You hear buzzwords multichannel and omnichannel, but really it’s customer-centric stores that we are trying to create. We have 7000 SKUs in our stores, but I think we’re going to be making them and have already made a lot of progress making them much more kind of accessible to not just the 7000 SKUs that we have in the store, but to the now 150,000 SKUs that we offer online. And I think that will be growing to about 300,000 later this year.

There are some things you can do in stores that you can't do online. And I’ve talked to a lot of our online competitors. And some of them are even a little envious that we have people to explain things, that we are able to offer service and services that maybe you can't get online. So, we’re not getting out of the retail business; we are embracing the things that make us special and different and recognize the fact that we have a lot of stores.

But we will have probably fewer stores. We’ll probably have fewer square footage in our footprint. And we’re also kind of waiting to see if there is going to be any store closures as a result of industry consolidation between OfficeMax and Office Depot.

Matt Fassler – Goldman Sachs

If I could follow up on one of the comments that you made. You talked about the changing technology mix in the business. Could you talk about how you’ve adapted your selling processes and your in stock and anything you have done to sort of recognize? You talked about digital cameras to tablets and PCs, et cetera. How are you evolving the way you approach technology in your stores?

Ron Sargent

Well, basically, we think technology is a key part of our product mix. We don't think that’s going to change. But technology changes quickly and we have to evolve quickly to respond to that.

So, at one point, I think PCs were about 9% of our total sales. Today, PCs are about 3% of our total sales and declining virtually every quarter. That’s being replaced by two things, really. Tablets, which are growing dramatically and I think we will be passing our PC volume in the not-too-distant future.

I think the other one is smartphones. And we started out with smartphones in 500 stores. We will now be expanding that to 1000 stores here in the next six, eight weeks or so.

But technology is changing, and things you used to buy as a single thing, like a GPS device or a digital camera, I mean, that’s all being done on your phone. And some of the technology products, things like boxed software, I mean, that’s coming down from the cloud.

Our second best-selling SKU at one time was a four-drawer file cabinet and now I have one of those on my keychain. And I remember trying to explain to my two sons about a Rolodex, and they thought it was hilarious the fact that we had cards that you put on wheels to kind of stay in touch with people, and that’s being replaced by smartphones as well.

So, we’re always kind of evolving. We’re taking space out of the things that aren't growing. We’re adding space to the things that are growing.

Matt Fassler – Goldman Sachs

On smartphones, it is a category that I would argue is at the same time exciting, because of everything you just said, and a little scary because retailers of smartphones are somewhat ubiquitous. Every mall has a lot of kiosks, lots of your competitors, et cetera. It’s a business that I think you were in a while ago, walked away from. Now, you are back in; it seems like you are getting in a bigger way.

What does one do to differentiate oneself and to execute in a pretty crowded field in that regard?

Ron Sargent

Yes, I think 10 years ago, when we had cellular phones, it’s taking us a long time to kind of light up a phone. I think we realized that that device is going to be so important to our future that we had to be there. And virtually it’s all incremental sales. I mean, we have millions of customers go through our stores every week, and many of those people are looking to upgrade their phone, buy a phone.

Pricing is virtually the same as anywhere you will see anywhere else. And I think we’re doing a pretty good job expanding selection and we hope to expand that selection even further. But yes, I mean we have changed the process. We’re outsourcing it. Now, we’re bringing that in-house. And I think we are pretty happy with the direction we’re heading in smartphones.

The other thing that I think is important – and I've pulled out a stat – is mobile phones and how mobile phones are going to not only be important to sell, but how they’re kind of changing the shopping experience. And when you look at our revenue growth from mobile phones, in the second quarter, we’re up 88% in revenue generated by mobile phones. Period seven, we’re up 103%. And year to date, we’re up 64%.

So, I think that traffic is really the thing that we offer. Obviously, we offer people who can help you, we offer service, but you can get that a lot of places.

Matt Fassler – Goldman Sachs

So, you actually opened the door to a couple questions that I want to jump into. You mentioned omnichannel, I guess, is a buzzword. But clearly one of the themes from retailers, and actually from a private equity panel we had up on this very stage yesterday relates to the inevitable interaction of stores with online and the store as an asset.

There are a number of sort of cookie-cutter tactics that are made available to consumers – buy online, pick up in-store, retailer shipping from store. You obviously have a very well-developed delivery business, better than almost any other retailer. We will talk about that, I think, separately. But can you talk about that integration of the online effort with the store-based retailer?

