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Staples (NASDAQ:SPLS)

Q4 2013 Earnings Call

March 06, 2014 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 Executive Vice President

Demos Pameros - President of North American Stores & Online

Shira D. Goodman - President of North American Commercial

Joseph G. Doody - Vice Chairman

Analysts

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

Aram Rubinson - Wolfe Research, LLC

Christopher Horvers - JP Morgan Chase & Co, Research Division

Michael Lasser - UBS Investment Bank, Research Division

Adam H. Sindler - Deutsche Bank AG, Research Division

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

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

Gary Balter - Crédit Suisse AG, Research Division

Gregory Hessler - BofA Merrill Lynch, Research Division

Priya Ohri-Gupta - Barclays Capital, Research Division

Daniel T. Binder - Jefferies LLC, Research Division

Joseph I. Feldman - Telsey Advisory Group LLC

Operator

Good day, ladies and gentlemen, and welcome to the Q4 and FY 2013 Staples, Inc. Earnings Conference Call. My name is Allison, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Mr. Chris Powers, Vice President of Investor Relations. Please proceed, sir.

Chris Powers

Thanks, Allison. Good morning, everyone. And thank you for joining us for our fourth quarter and full year 2013 earnings announcement.

During today's call, we will discuss certain non-GAAP metrics and comparable period measures, excluding the 53rd week in 2012, to provide investors with useful information about our financial performance. 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 and other calculations of financial measures that we use to analyze our business. I'd also like to remind you that certain information discussed on this call constitutes forward-looking statements for the purpose of the Safe Harbor provision 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 are: Ron Sargent, Chairman and Chief Executive Officer; and Christine Komola, Chief Financial Officer. Also joining us are: Joe Doody, Vice Chairman; Demos Parneros, President of North American Stores & Online; Shira Goodman, President of North American Commercial; and John Wilson, President of Europe. Ron?

Ronald L. Sargent

Thanks, Chris, and good morning, everybody. Thanks for joining us today. This morning, we reported our results for the fourth quarter as well as the full year 2013.

Total company sales for the fourth quarter were $5.9 billion. That was a decrease of 11% versus Q4 of last year, when we had an extra week in the quarter. If you exclude that extra week, as well as the negative impact of the stores we closed in the 12 months before Q4 of this year and the stronger U.S. dollar, total company sales were down about 2% year-over-year. We reported earnings of $0.33 per share from continuing operations.

We're certainly not happy with our fourth quarter results, but we are making progress as we reposition Staples as the destination for every product businesses need to succeed. A year ago, we announced that we were going to fundamentally reinvent our company for the future. This is essential. Our customers are using less office supplies, they're shopping less often in our stores and more online and the focus on value has made the marketplace even more competitive.

Last year, we set 7 goals to measure our progress. Our first priority was to accelerate online sales. Second, we wanted to expand our assortment to serve business customers in categories beyond office supplies. Third, we wanted to build scale and credibility in adjacent categories in our commercial business. Fourth, we wanted to drive sustainable growth in copy and print. Fifth, we wanted to streamline our European operations and generate a profit for the year despite continued pressure on the top line. Sixth, we wanted to eliminate $150 million of cost to fund our growth initiatives. And our final goal was to improve retail store productivity.

Well, during 2013, we achieved 6 of our 7 goals. But we're still not satisfied with our performance. We didn't improve retail store productivity, and we also saw weaker-than-expected sales trends in core office supplies across the business. Before we get into our business unit results, I'd like to just take a minute to talk about what we did get done in 2013 and the areas where we came up short of our plans, as well as our key priorities for 2014.

Starting with online sales. Staples.com sales in the fourth quarter were up 10% in local currency, excluding the extra week from last year. This compares to a 4% growth that we saw in the first 3 quarters of the year. This momentum was driven by higher traffic, higher conversion and a very strong technology sales during the holiday season. We're also helped by our supply chain infrastructure that offers free next-day delivery to over 95% of customers in North America. Today, about half of Staples' global sales are coming in through our public and commercial websites.

Turning to assortment expansion. We started the year with about 100,000 items on Staples.com, and many of these were office supplies. We ended the year with over 500,000 products online, and we're just getting started. Today, more than 80% of our sales on Staples.com are to business customers, and we're becoming more relevant every month. We've added new products in areas like business technology, furniture, facility supplies, safety supplies and many other categories. And we also launched a wide assortment of products to serve industry verticals, like restaurants and retail stores. The good news is that we're building scale beyond office supplies and we're becoming more credible with our business customers.

During the fourth quarter, we relaunched our brand with our new Make More Happen campaign, which has received very positive feedback. At the end of Q4, our expanded assortment on Staples.com, staples.ca and quill.com were driving over $4 million in sales per week compared to about $1 million in sales per week at the beginning of the year. The assortment is also driving close to $1 million of sales per week with our mid-market contract customers.

The reinvention of our $7 billion contract business in North America is right on track. Throughout 2013, we drove solid growth in categories beyond office supplies, which offset weakness in the core. Our new team-based selling model has received positive feedback from our customers. And based on our early success, we recently rolled out a similar concept in the mid-market with the addition of 100 new business development sales associates who are selling in a more unified and collaborative way. I'm also pleased to report that late in the year, Staples won the opportunity to serve as a wholesale partner for Guy Brown, which is one of the largest diversity suppliers in the country. While this relationship is going to take some time to build, this is a very large strategic opportunity that will help to offset some of the pressure in core office supplies over the coming years.

During Q4, we also announced changes to our North American Commercial leadership. After 15 years leading our commercial business, Joe Doody has taken on the role of Vice Chairman. In his new role, Joe will lead our reinvention work and have responsibility for strategic planning, business development, as well as our businesses in Australia and New Zealand and high-growth markets. Shira Goodman has taken on the role of President, North American Commercial. Shira has led our reinvention over the past year and will be a great asset as we continue to drive growth in categories beyond office supplies in the commercial business. I'd like to congratulate both Joe and Shira, who are here today, and wish them the very best in their new roles.

Turning to copy and print. Sales in North American Stores & Online were up in the mid single digits in 2013. We continued to build momentum in copy and print online, at our retail stores and with our outside sales force. Many small and medium-sized businesses spend more on copy and print than they do on office supplies, and Staples is best positioned to meet the needs of those customers. We have an unmatched omni capability in copy and print. We've recently combined our retail and mid-market contract sales forces to aggressively pursue this opportunity. Our lead generation is better. We're driving incremental traffic to our stores, and we're better leveraging our online capabilities to accelerate growth in this high-margin business.

