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Executives

Laurel Lefebvre - IR

Demos Parneros - President of US Stores

John Mahoney - Vice-Chairman and Chief Financial Officer

Mike Miles - President, Chief Operating Officer and President of Staples International

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

Joseph Doody - President of North American Delivery

Analysts

Aram Rubinson - Nomura Securities Co. Ltd.

Joseph Feldman - Telsey Advisory Group

Oliver Wintermantel - ISI Group Inc.

Daniel Binder - Jefferies & Company, Inc.

Kate McShane - Citigroup Inc

Gary Balter - Crédit Suisse AG

Bradley Thomas - KeyBanc Capital Markets Inc.

Matthew Fassler - Goldman Sachs Group Inc.

Stephen Chick - FBR Capital Markets & Co.

Michael Lasser - Lehman Brothers

Christopher Horvers - JP Morgan Chase & Co

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Michael Baker - Deutsche Bank AG

Staples (SPLS) Q1 2011 Earnings Call May 18, 2011 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Staples, Inc. Earnings Conference Call. My name is Carry, and I will be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And I would now like to turn the call over to your host for today, Ms. Laurel Lefebvre, Vice President of Investor Relations. Please proceed.

Laurel Lefebvre

Good morning, everyone. Thanks for joining us for our first quarter earnings announcement.

During today's call, we'll discuss some non-GAAP metrics to provide investors with useful information about our financial performance. Please see the Financial Measures & Other Data section of the Investor Information portion of staples.com for an explanation and reconciliation of such 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 purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed or referenced under the heading, Risk Factors, and elsewhere in Staples' latest 10-Q filed this morning.

Here to discuss Staples' Q1 performance and business outlook are Ron Sargent, Chairman and Chief Executive Officer; Mike Miles, President and Chief Operating Officer; and John Mahoney, Vice Chairman and Chief Financial Officer. Also joining us are Demos Parneros, President of U.S. Stores; and Joe Doody, President of North American Delivery. Ron?

Ronald Sargent

Thanks, Laurel, and good morning, everybody. Thanks for joining us today. Our first quarter results show that we are making good progress on our key growth initiatives and we're gaining share in North America, but at a cost to our bottom line.

Total company sales in the quarter were up 2% to $6.2 billion and adjust -- and earnings per share was $0.28. And that's up 8% on a GAAP basis. It was also flat compared to adjusted earnings per share of $0.28 during the first quarter of 2010.

North American Delivery grew the top line 2% with the growth in all 3 of our Delivery businesses, Our Facilities and Breakroom business continue to outperform in Delivery, with 10% growth in the quarter.

North American Retail grew the top line 1% and that was helped by strong performance in 2 growth initiatives. Copy & Print sales were up 4% and we made good progress in our technology business, with computers up mid-single digits, EasyTech services growing double digits and a new tablet offering.

In International, the top line declined 2% in local currency. High-growth markets showed good momentum and European Delivery continues to gain share, while European Retail continues to struggle.

On the bottom line, total company operating margin rate declined 69 basis points to 5.6%. While North American Retail operating margins were flat on a slightly negative comp, our investments to gain market share in North American Delivery and disappointing results in our International business weighed on company-wide profits.

Although we made good progress on each of our growth initiatives and we gained market share, sales results for the quarter were below our expectations. Profitability was mixed, as we invested to drive share gains.

Let's take a look at what happened in each of our business units during the quarter, and I want to start with North American Delivery. Sales for the first quarter were $2.5 billion, up 2%, holding steady at low single-digit positive growth for the past 5 quarters as we continue to take share. White-collar employment has been slow to recover, but we are waiting for the economy to improve. We've used our financial strength to win new customers and retain existing business. Quill, Staples.com and Contract each grew the top line in the first quarter.

Category trends were positive in core office supplies, with single-digit growth in paper. Technology accessories and printer were also strong. Our Facilities and Breakroom initiative is picking up steam, up 10%, with the strongest growth at Staples.com and Quill. Each of the 3 businesses grew their top line in this product category faster than in Q4. We continue to win new customers and invest in salespeople, training and lower prices to drive the Facilities and Breakroom category. We also achieved good growth in other adjacent categories, including strong performance in Promotional Products.