Ron Sargent

Sure. I mean, again, we’re – we think customers are going to look to Staples as a lot broader than just a place to buy paper-based office supplies. And in order to do that in the space we have, we have to rely heavily on our online assets. As I said earlier, the approach is really onward to online.

And I think we’re terrific at picking, packing and delivering products next day for free. Where I think we’re spending all of our time and all of our assets and all of our energy on is really improving the user experience when they go on our website, because we’re not competitive compared to the best-in-class online player.

We’ve hired a chief digital officer. That person has built a team. We have opened a facility in Cambridge. I think we’ll probably be opening a facility on the West Coast. But the capability to do things like predictive analytics, we’re behind in. The area of dynamic pricing, we’re behind in. So, those are the areas where we’re really spending a lot of energy and money to get better at.

We have the customers. We have trained our associates to sell not just office supplies, but the entire selection of things that we offer. We have opened eight or nine what we call the new omnichannel store, about 12,000 square feet. We’re still tweaking it, but I think we’re making some progress there.

We’re equipping associates with devices in-store, where they can look up not only anything that we would offer, but if they want to compare pricing with anybody online, to see if they’re getting the best price, those sorts of things.

Christine, anything you want to add?

Christine Komola

Just add that to your point, Matt, we do actually have a lot of capabilities just in terms of the connection in-store to the online business. So, right now, we’re really encouraging our in-store associates to help customers just to try the online business, which means we have actually changed our bonus structure, so the in-store team actually is bonused on online sales. And that’s really encouraged them to get onto the website and help customers on the website.

And to your point, we’ve actually kind of really reinvested in what we call kiosk sales. We’ve reinvested in reserve online, pick up in the store. So, just a lot of things to get our retail customers, which we have obviously a tremendous number of them, to actually just try the website and to start engage them and hopefully continue to keep them sticky.

Ron Sargent

Yes, omnichannel sales were up about 47% in the second quarter.

Christine Komola

Yes.

Ron Sargent

That is a small base, because kiosk sales were less than 1%. But when you look at things like copy and print, that was a very small business at one point, and now it’s one of the fastest-growing and biggest parts of a single category in our store.

Matt Fassler – Goldman Sachs

As we think about digital competencies and we think about online, customer data, what we think is paramount, using customer data is paramount. You have had a loyalty program for a while. Your loyalty program has evolved. Can you talk about its latest iteration and how you are deploying it in your pursuit of share?

Christine Komola

Sure. So, we do – we’ve got our loyalty program as 25 million customers, and it’s been a hallmark since the beginning of Staples.

Right now, we have changed – this is the first year, just started in March, so customers have 5% off all products. And so far, it’s gone well. It’s still early stages, but there’s been upticks on the customer account and average order. It’s early to see how dramatic it actually changes year-over-year, but we’re very encouraged by the signs that we see so far.

Matt Fassler – Goldman Sachs

Great. I want to talk for a second as we’re at retail, and then maybe just a couple of other big-picture business questions. The cadence of back-to-school, you’re – we always ask this question of your company and your peers at this conference, because back-to-school is kind of beginning to wrap up.

Ron Sargent

Sure.

Matt Fassler – Goldman Sachs

You spoke about it a bit on your conference call in August. Any thoughts on the cadence this year versus prior years?

Ron Sargent

Sure. I think back-to-school – it seems like it starts later every year. When you look at our July sales, pretty much nonexistent, and in previous years, we expected to do a little better in July. I think things started to pick up in August, and these next two weeks are our two biggest back-to-school weeks.

We’re heavily concentrated in the Northeast. And when you look at back-to-school in the Boston area or the New York area, that’s really occurring right now.

I think one of the advantages we have over maybe some of the mass guys is they’ve quickly moved on to the next promotional season, Halloween. We do a lot of business even after school starts, and I think we’ve probably got until September 25 to note.

In terms of back-to-school, I don't think this is a booming back-to-school. I think it’s going to be more of a flattish back-to-school for us. We expect it to be up just slightly, but I think we’re probably going to be in more flat kind of mode for back-to-school.

Matt Fassler – Goldman Sachs

Okay. And the promotional environment within that sales performance?

Ron Sargent

The promotional environment really hasn't changed much. I think maybe some mix has changed. PCs aren't selling nearly as well as they maybe have been in previous years. So – but office supplies have held up very well, and again, that is where the margin is.