Throughout 2013, we also made good progress on efforts to reduce expenses and improve the productivity of our business. At the beginning of the year, we committed to driving $150 million in gross savings. We surpassed this goal, and we achieved over $200 million of cost reductions for the year. We reduced product costs. We streamlined our retail and contract organizations. We reduced overhead, eliminated nonproduct-related expenses and outsourced lower-complexity tasks.

In Europe, we also took aggressive action to right-size our cost structure throughout 2013. While our sales trends remained tough, these actions are showing up on the bottom line, and we generated a profit in Europe for the full year. We reduced headcount and nonproduct-related costs, consolidated operations and streamlined our pan-European assortment. We also drove efficiency and an improved customer experience with the rollout of our quill.com platform in Spain, in Germany and in the Netherlands.

Another one of our top priorities was to improve retail store productivity. During 2013, we reduced our retail footprint by more than 1 million square feet through 40 net store closures and 40 downsizes and relocations. We also developed a new 12,000-square-foot store. We now have about 30 of these new stores in operation, which continues to retain over about 95% of sales. Over the past year, we learned a lot of valuable lessons, and we built a stronger foundation to accelerate growth. But our progress has not been fast enough. It's clear that we underestimated the headwinds that we're facing in our retail stores as well as demand for core office supplies. We're holding ourselves accountable. And as we enter 2014, we're addressing our biggest challenges head-on. The performance of our retail stores has consistently fallen short of our expectations over the past few years, and we continue to see customer demand shifting online. As a result, we will take more aggressive action to right-size our retail footprint and create an organization that is better positioned to respond to the changing needs of our customers.

This morning, we're announcing that over the past -- the next 2 years, we plan to close up to 225 stores in North America. While we don't take this decision lightly, we know it is the right thing to do for the long-term health of our business as we become more efficient and increase our focus online. Now I want to make it clear that we're not getting out of the retail business. Our stores are an important differentiator versus the competition. They are a key part of our omni-channel strategy, and we know customers appreciate the convenience and service stores provide. That said, stores have to earn the right to stay open, and we are committed to making tough calls when it's necessary. We remain intensely focused on improving the productivity of our retail stores. Based on very strong early results, we're accelerating store relocations and downsizes to our new 12,000-square-foot format in 2014, and we're making additional investments to enhance our omni-channel presence in every store.

We're also evolving our stores to build scale and credibility in new categories. During the fourth quarter, we added iPad in over 900 of our U.S. stores. And starting next week, we'll kick off our program to eliminate more than 1,100 unproductive office supply SKUs in our stores. We'll replace these with more productive categories beyond store supplies, like cleaning and breakroom, storage, retail storage supplies, mail and ship supplies, facility supplies, early education products and office gifts. We're remerchandising more than 100 stores every week, which puts us on track to complete the U.S. chain by mid-June.

In summary, over time, we'll have fewer stores, our retail format will be smaller and more productive, we'll continue to increase our mix of copy and print and mail and ship services and our assortment will be more relevant to our customers. We're also developing a multiyear plan that focuses on aggressively reducing costs and changing the way we do business. We expect to eliminate approximately $500 million of annualized cost over the next 2 years with about $250 million coming in 2014. Our biggest opportunities this year are related to supply chain, retail store closures and labor optimization, nonproduct-related services, IT hardware and services, as well as marketing services. We're also kicking off projects to drive savings across our contract sales force and customer service organizations, which will be key contributors to our cost reduction in 2015.

In addition to our plans to reduce cost and improve store productivity, we plan to build on many of our early reinvention successes in 2014. We'll drive customer acquisition and retention by further improving our desktop and our mobile websites. We plan to triple our assortment and exceed 1.5 million items on Staples.com over the next year. We'll introduce several new omni-channel capabilities. We expect to grow the commercial business in categories beyond office supplies. And in Europe and Australia, we'll remain focused on driving profit improvement and further stabilizing top line trends.

Now let's take a quick look at our Q4 results for each of our business units, starting with North American Stores & Online. Sales for the fourth quarter were $2.9 billion. That was down 12% compared to Q4 of last year. If you exclude the impact of the 53rd week, as well as the 63 stores we closed in North America during the 12 months prior to Q4 and the negative impact of the stronger U.S. dollar, sales declined approximately 3% year-over-year. Fourth quarter same-store sales, which excludes Staples.com, declined 7%. Customer traffic was down 6% and average order size was down 1%. The holiday shopping season started off about in line with our expectations. We had a solid performance on Thanksgiving as well as Black Friday. However, promotional activity in traffic-driving categories, like computers and tablets and mobile phones, they increased dramatically throughout the shorter holiday season and we decided not to chase the competition.

We were also negatively impacted by unfavorable weather during some of our highest-volume weeks in Q4. And as a result, same-store sales declined in the double digits during December. And while technology, hardware and accessories only make up about 1/4 of our retail sales, these categories drove about 1/2 of our Q4 comp decline in North America. We were also negatively impacted by the fact that we did not have Apple hardware in our U.S. stores during the holiday season. Over the past few years, our relationship with Apple has continued to evolve. And as I mentioned earlier, we now have iPad in more than 900 U.S. stores. We're very excited to add iPad to our assortment, and we believe that it enhances our competitive position as the technology authority for small business customers. During the fourth quarter, Staples.com sales grew over 10% in local currency versus the prior year, excluding the extra week. This growth was supported by increased customer traffic and improved conversion as our improved site experience and expanded assortment continue to build momentum.

Taking a closer look at category trends for North American Stores & Online during the Q4. Growth in facilities and breakroom supplies, paper, copy and print was more than offset by weakness in business machines and technology accessories, office supplies, as well as computers. North American Stores & Online operating margin decreased 355 basis points versus last year's fourth quarter to 6.1%. This was driven by lower product margins in Staples.com due to strong growth in low-margin categories like mobility and computers. We also had an unfavorable comparison to a highly profitable extra week last year, the negative impact of fixed cost on lower sales and increased costs related to growth initiatives in Staples.com.