Our Canadian Delivery businesses performed well in the quarter, with both Contract and Staples Business Delivery up high single digits in local currency. New customer acquisition and retention remained strong, and we haven't seen much change in the buying behavior of our existing customers. One exception to this was in the government sector. And while we continue to bring in a lot of new business in this area, the federal government spending was down double digits this quarter, as a result of the recent budget challenges and declines in this segment negatively impacted NAD's growth rate by about 30 basis points.

State and local government spending also decelerated from high teens growth last year to about flat in Q1. We expect this trend to turn around in the coming months now that the federal government has passed the budget and is appropriating funds to state and local agencies once again. We know we're gaining share in our Delivery business, but these gains came at a cost in the first quarter. NAD operating margin declined 43 basis points to 7.8%, reflecting lower product margins in Contract and higher delivery costs due to fuel increases. This was partially offset by lower marketing expenses and good margin performance in Staples.com.

In Contract, we were aggressive with bids to win customers this quarter. We took on new accounts and we rebid some existing business at a slightly lower margin, but operating profit remains very healthy. Staples.com grew profit significantly faster than sales as they were quite a bit less promotional than the prior year. And they saw nice margin improvement across core categories. We continue to invest in our warehouse network and IT systems as we prepare to move customers into our new ordering platform. Fuel expense also weighed on our performance, negatively impacting total NAD operating profit by more than $3 million during the quarter.

While we're not happy with NAD's margin performance this quarter, we are pleased that we kept up the pace of customer acquisition and are in a good position to improve our margin performance as we progress through the year. Our optimism about the rest of 2011 is based on continued share gains, momentum in our growth initiatives, easier comparisons in the back half, as well as some actions we're taking to reduce costs.

Moving on to North American Retail. Sales in Retail for the first quarter were $2.3 billion. That was an increase of 1% and a modest decline in local currency compared to Q1 of 2010. First quarter same-store sales were down slightly, with the U.S. Retail business comping flat and the Canadian Retail business down low single digits, causing the overall North American comp to decline 1% in the quarter. Strength in services, paper and computers were offset by weakness in printers, furniture and computer media. Customer count comps decreased 1% compared to Q1 of last year and average order size was up about 1%.

Our growth initiatives gained momentum during the first quarter. In technology, we're working hard to become a leader in the technology for small business. As you've seen on our recent TV ads, we're reallocating a portion of our marketing resources to build awareness of new offerings in technology products for mobile professionals. We began to sell the Motorola XOOM and the BlackBerry PlayBook during the first -- last, I'm sorry, the last few weeks of Q1. The Kindle continues to sell well, and we're happy to add the NOOK Color to our assortment as of May 1. We'll add several more tablet SKUs in the coming months. While it's still too early to know the impact that tablets have had on our results this year, sales of tablets and accessories are off to a good start.

In our Copy & Print initiative, we continue to strengthen our position in this category. Copy & Print grew 4% in the quarter as we benefited from investments in remodels, training, quality improvements and sales force. Results from our 200 copy center sales reps also continue to ramp nicely.

And even though Facilities and Breakroom is primarily a North American Delivery growth initiative, we're also seeing great potential in our Retail stores for this category as well. After testing a new planogram last year, we're in the process of expanding our Facilities and Breakroom assortment and are rolling this out to several hundred stores during the second quarter.

North American Retail operating margin was 7.6% for the quarter. That was essentially flat compared to last year. The results reflect strong margin management as we carefully manage our technology assortment, drive attachment selling higher, shift to a higher mix of service businesses and balance investments in our growth initiatives. Product margin improvement and leverage of rent and occupancy were mainly offset by investments in labor and marketing to support growth initiatives.