Matt Fassler – Goldman Sachs

I want to touch base for a minute on the international business. Can you talk about where you see the end game for your retail business? Obviously UK, Germany are the two biggest businesses; you have some other significant businesses. If you look three years out, what do you think this footprint looks like for you?

Christine Komola

Retail is definitely not the primary driver in Europe. So, we closed about 15% of our stores, the real dogs, last year. Right now, John Wilson, who leads the charge over there, has been kind of really prioritizing where our growth is. And retail is the one that we are de-prioritizing, quite frankly. So, we are focusing on the online business over there.

We’ve just launched a new platform, basically taking our Quill platform, launched it in Spain this weekend, and changing the whole way we actually operationalize that business. Contract is the other significant business over there, where we’re investing in sales force and kind of really making sure that we drive that piece of it and have the best service that we can for our customers. And then, the retail side, it is basically making sure we service the customers, we take care of them, we have the right product. But it is deemphasized and is not getting a tremendous amount of capital.

They are – the stores that are left are making money. They are covering basically their cost of capital. So, we feel like the store mix is probably about as good as it can get there right now. We don't plan to open new stores or close it any further than we have.

Matt Fassler – Goldman Sachs

So, those of us who remember John Wilson from when he was with you...

Christine Komola

Yes.

Matt Fassler – Goldman Sachs

And when he was with the Gap know he is a tenacious manager.

Christine Komola

Yes, he is.

Matt Fassler – Goldman Sachs

Can you talk about the changes that he is trying to implement more broadly in the European marketplace for you?

Christine Komola

Sure. So, John has been over there since about – a little over – maybe a little over a year now. And he has driven tremendous amount of change. He’s really focused the team on taking costs out of the business. It’s obviously an extremely difficult economic environment, so he has actually leveraged that.

So, he’s taken out 1000 heads. He’s put together a plan, which consolidates the operations, which we will start to execute next year. But he’s already started it with things like product assortment. So, he has driven basically the need to have kind of one, common assortment across all of our businesses in Europe, which basically consolidates probably 70% of our SKUs.

What that’s enabled us to do is get an amazing amount of buying synergies. So, he’s hammered our vendors hard. It’s also enabled us to really kind of put forward a plan that consolidates kind of the key merchandising and marketing, so each merchandise marketing team is not built up in each little individual country, building their own little fiefdom (ph), creating their own incremental SKU plan. So, he’s put together a plan to take out that overhead and that G&A and leverage that across Europe as well.

So, that’s just one example, and I think that has been a big benefit for this year, and you’ll see that in the second half of the year as earnings start to really come together now that his plan is in place. So, those are just a couple of examples where he has driven change that has been very difficult to get done from here. It’s just…

Ron Sargent

And really, John is a force of nature. I mean, he joined us last September. And the ability to make bold decisions, hard decisions has really started to pay off.

We lost money, I think, in the first half in Europe, and I think we will make up that loss in the second half, and in fact, end the year making some money in Europe. So, I don't think Europe is a drain on us. And I think some of the changes he’s made imply that Europe is going to get much, much better.

He was at our Board meeting yesterday, and he was talking about his kind of bold plan for Europe over the next couple of years. He also mentioned that he has moved his family to the Netherlands. His kids are in school, and he’s riding a bicycle to work and home every day in the rain.

Christine Komola

That alone is comical to think of.

Ron Sargent

But, no, John has really made a big difference for us there.

Matt Fassler – Goldman Sachs

Great. I want to talk for a moment about the delivery business, obviously the third and very critical piece of the business.

First of all, perhaps the structural demand environment. As you think about the moving pieces in terms of paper that you discussed earlier, can you talk about the tools that you have at your disposal to combat that in delivery relative to other parts of your business?

Ron Sargent

Yes. When you look at our delivery business, it’s composed of Staples.com and Quill.com, which is really the public online business. At the same time, it uses all the – virtually the same infrastructure in our contract business.

When you look at the changes we have begun to make under Faisal Masud's leadership, and Faisal comes to us from eBay, Groupon, Amazon and many of the great e-commerce companies, we’re starting to get some traction. I mean, we were – in our online business, Staples.com, I think we’re minus one in the fourth quarter. We were plus 3 in the first quarter in terms of top-line growth. We were plus 4 in the second quarter in local currency. And I think that’s going to accelerate next quarter and the quarter after that and the quarter after that.

So, I feel like – Faisal talks about the low-hanging fruit, and I’ve been kind of encouraging him to pick some of the low-hanging fruit quickly. But I think he has a – he’s very excited about what we do have and he’s very excited about the opportunities of the things that we don't have. And I think his team will be making some of those changes.