Moving on to North American Commercial. Sales here for the fourth quarter were $2.0 billion, and that was a decrease of 7% compared to last year. Excluding the impact of the 53rd week and the negative impact of the stronger U.S. dollar, sales increased approximately 2% year-over-year. Sales in both contract and quill.com grew in the low single digits during the fourth quarter. Excluding the extra week, growth remained strong in adjacent categories like facilities and breakroom supplies, which is now a $1 billion category in North American Commercial and $2 billion for the total company. We also drove growth in tablets. This momentum was partially offset by weakness in paper, ink, toner and office supplies. North American Commercial operating margin for Q4 decreased 75 basis points versus last year to 8.5%. This reflects, again, the unfavorable comparison to the extra week last year, which was very profitable, as well as investments in sales force as we strengthen our team-based selling model, partially offset by improved product margins.

In International Operations, sales for the fourth quarter were $1 billion, and that was a decline of 13% in U.S. dollars versus Q4 of last year. If you exclude the impact of the 53rd week last year, as well as the 46 stores that we closed in Europe during the 12 months prior to Q4, sales declined approximately 3% in local currency year-over-year. In Europe retail, same-store sales were down 1% during the fourth quarter. That was our best comp performance in 6 years. Average order size declined about 1% and customer traffic was flat. We're stabilizing sales trends in the European contract business with sales per day down in the low single digits during the fourth quarter. And in the European online business, sales remained weak, but we're making great progress evolving and standardizing this business. In countries where we've rolled out the quill.com platform, we're seeing sales growth, which is supported by stronger trends and customer acquisition, conversion and retention. We're also improving the efficiency of our digital and print marketing and look forward to building on our momentum here throughout 2014.

Turning to category product trends across Europe, where we continue to experience weak demand for core office supplies, ink and toner, business machines and technology accessories. And this was partially offset by growth in tablets. In Australia, we continue to make progress turning the business around. Sales trends improved throughout 2013. And during Q4, local currency sales were down in the low single digits, excluding the extra week last year.

During Q4, International operating margin improved 83 basis points versus last year to 1.3% of sales. And this improvement was driven by improved product margins as a result of our assortment optimization initiative across Europe as well as reduced amortization expense in Australia. The operating margin improvement was partially offset by, again, the negative impact of fixed cost on lower sales and the unfavorable comparison to the highly profitable extra week last year.

And with that, I'll turn it over to Christine to review our financials. Christine?

Christine T. Komola

Thanks, Ron. Good morning, everyone. Total company sales for the fourth quarter were $5.9 billion, which is a decrease of 11% versus Q4 of last year. We did have a 53rd week in 2012, which accounted for $461 million of revenue during Q4 of last year. We did close 109 stores in North America and Europe during the 12 months preceding Q4 of 2013, and this negatively impacted total company sales growth for the fourth quarter by about 1%. Excluding these items, total company sales in local currency were down about 2% in Q4. Our fourth quarter earnings per share from continuing operations on a fully diluted basis came in at $0.33 per share. Excluding previously announced charges related to employee severance and other restructuring activities during the third quarter of 2013, we achieved adjusted earnings per share from continuing operations of $1.16 for the full year.

I want to be clear. We are disappointed about coming up short of the full year earnings guidance that we provided last quarter. Coming into this quarter, we expected to drive much stronger same-store sales in North America. Unfortunately, the competitive intensity during the shorter holiday season, as well as unfavorable weather in some of our strongest markets, like the Northeast, resulted in sales trends that fell well short of our expectations. We also continued to experience relatively weak demand for our higher-margin core office supplies across the business.

Gross profit margin for the fourth quarter decreased 52 basis points to 25.7% of sales. This decline reflects the negative impact of fixed cost on lower sales, as well as lower product margins in Staples.com. Our SG&A rate increased 102 basis points versus last year's fourth quarter to 19.7% of sales. This was driven by the impact of fixed costs on lower sales, as well as investments to drive growth in our key reinvention initiative, which was partially offset by cost-reduction activities across the company.

On a GAAP basis, total company operating margin increased 98 basis points during the fourth quarter to 5.8%. Excluding charges in the prior year, non-GAAP total company operating margin decreased 177 basis points. But during the extra week of the fourth quarter last year, we did generate approximately $83 million of pretax income. If we excluded this extra week, non-GAAP total company operating margins for Q4 of 2013 declined about 100 basis points.

Capital expenditures for this year were $371 million compared to $350 million we spent last year. With full year operating cash flow of $1.1 billion, we generated $337 million of free cash flow in 2013. Despite solid improvement in key working capital metrics like accounts payable, the headwinds from our lower-than-expected net income, as well as higher-than-expected inventory balances at year end, caused us to come short of our goal of $900 million free cash flow for the full year. While cash flow was weaker than expected this year, we've remained committed to returning excess cash to shareholders. During the fourth quarter, we repurchased 2.5 million shares for $37 million, bringing our total share repurchase for 2013 to 20.6 million shares for $306 million. We also returned $313 million to shareholders through our cash dividends for the year.

During Q4, we repaid $867 million of debt with our cash on hand. We now have approximately $1 billion of long-term debt, which includes 2 $500 million notes that mature in 2018 and 2023. This will provide us with the flexibility to deploy free cash flow against our store closures and restructuring activities and more aggressively pursue capability-based acquisitions and be able to continue returning excess cash to shareholders through dividends and share repurchase.

At the end of the year, Staples had approximately $1.6 billion in liquidity, including cash and cash equivalents of about $493 million and available lines of credit of about $1.1 billion. As Ron mentioned at the beginning of today's call, we're building an aggressive plan to reduce annualized costs by $500 million over the next 2 years, with about half of that being achieved in 2014. We plan to reinvest some of the savings in areas where we have made progress over the past year. We're adding new e-commerce talent and improving our website to drive growth online. We're reallocating marketing expense to build awareness of our operating categories beyond office supplies. We're hiring and training new business development associates and category specialists in our contract business. And we'll continue to sharpen our prices in key categories.

Over the next couple of years, as we optimize our supply chain, close stores and pursue other cost savings, we expect to incur restructuring charges. Some of these will be cash charges related to lease obligations and severance and others will be noncash in nature, like inventory write-downs and fixed asset impairments. In addition to the actions we're taking to reduce risk in our North American store network and optimize our cost structure, we're also taking a harder look at our portfolio of businesses around the world. A couple of weeks ago, we signed an agreement to sell our SmileMakers business as we continue to narrow our focus and aggressively pursue our best growth opportunities.