During the first quarter, we opened 5 stores. We closed 4 stores, ending Q1 with 1,901 stores in North America, That's 1,574 in the United States and 327 in Canada. The Retail demand environment for office products remained soft. And as a result, we've decided to open fewer stores than originally planned. We will now open about 20 new stores in the U.S., 10 in Canada and we're going to close about 10 stores for a net addition of 20 stores in North America compared to our previous guidance of 40 new stores. We're also in the process of trimming significant square footage from our current 18,000 square foot Dover format. And with approximately 500 lease renewals over the next 3 years, we plan to be very aggressive in reducing size of existing stores.

And with that, I'll turn it over to Mike to talk about our International business.

Mike Miles

Thanks, Ron. Good morning. Sales for the first quarter in International were $1.3 billion, an increase of about 4% in U.S. dollars and a decrease of about 2% in local currency compared to Q1 last year. Overall, the top line was encouraging in our European Delivery business and in high-growth markets as we continue to invest to gain market share. Conversely, European Retail sales remained very soft.

Operating margin for the International business was 71 basis points, a decrease of 216 basis points from the same period in 2010. We have planned for a margin rate decline this quarter as we invest in growth initiatives like a mid-market sales force and the growth of Staples.com. We also knew we'd be incurring additional depreciation for SAP and severance as we continue to rightsize our G&A. What we did not plan for was the severe fixed cost deleverage in our European Retail business, which contributed to the magnitude of our overall decline.

Sales in Europe office products were mixed, with respectable performance in our Delivery business, offset by continued weakness in Retail. Delivery grew the top line 5% in local currency as we aggressively went after new business and ensured strong retention rates with our contract customers. Contract sales performed well with solid growth in Germany, the U.K. and the Nordics. We continue to invest in our mid-market effort in the U.K. and are encouraged with our results there. We're now about a month into the rollout of a similar mid-market delivery launch in Germany.

As with NAD, winning new tenders and maintaining our current Contract business required an investment in gross margins. We're also facing higher fuel costs and the typical lag in pushing through paper price increases to our Contract customers. And as a result, Delivery margins were under pressure. We're working to pass-through the price increases where appropriate and driving average order size up using tactics from North America such as implementing hard stops on small orders.

The European Retail business had another tough quarter. Comps declined 11%, driven by weak traffic in the U.K. and the Netherlands. Germany was down low single digits and the Nordic sales were flattish for the quarter. Computers and other technologies have been the weakest categories, but sales have been soft across the board. Our efforts in the U.K. have identified a number of marketing and merchandising tactics to help turn things around and we've already begun to implement some of these, but we clearly have much to do in both regions to improve our business.

Our high-growth markets performed well this quarter. China grew the top line and saw significant improvement in profitability year-over-year. In South America, sales increased double digits and we continue to operate on a close to break-even basis. In Australia, the top line increased 7% in U.S. dollars and declined 5% in local currency. We're investing in staples.com.au and a mid-market Contract sales force to drive growth.

Despite the margin decline in the first quarter, we expect full year operating margin in International to improve compared to last year. We're making progress on the plans we've laid out to lower the cost base of our operations. In Europe, we have announced changes that will help us to delayer our organization, with a goal of reducing overhead by 20% in the coming years. We've combined sales offices in our Printing Systems business and consolidated several more office products warehouses. We have also strengthened our private label team and are making progress in moving the current penetration from the high teens to our North American averages. As the year plays out, we expect to make progress turning around our Retail business, continue to reduce losses in China, improve gross margins and see favorable impact on the headcount and other cost actions we took last year.

Now I'll turn it over to John to review our financials.

John Mahoney

Thanks, Mike. For the first quarter, total sales increased 2% versus last year to $6.2 billion. The foreign exchange impact from the weaker U.S. dollar had a positive impact in the top line, with sales growth flat in local currency for the quarter. Strength in the Canadian and Australian dollars drove close to 2/3 with this benefit.

Our first quarter GAAP earnings per share on a fully diluted basis increased 8% to $0.28 versus the first quarter of 2010. Excluding the $21 million of pretax integration and restructuring expense during the first quarter of last year, earnings per share were flat year-over-year.