In the contract business, we’ve got basically two big competitors, Office Depot and OfficeMax. Our contract business is growing in the, I think year to date, around 2%. And we think that’s going to accelerate throughout the year as well, as our two competitors come together, assuming they do.

So, I think many of the things we’re doing, whether it’s making website functionality better, whether it’s expanding the assortment. All of those things are going to allow us to drive delivery growth much faster than we’ve been able to drive retail growth because we’re kind of disappointed in our retail top line. It was minus 3 comp, I think, last quarter.

Matt Fassler – Goldman Sachs

If you think about pricing on new contracts and competing for new contracts, this seems to be one area, where the industry might be in the most disarray, presumably to your advantage now and maybe even over time. And I know that winning new business in this space has been very hard, because you sort of need to shock your customer with your pricing structure. And you have been pretty disciplined in general.

What is the environment now? Are your competitors compensating? Or are they backing away? And what does it take to win a new contract?

Ron Sargent

Yes. The – first of all, the majority of our contract business is in the midmarket, where it’s kind of easier to get accounts, it’s easier to lose accounts, and those are – tend to be very profitable accounts.

I think the area where you have the most pricing pressure is probably in the largest accounts, the Fortune 100. I think today, we have 66 of the Fortune 100. I have the list of 34 on my wall on my office that we don't have. And so, I keep that pretty close, because I want to get the rest.

But in terms of pricing, you know, it’s always going to be aggressive. The biggest companies always buy everything very well, and I don't think that’s going to continue.

What they do care about though is service. And to the extent that nothing has happened at this point, there’s really no reason to change. Many of these are in kind of multi-year agreements and contracts.

But I think if service changes, I think people will be looking for a place to go. We know how hard it is to integrate a contract business because we bought Corporate Express in 2008 and integrated it incredibly carefully.

I think in the event there is an industry merger, I think there will be disruption from integrating a contract business, a retail business, an online business and a corporate office.

Matt Fassler – Goldman Sachs

There are three questions we’re asking every company at the conference, and I’ll ask you some form of them.

The first is as you think about the second half of this year and the environment in which you expect to operate – I guess operating now and expect for the rest of your fiscal year, how would it compared to the environment that you saw in the second quarter?

Christine Komola

You know, from us, the external environment, I don't see dramatic changes. I think it will – kind of ebbs and flows and I haven't seen a big change.

I do see good momentum in our business that we control. So, as Ron said, Faisal and the online business, I absolutely think that will continue to drive sales growth over time, and it will definitely be better, which obviously will help the bottom line.

I also think that the retail, albeit a negative 3, we’re not expecting to be significantly, dramatically up, we do see a sequential improvement there as well. And as Ron said, I think on the European front, I think the bottom line will continue to improve. John Wilson has great momentum going in that arena.

So, within the context of our guidance that we have given out, I think that things will continue to sequentially get better and we will drive everything that we can to make sure that that happens.

Matt Fassler – Goldman Sachs

And any initial thoughts less about your guidance per se and more about the world in which you'll operate for ‘14?

Christine Komola

‘14 is still early. We’re just starting. As Ron said, we just started our strategy and our budget planning kickoff. So, we – I think that we’ll get back to you guys. And as we think about it going forward, there will be good momentum.

I think things that we’re putting in place around our strategy and the transformation work that we’ve done continues to take momentum, whether it’s the SKU assortment, the online kiosk driving the customer's assortment. You continue to see good traction in all those areas. So, I think I am optimistic about the future that we can kind of manage to.

Matt Fassler

A second question relates to profitability, and it’s kind of a directional question. If you think about your operating margin and you look at the next 12 months, so it sort of encompasses half of this year, half of next year – thinking about direction. And it’s a pretty relevant question for you, I think, because you have made the decision to invest and to take your margin down. I know you’re not hoping for it to be down, but you’ve guided for it to be down…

Christine Komola

Yes.

Matt Fassler – Goldman Sachs

For at least a part of that horizon. What do you think the direction generally will be?

Christine Komola

Yes. I think it’s – we did bring guidance down. We wanted to make sure that we could continue to invest in the right areas, and I think that’s important for us. And obviously, the investments that we do, we expect to pay off within a reasonable time period.

So, I think we have got good momentum. We‘ve also got things, which we are all very happy about, is getting rid of our bond that’s paid – that we’ll pay down, which is 9.75% rate.