Turning to our outlook. While we strive to be transparent and offer a balanced view of the risks and opportunities ahead of us, the long-term trends in our business have become harder to predict. Last year, we made good progress with our reinvention priorities, but we did underestimate the impact of the decline in our core office supplies as well as the intensity of the competitive environment at retail. As we enter 2014, we're reshaping and restructuring underperforming parts of our business. We're increasing our investments to drive growth online and in categories beyond office supplies. We're aggressively reducing square footage in our retail store network. Our largest competitor is going through a multiyear integration. And we're going up against new competitors in new markets as we expand beyond office supplies. As a result, we are changing our guidance practices and no longer providing annual sales or EPS guidance. We do remain committed to being transparent and plan to help you understand our near-term expectation with quarterly financial guidance.

During the first quarter of 2014, we expect total company sales to decrease versus Q1 of last year. We expect to continue building momentum in our key categories beyond office supplies, and we'll aggressively pursue opportunities to gain share in our industry as it consolidates. This will be offset by continued declines in our core office supplies and in computer and technology accessories.

On the bottom line, we expect first quarter fully diluted earnings per share in the range of $0.17 to $0.22. This will be driven by the negative impact of fixed costs on lower sales as well as the ongoing investments we plan to make in our growth initiatives, somewhat offset by increased efforts to reduce costs across the business. Please note that our first quarter guidance does not reflect any potential impact on sales or earnings per share in connection with our 2014 restructuring plans. As we finalize our plans, we do intend to communicate the impact that these actions will have, both on the top and bottom line. For the full year 2014, we expect to generate more than $600 million of free cash flow, which reflects cash payments related to previously announced restructuring activities and our considerations for the impact of future 2014 restructuring activities.

Thank you for your time this morning. I'll now turn it back over to Ron.

Ronald L. Sargent

Thanks, Christine. As I said earlier, we've made good progress on many of our reinvention priorities. And I'd also like to thank our associates for their hard work and their dedication. 2013 certainly turned out to be a more difficult year than we expected. I want to make it clear that it is not business as usual here, and we have a lot more to do as we address the things that aren't working. In 2014, I look forward to building on our early reinvention successes as well as overcoming our biggest challenges as we continue to reinvent Staples.

I'll now turn it back over to our conference call moderator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Nagel of Oppenheimer.

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

The store closing plans, so you now say that the plan is to close 225 stores by 2015. So a few questions with that. One, what is -- maybe explain to us the science behind the math behind the 225 number. And is this -- as you think about the chain and maybe the new strategic positioning from Staples, is this more of an interim goal, where you could see further store closings as we look beyond 2015? And then finally, your competitor -- or your 2 competitors have merged recently. They also -- I think it's pretty well known, they're also looking to close stores. I mean, how do your store closing plans take in consideration any closing plans they may have?

Ronald L. Sargent

Yes. Let me try to take them one at a time. First of all, the science behind the 225. I mean, we have great data around all of our stores and their performance. At the same time, we also looked at knowing where the market is but where the market is going. And if you look over the next couple of years, we've made certain assumptions about what sales are likely to be, what profitability is likely to be. Not all the stores on this 225 list are unprofitable stores. In fact, some are profitable. But we also looked at the opportunity to better network our existing store network. So we've tried to do it, be pretty scientific and try to get ahead of it. We've tried to not just look at kind of where we are but maybe where the puck is going. We've also obviously anticipated store closures from our competitor, who has stores that are across the street from each other and that sort of thing. So that's a little bit about the science. I don't want to get into too much of the detail. I've got to say, it's a very -- always kind of a tough decision to close stores. But I think it's also something that every good retailer does. Customer traffic patterns shift. Your cotenants change. Sometimes stores just get old, or your lease is up and the sales can be shifted to other locations. At the same time, however, we've got to make sure that all of our assets are productive. We've taken out over 1 million square feet of space each of the last 2 years. We've closed about 30 to 40 stores a year, and we've downsized many others. And I think this morning's announcement is really just a recognition that we need to be more aggressive in closing our marginal stores and also accelerate investments in remerchandising and rightsizing the remainder of our 1,600 stores in North America. We also think that, as I said earlier, a lot of these closures are going to make surrounding stores more profitable, particularly in the Northeast, where we've got a very high, dense network. So what we're trying to do this morning is to get ahead of this issue. I never use the word ever or always or never because I think we will continue to close stores as long as Staples exists. But we felt like this was the right number to get ahead of the issue. We want to improve our same-store sales. This will help us there. It'll certainly improve our profitability of our retail business. And I think it will certainly improve the returns on our assets of our retail business as well. I'm not sure if I answered both your questions.

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

No, you did. That's very helpful. And just one follow-up to that. So the closings, will they be mostly taking advantage of lease expirations? Or will you actually be getting out of leases early in some cases?

Ronald L. Sargent

Well, I think it's going to be both. I mean, obviously, you're going to try and optimize cash flow and profitability based on leases coming up for renewal. I mean, we have a couple of hundred, I think 225 leases coming up for renewal every year. So we're going to be kind of optimizing based on lease renewals. But in some cases, if you've got a store that loses money, you're almost better off closing the store, reducing your losses and trying to sublet the space for the existing life of the lease. I guess that's the good news, is that we don't own really much of our retail assets. It's all leased. So you probably have another -- every year, you have another 225 stores up for renewal that you can kind of work through.

Operator

And your next question comes from Aram Rubinson of Wolfe Research.

Aram Rubinson - Wolfe Research, LLC

Two things. One, can you help us with the retail gross margin and let us know kind of what the development was in that 2013 in terms of the merchandise margin only? Just give us a sense as to where that stands, and then I have a follow-up.

Ronald L. Sargent

Yes. Christine?

Christine T. Komola

Aram, in terms of the retail gross margin, it was really -- the retail actually wasn't significantly changed kind of quarter-to-quarter. What was really the driver was the dot-com margin. It was really a mix issue in terms of we sold a significant amount of technology, which as you probably recall was very low. We have very little share online of the technology business. So overall, the mix in retail is actually pretty good. It's really a margin mix challenge on the dot-com side of the business.

Aram Rubinson - Wolfe Research, LLC

And I appreciate the additional store closings, which addresses the excess capacity, but stores aren't the only kind of fixed assets you guys have in your business. Can you talk about what you're doing on the distribution center side or your truck fleet side to give us a sense as to how you're managing capacity reductions in other areas of fixed goods?

Christine T. Komola

Sure, absolutely. As we look at kind of all of our assets, you're right. We are challenging all of the different assets that we work with. And that includes the fulfillment centers on the delivery side as well as the retail fulfillment centers. So all areas are being challenged. That's part of our goals in the $500 million. We are going to look to consolidate and look to kind of evaluate how each one of those are performing. And I think you'll see changes in the next 12 months in those areas. We're not ready to kind of go facility-by-facility yet, but you will see changes.