Foreign exchange rates had a modest impact on earnings this quarter benefiting operating income by about $4 million. Gross profit margin decreased by 22 basis points to 26.5% during the first quarter. This reflects lower margins in North American Delivery, driven by higher delivery costs and more aggressive efforts to acquire and retain customers in our Contract business, partially offset by stronger gross margins in Staples.com.

We also deleveraged on weak sales in Retail in Europe, but leveraged rent and occupancy in North American Retail. On an adjusted basis, SG&A deleveraged 44 basis points versus last year's first quarter, primarily due to investments in labor in our North American growth initiatives and marketing in North American Retail, as well as severance and deleverage and fixed costs in International.

Adjusted operating margins decreased 69 basis points during the first quarter to 5.6%. First capital -- first quarter capital expenditures came in at $63 million, up from the $49 million we spent during the same period last year. With operating cash flow of about $210 million, we generated free cash flow of $148 million. We paid down our $500 million bond that matured on April 1 and repurchased 7.1 million shares for $147 million. In 2011, adjusting for the slow start to the year and lower store growth, we're reducing our capital expenditure plan by $100 million to $400 million. We still expect to generate more than $1 billion of free cash flow.

When we put together our plans for 2011, we expected to see steady improvement in our top line performance in all 3 of our businesses. A few months into the year, our top line remains flat, reflecting very little improvement in employment. At the same time, both in North America and in Europe, we've made the decision to be aggressive in winning and retaining customers in the Contract space. Finally, trends in our International business are below plan.

As we look ahead to the second quarter and the rest of the year, we think it's prudent to adjust our view of the business and to adopt a more conservative outlook. We now expect total company sales to be flat to slightly positive for Q2 and to increase in the low single digits for the full year compared to 2010. We expect to achieve earnings per share in the range of $0.18 to $0.20 for the second quarter and $1.35 to $1.45 for the year. If sales trends improve from here, we expect our earnings will be higher than this range.

Thanks for your time this morning, and I'll turn it back over to our conference call moderator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Matt Fasler with Goldman Sachs.

Matthew Fassler - Goldman Sachs Group Inc.

Two questions if I could. I'd like to start off by asking about Contract pricing, essentially when you commenced a more aggressive stance, how you're thinking about ROI and how intense -- how the intensity level of the competitive backdrop might be evolving here?

Ronald Sargent

Maybe not as intense as the margin performance would indicate, but let me ask Joe to respond to that one. Joe Doody?

Joseph Doody

Yes. I think, Matt, overall one, our industry continues to remain aggressive and it's something that we've been dealing with an ongoing basis. We are still remaining disciplined in our pricing approach and we do have a significant advantage with our lower cost structure that allows us to be much more profitable than our peers at the same price levels. And we're not going to chase unprofitable business. But if necessary, we will be aggressive at both winning new business, as well as retaining our existing accounts that are out for rebid. I do feel very good about our ability to manage our Contract gross margins. What we have is a highly centralized pricing control that does adapt to the competitive environment out there. So we feel good about looking at them each individually and address in looking at full cost of operations and we've been competitive selectively where we feel we need to be and we'll continue to do so into the future.

Ronald Sargent

When you look at margin performance, it's certainly not all pricing. I mean, there are certainly other investments, fuel, the warehouse network, that sort of thing.

Joseph Doody

Yes. If you look at the total NAD picture, certainly the overall margin performance has affected, as Ron said, by the fuel, but also really selectively some continued investments that we're making in the business. I'd probably point to 3 things there. One is the Facilities and Breakroom, in terms of people, pricing and training that we've invested in heavily here in the first part of this year. It's already showing a return, but will continue to show a return in the future. Two is account acquisition in the mid-market. We're at our highest level of business development associates going after mid-market new business and that's showing up with a higher number of new business customers acquired here in the first quarter that will give dividends in the future. And then three is our investment in our websites, and specifically, we'll be launching by the end of Q2 a new website for Staples Contract that will replace our Corporate Express, EWay and Staples link in our legacy Contract business.

Matthew Fassler - Goldman Sachs Group Inc.