We’ll pay that down, and that‘s obviously got pretty significant momentum for us, helping us into next year. So, some of that will also help. So, I think between the investment momentum and things like the interest momentum, it’s encouraging.

Matt Fassler – Goldman Sachs

And then, the final question I'd ask relates – on this front, relates to capital allocation. Again, pretty germane…

Christine Komola

Yes.

Matt Fassler – Goldman Sachs

Because it is a dynamic process for you. If you think about investing in the business, you think about dividend…

Christine Komola

Yup.

Matt Fassler – Goldman Sachs

Buyback, deleverage, which clearly in the very short run is a part of your…

Christine Komola

Yup.

Matt Fassler – Goldman Sachs

Thought process, how do you prioritize?

Christine Komola

We first prioritize into the business. So, that’s always our first priority. That’s our quickest return and that’s why we do that.

Dividend, we just – we will continue our dividend program and we basically grow that over – as earnings grow, we manage it that way. And then, the buyback is our program that we manage with our excess cash.

And right now, we don't see any major shifts in where we are. So, we have dividend of about $300 million this year. We don't see any dramatic shifts going forward. And then, our buyback program will probably be close to the same. Right now, we’re about $300 million planned for this year. We will see how that goes. Obviously, we’re buying more now, given our stock price is low, which is just something we want to take advantage of.

Matt Fassler – Goldman Sachs

Great. I have some more questions, but I want to give the audience a chance to ask. We already have a hand up, and we have roving mics, so please go ahead.

Question-and-Answer Session

Unidentified Speaker

Thanks, Matt. Thanks, Ron and Christine.

I just had two questions. I know historically, private label has been a big source of profitability and margin expansion. Could you share with us broadly how much private label is as a percentage of revenue today, and estimate what that could be five years from now and what the margin contribution is?

And then, given your now global presence, could you share with us your thoughts on the small and midsize business consumer across your key regions? Because I know that’s critical to your future growth. Thank you very much.

Ron Sargent

Thanks, Yumi (ph). Are you talking about the health of mid-to-small business? Okay.

First of all, private label. And we call it own brand, because it’s not just Staples brand, but it’s also Quill brand and, increasingly, I think you’ll be seeing a group of Fighter brand SKUs, which are lower margin. I think they’ll be frankly lower quality, but will have terrific price points.

The private label today, depending on how you count it. Different people count it differently as – for example, the copy center, is that private label? Or is it not?

I tend to look at kind of physical product, and it’s probably in the 23%, 24%. Some parts of our business higher, higher-end delivery, a little lower in retail, higher in North America, a little lower in Europe.

So, we think there’s some opportunity, and private label will be a key part of the growth strategy going forward. We feel like it’s already our number one vendor, accounting for a huge part of our business, but we think there’s more to be done there.

So, I think when you look at some of the initiatives, whether it’s Fighter brand SKUs, whether it’s making our product a little more fashionable. And you can see that there are some other competitors who are out there selling more fashionable office supplies. We’ll be doing that as well.

What should the number be?

It should be 30%. And when you convert from a national brand to a private-label brand, historically on basic office supplies, we’ll pick up 1000 basis points. So, 10 percentage points is kind of what we’re seeing.

We‘ve wrestled with some categories. Do you need national brands at all?

Envelopes, for example. We’ve pretty much have 100% share of the envelope category. And there’s other categories like that that we think the Staples brand is every bit as strong as the national brand.

In terms of the next question, small and medium-size business health.

Christine Komola

I would say it’s been – it shows signs of encouragement, I think, especially in North America, but it’s still difficult to get credit with these small business customers, so you see kind of a lot of ups and down, although the ups and downs have probably narrowed.

I think if you think about it globally, Europe is under a tremendous amount of pressure. Unemployment in the various countries ranges from, I would say, 30% in the South to a lesser extent, maybe 9%, 10% up North. So, I think Europe is definitely behind and under a lot more pressure.

And I think you start to see it now in places like China. Australia is feeling somewhat of the pressure as well, based on the China environment. So, albeit those are much better than here, I think it’s still moving slowly upwards.

Ron Sargent

And even in this country, we’re still 7.3% unemployment. And prior to the great recession, we were probably more in the 4%s and 5%s. So, a lot of people still not working; this recovery has not been a terrific recovery.

Christine Komola

And then, I think even for us, it’s been difficult because where categories and where businesses are actually coming backwards, mining, construction, not white-collar. And I’m sure many people in this room have felt that over many years themselves. So it's difficult.