Operator

And your next question comes from Chris Horvers of JP Morgan.

Christopher Horvers - JP Morgan Chase & Co, Research Division

So first, a follow-up on the store closing side. I think historically, you've talked about maybe 20% to 30% sales retention if you still close a store nearby and a 20% maybe incremental margin. Are those the right way to -- was that -- is that correct historically? And how do you think about the flow-through in incremental margin, given what's going on in the core office supply category?

Ronald L. Sargent

Let me ask Demos to respond to that one, Chris.

Demos Pameros

I think your 20% number, as a rule of thumb, is a good number. Obviously, it depends on a case-by-case situation. Proximity, neighboring competition, et cetera have impacted that number. But I'd say that's a fairly safe bet that we see, and the flow-through assumption, I think, makes sense as well.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Okay. And then also on retail, as you remerchandise these stores, can you share some insights in terms of how the mix is going to change among the different categories? The number of SKUs coming out of core office supplies, how much of sales do you expect that to generate in the new store versus the old format, old merchandising format? And what categories are going up significantly at the margin, whether it's technology and/or jan/san, and really by how much?

Demos Pameros

Right. So there's a lot going on, which is really exciting for us. So first, with what's coming out, as we've mentioned before, there are a lot of unproductive SKUs in categories within the store, primarily SKUs within categories. There aren't very many categories that go completely. So as we've taken a hard look at things and put strict financial requirements on each SKU from a margin dollar productivity standpoint, we're eliminating close to 1,200 SKUs across the entire chain. And that process has already started. So as that product exits the chain, we are replacing those items with a little over 1,500 new items that span in a lot of the good categories that we've been testing. We've talked about a few. Cleaning and breakroom is our #1 category that we like very much. It's been successful in the other channels. It's also growing nicely at the retail store level. Our issue is that we haven't had this in all the stores. We've only had it in a few hundred stores with a presentation we like. So our new reflow remerchandising initiative will now get this across the entire chain. Some of the other categories that we are expanding and zeroing in on, we mentioned a few retail supplies, early education, expanded storage section and office gift shop. We have some sort of a little bit of fashion with a vendor named Poppin in our stores, which is doing very well. There's a new front-end program. So it's a nice injection of new, interesting, fun products going into the stores. That's going to the chain. And then as we roll out our new 12,000-square-foot store, the beauty of that store is that it's the right size. So not only do we get rid of the unproductive space and categories, but the store fits and works very well as we're able to retain the vast majority of sales and now add on top of that some of these new categories. Last thing I'll say is that the services penetration will continue to grow, which, from a profit standpoint, really impacts the overall profitability of the store favorably. So that's a little bit of a picture of sort of how we're proceeding forward.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Is the 1,200 mainly in core office? Or is there some business technology SKUs as well? Or is it mainly core office?

Demos Pameros

It's mainly core office, but there's some -- for instance, like the printer section is overassorted. There are some what I would call old business technology, like GPS, things like that, that we've cleaned up. But those are fairly small already. But business software continues to shrink at the store level. So we just take the opportunity to really clean up.

Christopher Horvers - JP Morgan Chase & Co, Research Division

I got you. And then one last question for Christine. On the SG&A, you cut over $200 million last year. SG&A dollars were down $150 million year-over-year, but sales were also down $1.3 billion. So any sense on how much of that $200 million actually flowed down to the bottom line? And any -- is that a good indication or any discussion around how much of the $500 million over the next 2 years might flow down?

Christine T. Komola

We have -- it's hard to kind of give you that level of specificity. As we think about these, we've been very careful in that we want to make sure we take the costs out and we really make structural changes as we go forward. At the same time, we are reinvesting in things like the sales force and the dot-com business. So it's definitely a blend. As we go forward into our $500 million challenge, we feel really confident based on some of the results that we've seen here that there are structural changes and there are business process changes which are really long term in nature that we can make, some of them with the supply chain, some of the indirect spend. So we feel confident that we can kind of up the ante in all of these areas. And so you'll see in here a lot more specifics around our business process changes as we go forward.

Operator

And your next question comes from Michael Lasser of UBS.

Michael Lasser - UBS Investment Bank, Research Division

How far along are you into making price investments? And what has been the competitive response as you've made those investments?

Ronald L. Sargent

Well, I mean, I think just part of running your business is, over time, you've got to be competitive on price. And you don't necessarily have to be exactly the same, but I think your total offering has to be competitive. I think the key point is it's much more about the value proposition versus strictly the price. We're going to continue to sharpen pricing in a lot of key categories to ensure that we're in the reasonable range of online competition. As I said, I don't think we have to be the lowest price on all items, but there are many other things that are important to customers, things like free next-day delivery with no minimum order size, 5% back for rewards customers. We've recently implemented a cross-channel price match guarantee, where we'll match prices of items that our competitors stock, both in our stores and online. We're also spending a lot of time enhancing our dynamic pricing capabilities. We used to change prices weekly. Today, we change prices daily. And very soon, we'll be changing prices minute-by-minute to really to generate like personalized offers for customers through our Runa business that we recently acquired. So we're in the process of implementing price-scraping tools to ensure that we're appropriately priced versus our competitors across all categories. And I don't know that you have to be priced exactly the same on every single SKU in your assortment. But I think on those key items, I think you've got to be priced aggressively. Otherwise, I think you lose your relevance. In terms of where are we on the journey, I mean, I think we're kind of on the journey. We've been on the journey for the last couple of years. And I think we'll probably be on the journey the rest of the time that Staples exists.

Michael Lasser - UBS Investment Bank, Research Division

Okay. My follow-up is, Ron, the origin to the office supply superstore retail business were really competing on assortment. And maybe, this day and age, assortment becomes less a competitive advantage when product distribution is ubiquitous. So how do you find that competitive advantage today and evolve towards that? And what's going to be the advantage over time?