Matt Fassler – Goldman Sachs

Other questions from the audience?

Next question I want to ask you relates to store format. The industry's optimal format seems to have been getting smaller. It seems like you’re able to do more with less. From a footage perspective, there have been wildly varying accounts of what the productivity looks like by company. Your stores are not so different from one another that the numbers could actually be that different, in my humble opinion. I’m interested in what you think the right box is, and as you talked about mixing out your lease expirations and you re-create the chain in the image of the optimal box today, what that box looks like.

Ron Sargent

We think the number is 12,000 square feet. Historically, we’ve been opening – at one point, we opened 23,000 square foot stores, then it was 20,000 and then the prototype became 18,000. Then, I think over the last few years, we‘ve realized that the things we are selling take up less space – the file cabinets to flash drive example.

So, we think 12,000 is the number. We don't have hundreds of these. We have less than 10. We have retained 95%, 96% of the sales previously.

In Norwood, Massachusetts, the biggest comment that we get is, “Your store looks so much better now that you have expanded it.” And that store went from 24,000 square feet to 12,000 square feet. So, it looks bigger, it feels bigger, it’s much lower-profile.

And if you can take out half your rent and you can kind of allocate the products that are selling better and if you can become omnichannel and present services in the right way, you should pick up 200 to 300 basis points on the bottom line going forward with these stores. We’ve got some stores that are doing over 100% of what they were before we remodeled them.

So, whether that is 12,000 square feet, as we think, or 5000 square feet, as we have heard from Office Depot and OfficeMax, time will tell that out. But 5000 is really a small space to sell office products.

Matt Fassler – Goldman Sachs

And if you have a lease expiration, relocate it to a 12,000 square foot store, what is the ROI on the process of making that move?

Ron Sargent

I mean, we look at every investment the same way. We get kind of a cost of capital and then a couple hundred basis points. Above that is our hurdle rate. And we make every decision on whether we think it is better to keep the store open or close it, whether it’s to keep it open or remodel it.

And then, you’ve got the other ingredient, which is landlords. So, in many cases, landlords don't want to lose you and they will help you kind of reduce the size of your space. In some cases, you might want to relocate to a smaller box that‘s already up and existing. And in some cases, you might have a great store that’s 20,000 square feet, the landlord knows it and you know it. And you may say, “Thank you very much, I am going to renew as is because it is a wonderful store. “

So, every one of those, we have like 200 decision points every year, but the trend is we got to get smaller and less square footage.

Matt Fassler – Goldman Sachs

Okay. There’s one other question I want to ask, and that is to dig a little bit deeper into industry dynamics, as this merger most likely becomes a reality, as sort of who's been asked the question? What changes might you anticipate in the operating environment for Staples as a result of this consolidation, which has been long-anticipated, and I think none of us would disagree, much-needed?

Ron Sargent

I mean, I think our strategy is onward to online. And I think our strategy will stay the same whether the Federal Trade Commission kind of allows the merger or not. Obviously, we’ve done a lot of contingency planning and a lot of modeling to see kind of what this means to the industry in the event it does happen.

But I think in the event the merger is approved, then I think there’ll probably be fewer stores. There’ll certainly be no more three-player markets. And in some cases, there’ll be one-player markets, which may present some opportunity as the second player in. St. Louis – I was there a few weeks ago – and I think there’s probably room for a second player, but probably not for a third player, for example.

And I think there will be disruption, because anytime you integrate two big companies, two different locations, a new CEO, and all of the channels and systems that go into that, I mean, I think that’s disruptive and we hope to take advantage of that. But I think we do need to take some capacity out of the industry, primarily on the retail side, if you ask me.

Christine Komola

Yes, I think that sums it up. I do think – and I also think it’s a good opportunity internationally for us to continue to pursue the disruption, because they will be distracted here in the US as well.

Matt Fassler – Goldman Sachs

Okay. A couple of things before we break.

First of all, I do want to acknowledge today is September 11. It is 8.44 a.m., and I think it’s appropriate for all of us to acknowledge that fact and that reality. Secondly, this session will continue by way of breakout in the Rendezvous Suite.

Next up in this room, we have McDonald's. In the Terrace Room, we have Five Below.

Please join me in thanking the management of Staples for their remarks. Thank you.

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Source: Staples, Inc. presents at Goldman Sachs Global Retailing Conference (Transcript)
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