Ronald L. Sargent

Well, I mean, I think there's a lot of advantages as we try to kind of define our value proposition. It's much different than, say, an Amazon's value proposition is. First of all, our customer base, much more business than consumer. Virtually 80% of our delivery sales are to businesses versus consumers. I think you differentiate yourself around free next-day delivery. I think you differentiate yourself around your contract business, which is -- offers customized pricing and probably better pricing than you'll see online. We've got a 3,000-person sales force. We deliver to customers on 1,400 Staples trucks. We've got, I don't know, 25 million loyal Staples Rewards customers and relationships with over 10 million SMB customers. And then we talked a little bit about this, this morning, is stores. We've got currently 1,900 stores in North America. And I think stores are going to remain an important part of our value offering with people and service and even same-day delivery offerings. So I mean, I think this omni-channel idea in stores is an important one, and I think it really differentiates us compared to others. I'm not sure we need as many stores today as maybe I thought we did 5 or 10 years ago. Back then, I thought maybe 4,000 stores was probably the right number in North America. Today, in North America, my guess is there's probably room for 2,800 stores or 3,000 stores. And if you just carve out Canada, you're -- probably in the U.S., there's probably room for, I don't know, 2,400 stores in the United States today. So I guess, the point is we're constantly evolving our model. I mean, if we just stayed in bricks-and-mortar stores selling office supplies, I think we would have a different story to tell this morning. But I think we have evolved our model over time, and we've got to continue to do that to make us more competitive. And I think more assortment does that, I think more online does that and more omni-channel does that.

Michael Lasser - UBS Investment Bank, Research Division

Okay. Let me ask one quick follow-up question. That's helpful. On capital allocation outlook for this year, dividend is going to probably absorb half of the free cash flow. Do you expect that you'll be able to maintain this payout ratio? And then what's the outlook for share repurchases?

Christine T. Komola

We actually -- as we think about our capital deployment, we feel confident in the investment in our business. That's always the first priority. We do plan to continue to be able to invest and give back to shareholders, and that's the commitment to the dividend. We just announced we're going to maintain that dividend program, and as well as we'll manage the share repurchase program and balance it with capability, M&A activity. So we feel good about it and balanced between investment in the business and shareholder returns.

Operator

And your next question comes from Adam Sindler of Deutsche Bank.

Adam H. Sindler - Deutsche Bank AG, Research Division

Hoping to stick with the free cash flow topic for a moment. One thing you discussed in your $600 million outlook is -- or one thing, I guess, that was not discussed is working capital. And I know you guys talked about switching out 1,200 SKUs for 1,500 this year. You added iPads as well last year. If you could just help us maybe think about what your thoughts are on working capital, the impact of that, and then also maybe just some sort of general guidance around what you think payments could be to exit leases and some of the other restructuring costs that you said was mentioned in that $600 million.

Christine T. Komola

Okay, Adam. In terms of our free cash flow, we have given guidance kind of overall, and that does include the plan for the reinvestment and kind of restructuring charges. Having said that, we're not quite ready to give specifics. Our plan is still very much in process. And as we learn more, we'll continue to make sure that we give that clarity to you all. In terms of the working capital metrics, I think as we go through our plans, we never give specific guidance in that direction, but I think that you'll see that the continued kind of progress in that area as we go forward. But there's not -- we don't lay out the specific plans SKU-by-SKU or business-by-business. But we're confident we'll continue to make progress in those areas.

Adam H. Sindler - Deutsche Bank AG, Research Division

When you say progress, working capital will be a source of cash or a use of cash?

Christine T. Komola

Not quite ready for that specification.

Operator

And your next question comes from Matthew Fassler of Goldman Sachs.

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

This is sort of a follow-up, and I'm not sure, Christine, if you just sort of said you won't answer this. But in looking at the free cash flow number, can you talk to CapEx plans for the year and some sense of the cash cost of the restructuring initiatives that you're contemplating?

Christine T. Komola

Matt, so we are -- as I said our $600 million will include the restructuring activities. Those activities are still evolving, and we haven't kind of finalized our plans. So I don't want to enumerate those. As we think about the CapEx, I think that, that will continue to evolve also based on kind of our reinvention. And so we feel confident that the CapEx that's in the plan will be able to be managed within that $600 million. And we'll adjust it, as we always do, throughout the year based on what happens in the business and how the results actually flow through.

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

Okay. And I guess, and then given your prior answer, the answer to this next one might be obvious. In your comments on guidance for the year, you spoke about kind of moving pieces and industry dynamics influencing your decision to guide. What are some of the big decisions or big -- that you have to make or the big issues in this sector that you feel are undermining visibility in a different way than might have been the case in the past, just as we think about the color that you're willing to give about the business?

Christine T. Komola

Good question, Matt. I think, as we said, I think the big drivers for us are our own restructuring program and how aggressively we're going to be able to grow in the areas that we expect to grow; industry consolidation and kind of what's the evolution of the stores that are going to be happening with our own kind of network, as well as the competition's network. So right now, between all of those dynamics, it just -- there's just too many moving parts to really give you all an accurate prediction.

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

So it sounds like CapEx, for instance, will sort of be influenced by your own store closing decisions as you figure out what's feasible and perhaps your competitions, and all those sort of play into highly prioritized different projects?

Christine T. Komola

That's right, Matt.

Operator

And your next question comes from Greg Melich of ISI Group.

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

I had 2 questions. First, Ron, you'd mentioned that through the quarter, it actually started pretty good in November, things were working. And then it sounds like the comp and probably the traffic was really bad in December. Could you just help us understand how January and even February are sort of playing out? Is there some stabilization there?

Ronald L. Sargent

I won't get into February because that's in the quarter where we're currently in. But January, we saw some improvement in January. Every retailer blames lousy comps on the weather, and we certainly had some of that weather. But I think it was an incredibly promotional December. I'm not sure that Staples is the place you buy your -- do your holiday shopping for your loved ones in terms of office supplies. And then on the technology side, it was incredibly competitive online as well as in other retail competitors. So I think shorter week didn't help us any. I think certainly weather didn't help us any. I'm -- you've got to look in the mirror and say, "Did our own offering not help us any?" But in terms of the quarter, it was kind of U-shaped, better in November, much worse in December. And in January, better, not back to November level though.

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

Okay. That's helpful. And then, Christine, on the -- I understand, in the guidance, you have that $600 million number. But just talking about the quarter and where you stand now with inventory, it's up 1% and sales are down. Is that inventory number too high? And with payables, I saw it was up 5% or up $100 million year-over-year. Is there -- is that sustainable, where we are with payables? Or was there something funky with bringing in the iPads that may have impacted that?

Christine T. Komola

As we look at those numbers we had, inventory should be fine. We did have a blip because of the holiday spillover, but we should be able to sell through that. In terms of AP, we did have last year, if you recall, we kind of had a timing issue on the AP. But I expect that to normal out. But our AP terms continue to improve.

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

So you think where you are now is a pretty good number for both, given where the business is?

Christine T. Komola

Yes.

Ronald L. Sargent

And putting Apple in 900 stores certainly added to our inventory level as well.

Operator

Your next question comes from Gary Balter of Crédit Suisse.

Gary Balter - Crédit Suisse AG, Research Division

I'm focused on 2 areas. I'm not sure if Shira is in the room with you. But I was hoping she could talk about, since taking over as the contract head, her thoughts about any different direction for the business.

Ronald L. Sargent

Sure. Shira?

Shira D. Goodman

I am very fortunate in being able to take over from Joe, who I think has grown a very solid business and a very strong team. And I think the team is very focused on our strategic priorities, which is growing beyond office supplies and restructuring as necessary to reduce costs to fund our investments. I don't envision a large change there. They are very focused, and those are the right priorities. I also believe that there was a lot of building blocks put into place in FY '13, in particular the team selling model in contract, that will really begin to reap the full year rewards of it in FY '14. So bottom line, I don't think there's any major dramatic changes. It's really executing to the plan extremely well, aggressively and speedily.

Ronald L. Sargent

Yes, just one addition, Gary. From my perspective, I think the thing I'm happiest about is kind of this first month on the job, Shira has really gotten her hands dirty working in distribution centers, going out on delivery trucks, taking calls in the call center. So I think certainly with her background of the company, she has good acquaintance with all of that. But I think getting even more connected to the operations side of the business as well as the sales force side of the business, I think, has been positive as well.

Gary Balter - Crédit Suisse AG, Research Division

Just following up on that, and this is for Christine, if you -- you mentioned in the explanation for the North American, whatever this division's called now, Commercial, that the 75 bps was mostly because of the extra week. Without that extra week from last year, would the margins have been flat?

Christine T. Komola

It'd be a little bit unfavorable but much closer to flat.

Gary Balter - Crédit Suisse AG, Research Division

So that was a big improvement over the last couple of quarters. So what changed in that business?

Christine T. Komola

The big improvements, you actually saw stabilization in gross margins, which was very encouraging. That's probably the biggest one. Our Quill business also started to -- as you know, we've been investing in the Quill business, and that started to pay off. So those are probably the biggest drivers.

Gary Balter - Crédit Suisse AG, Research Division

Was the -- like you had picked up one contract from one of your competitors. Has that started to have an influence? Or is that more in 2014?

Christine T. Komola

That's more 2014. But I think as you look at the momentum in those businesses and beyond office product business growing, those things are definitely -- they continue to take hold and have a positive impact on our margins.

Gary Balter - Crédit Suisse AG, Research Division

With the change in management in Boca, are you seeing -- like it seemed like near the end, OfficeMax was trying to give away contracts just for the sake of getting business. Have you seen more stabilization in the pricing?

Christine T. Komola

Yes, it does seem that -- as feedback has been a little bit more stable. It's always a competitive environment out there, as the guys tell me, but it feels a little bit more stable.

Gary Balter - Crédit Suisse AG, Research Division

And then just switching, one last question and I'll get off. On the dot-com, like you mentioned that the mix was the issue. If you put aside the mix, is the pricing in Staples.com basically the same as the pricing at Staples retail?

Christine T. Komola

If you look at the mix, I mean, there was mix [ph], but this is really driven by mix. I mean, overall, the pricing is fairly close, but there are many more products and there was a -- the dot-com business didn't have the technology in the past that the retail side had. Technology is priced pretty comparable. And now this year, we've put in the price guarantee, which kind of helps really reinforce the connections between the business units. So I think under Demos' leadership and kind of the joint strategy in promotional products, it's gone well in that direction.

Operator

And your next question comes from Greg Hessler of BofA.

Gregory Hessler - BofA Merrill Lynch, Research Division

So I just wanted to just go back to the free cash flow. For the year, I think you guys had indicated you thought you'd be at, at least $900 million. And by my math, it came in more at $737 million. And I understand that earnings were maybe a little weaker than you had been expecting. But what else sort of drove that miss versus your expectations?

Christine T. Komola

You're right, actually. It was primarily earnings-driven, but inventory was up. That was kind of the other big driver. It was offset by the AP a little bit. But I think between earnings being down, inventory being up, those were the biggest drivers. Our capital was up slightly as well, but those were the key drivers.

Gregory Hessler - BofA Merrill Lynch, Research Division

Okay. And then as you look to this year, it sounds like there are a number of moving pieces. You're kind of looking at free cash flow of $600 million. I mean, in the event that, that comes in a little bit lower than expected, would you be willing to pull back on the share repurchases? Or do you start to look at the balance sheet as a way to fund those?

Christine T. Komola

Greg, we definitely have several levers out there. It'll be we'll balance our capital throughout the year. We'll balance, like you said, the share repurchase throughout the year. So we definitely have some good levers and options to make sure that we manage to the $600 million. I'm confident that we'll be able to do that.

Operator

Your next question comes from Priya Ohri-Gupta of Barclays.

Priya Ohri-Gupta - Barclays Capital, Research Division

Christine, just a question around how we should be thinking about your adjusted leverage target over the next couple of years and whether there's any need to sort of reassess where you manage your credit ratings to, the flexibility.

Christine T. Komola

Sure. So it's a good question. We are very committed to our leverage ratio of -- right now, we're at close to 3. Our ultimate goal is the mid-2s. And that still remains the goal. Having said that, we do have the mid-2, the mid-3 right now. The investment grade and BBB rating is important to us. It's important for a couple of reasons. One is because it gives us access to the EP market. It gives us flexibility in our other areas of operations for the debt -- I mean, for the price that we pay in those areas. It's also important to our customers. So we want to make sure that we're sharing the information that we can to maintain that rating, and we'll continue to do so.

Operator

Our next question comes from Dan Binder of Jefferies & Company.

Daniel T. Binder - Jefferies LLC, Research Division

You mentioned earlier that you were reviewing your businesses around the globe. I'm just curious, are there any significant changes in thought on the major International businesses, whether it's countries or the whole division, as you go through this reinvention?

Ronald L. Sargent

Yes. I mean, we -- I think the key point is we want to be more focused on kind of our business. And we're going to probably continue to take a hard look at anything that's not earning its return. We've changed our relationship in India to much more of a franchise relationship. We've gotten out of the Printing Systems Division in Europe, which -- there's a lot of great reasons: one, it didn't fit; and two, it was not a widely profitable business. We've just announced this morning the SmileMakers business that we've sold, which is a production company for stickers for primarily dentists' office and doctors' offices and that sort of thing. And we're going to take a look at every one. And I think there's this growing realization that you've got to earn your keep and you've got to earn your return on assets if you want to continue to be a part of this portfolio. So I think we've made some of those decisions this morning around stores, and we're going to continue to take a look at every International asset to see if it's either going to earn its return or we're going to have to dispose of it.

Daniel T. Binder - Jefferies LLC, Research Division

And then a question on the technology business. You mentioned that the dot-com business suffered, from a margin rate perspective, from higher technology sales. And it sounds like you were more aggressive online than you were in the stores. I'm just curious if you could sort of give a little color as to why the different strategy and whether or not this shift in mix online is more permanent in nature.

Ronald L. Sargent

Let me ask Demos to answer that one. But December is always very highly promotional. And certainly, around technology is part of it as well. But Demos?

Demos Pameros

Definitely the seasonality bin with respect to online. And it got very, very hot and heavy online. And as price is clear, pricing was highly, highly competitive through the, I would say, from Black Friday through early January. So definitely the seasonality of Black Friday in December skewed our mix much, much more towards the consumer electronics and PCs and things like that. That is definitely not a permanent move as we now are in the January, February, just have much more of a business customer focus. And that's where the team is headed for dot-com as well as the stores.

Ronald L. Sargent

True. I think it's safe to say that our sales were probably higher than they should have been if we had been managing our dot-com margin a little better. And dot-com margin should return back in the first quarter, so dot-com margin will be back.

Daniel T. Binder - Jefferies LLC, Research Division

And then finally for Joe, if you could just give us a little bit of color on how he's going to be spending a lot of his time in his Vice Chairman role.

Ronald L. Sargent

Joe?

Joseph G. Doody

Yes, Dan. I think it's clear that the company is on a journey and reinvention, and I plan to spend a vast majority of my time focused on helping to drive that. And in addition, I'll have a few smaller operational responsibilities, as we said, Australia, New Zealand as well as the high-growth markets. And I just came back from Australia, and we're getting that business back on track as well. So that's my 2 primary focuses, Dan.

Operator

Your next question comes from Joe Feldman of Telsey Advisory Group.

Joseph I. Feldman - Telsey Advisory Group LLC

Wanted to go back to the stores for a minute. So I think earlier in the call, you mentioned that you see maybe 2,400 potential stores in the U.S. I guess, how do you guys see your part of that? Like is it half of it? Is it less than half? I mean -- and also if you could touch on what the right percentage of small-format stores is ultimately going to be, like how quickly you can transition to that smaller format. I know you said 225 leases come up for renewal each year. How do you get to those numbers?

Ronald L. Sargent

Well, in answering your first question, it's really not for us to decide. I mean, the customer always drives the bus. And if you're not providing kind of what the customer is looking for, you should close your store. And if you are, you'll get to keep your store open. Just to give you a sense, today, this morning, we have 1,873 stores, of which 1,536 are in the United States and 337 are in Canada. And with this morning's announcement, over the next 2 years, we'll be closing 225 stores. And that's where we think we ought to be in terms of density, in terms of kind of where the market is going, in terms of traffic, in terms of where we think the trends are with office supplies, where we think the trends are with movement to online. And then after that, it's kind of -- it's really up to others to figure out what the right number of stores are for others. In terms of smaller stores versus larger stores, I think the trend will be to, kind of quickly as we can, is to remodel, as leases come up for renewal, virtually most of the chain to this more productive 12,000-square-foot format. The sales are roughly the same, a little less, but your rent costs are cut in half, your labor costs are cut in half, electricity, common area maintenance. And you typically pick up a couple hundred basis points on the bottom line and you have a more relevant store to our customers and a little more connected store to online than our current stores, which I travel and visit a lot of stores, they feel too big given what's happened to the digitization of products, from GPS devices to digital cameras to file cabinets, boxed software. A lot of that stuff goes away. And we're going to be aggressively trying to reduce the size of all of our stores going forward to that 12,000-square-foot prototype.

Joseph I. Feldman - Telsey Advisory Group LLC

Got you. And then also wanted to follow up, I think you mentioned earlier in the call that with half your business is online these days, and I think 80% of that you said was business customer. How has that percentage changed at all? Has it skewed more towards business lately? Or trying to just understand where the business mindset is and how they're shopping these days.

Ronald L. Sargent

I think when you look at our online business, I think our delivery business, including commercial, which is virtually all business; our dot-com business, which I think has historically run about 80% business and 20% consumer; and then you've got your retail business, which is kind of half and half. And these are very small businesses as well as consumers. I'm not sure there's been a huge shift away from the business customer in our delivery business, although, in the fourth quarter, when we were selling a lot of technology, a lot of that was to consumers who were just basically buying on price. On the retail side, I would say it's probably -- I think it's, over the last 5 years, it's probably a little more consumer and a little less small business. But I don't think there's any kind of mega shift away from business or toward consumers.

Joseph I. Feldman - Telsey Advisory Group LLC

Got it. And then the last question that I would like to ask you guys. And I know you talk a lot about what was selling, the types of products. But I guess, given that mix and given maybe new account openings that you've had, are you seeing anything in the small- to medium-sized business, like where there's just more development? Or is it still mostly the same trend that we've seen, which is just existing businesses continuing to spend at slightly more moderate rate?

Ronald L. Sargent

I'll ask Joe to answer that.

Joseph G. Doody

Yes, Joe. That's clearly what the headwind is, is existing businesses spending slightly less than they have historically. So to really grow the business, it's, one, gain share in our core; and two, it's really driving, as Shira said, the focus on BOS, our beyond office supplies categories, from facilities and breakroom, which we've been extremely successful with, to print, promo, furniture and technology.

Operator

I'd now like to turn the call back over to Ron Sargent for closing remarks.

Ronald L. Sargent

Okay, thank you. Reinventing a company our size is really hard, but that's our job when customers shift what they buy or where they buy or how they buy. And I think Staples is well positioned to do this. We've got a strong brand. We've got a strong balance sheet. Half our business is already online. We have a strong relationship with businesses, from very small companies all the way up to the largest companies in the world. Our online capability is good, and it's getting better all of the time with improved talent and technology, a strong supply chain, free delivery. We've got a great business called stores that is very profitable and is a key part of our omni strategy. And we've got a consolidating industry which should reduce capacity and, we believe, create opportunity. So thanks for joining us on the call this morning. We look forward to speaking with all of you again very soon.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and good day.

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