Just a quick follow-up if I could, kind of a high-level question. The issue for this quarter I guess versus most public expectations was more about profitability than it was about sales, and you spoke to some investments that you're making. How long is the investment runway as you see it in terms of the number of quarters or years that you need to put money to work against some of these strategic initiatives that you have launched before you anticipate getting the kind of payoff that you would be happy with?

Ronald Sargent

Yes, I mean I think when we make these kinds of investments, we always look at them from a return on invested capital or a return on net assets basis, and we are making investments every quarter and sometimes we do a better job at spacing them out than in others. It seems like this year we've made a lot of investments early in the quarter. I think clearly, Matt, I'm not happy with our first quarter performance, especially as it relates to our International results, as well as our Contract margin. But I think there are certainly some things we could have done better and differently in hindsight. And I think at the same time, I'm disappointed about the slowness of the economic recovery. When you look at the jobs data, I know everybody's excited about the fact that we've -- in the last 8 or 9 months have replaced 1.7 million jobs, but since the recession started we've lost 8.75 [million]. So we've got 20% of the jobs back, and I guess what we expected to see the recovery pick up steam in 2011, but it looks to us like the economy is still stuck in neutral a bit.

Operator

And your next question comes from the line of Gary Balter with Crédit Suisse.

Gary Balter - Crédit Suisse AG

Just wanted to understand, you lowered guidance for the full year by $0.15 and the wording in your fourth quarter was you expected a modest economic recovery and now you're seeing, I assume, very little improvement in the economy. That seems like $0.15 is a lot for that. What else have you seen that caused you to go down so much?

Ronald Sargent

John?

John Mahoney

Well, I think, Gary, that the -- we probably got out over our skis a little bit on some of the investments and some of the growth initiatives, that's why we've cut back on our capital spend for the rest of the year. We have, as we mentioned, seen a very competitive situation in NAD, as well as some costs in the areas of fuel and supply chain that have been sticky in terms of persistence. We've seen crude oil prices come down, but we haven't seen diesel fuel prices come down, for example. And frankly, we're behind plan in International, as we said earlier, and I think our caution is reflected in the need to get after some of those problems and make progress against it. That's why we have a fairly broad range of our annual EPS. And as I said, if we see some better performance from sales, we'd expect to see better earnings per share performance as well.

Ronald Sargent

And our plan was based on low to mid single-digit sales growth and there's huge leverage when you can grow the top line. At this point, after 3 months into our fiscal year, we haven't seen that kind of sales growth come.

Gary Balter - Crédit Suisse AG

When you look at that, because historically you had a wider gap between yourselves and the number 2 and 3 players in the business and while there's still a little bit of a gap, it's narrowed, what do you think is happening and is there something possibly internally? Are those companies getting better? What -- why is the gap closing so much?

Ronald Sargent

Yes, I'm not sure -- there's still a nice gap, John?

John Mahoney

I guess, Gary, our businesses have become so relatively different and with the complexity of our business, we have a big business in Australia, our International business in Europe is different than certainly than OfficeMax who doesn't have one. The impact of our Canadian business on our overall performance makes it much harder to reconcile than it used to with our direct competitors. I mean we're more than twice as big as either one of them. So I don't really have great visibility into all the details of what affects their business, so I think our commentary is really limited to our ability to talk about how we're doing against our plan and against last year.

Gary Balter - Crédit Suisse AG

Can we drill down a bit in International, because obviously that was the weakest part by far? What -- like the minus 11 comps, is that -- is there -- as you look for what are the factors behind that, how much of that do you attribute to macro versus either changes you're making or presentation areas that you could fix that don't rely on the macro?

Ronald Sargent

Mike?

Mike Miles

Yes. Gary, I think, clearly when you look at European Retail, you have to attribute a little bit of our issue to the macros. If you look at what's going on particularly in the U.K. with Dixons Group or Comet, you can get a little bit of a sense for the fact that at least in the CE space the market is very, very weak. And clearly, that's contributed to our results as well. But we think that we own a big part of our performance and can make some improvements even in the current macro environment and we're [ph] looking at changes to the marketing program, in the merchandising, in the short term. And in the longer term, changes to the emphasis that we have on services, implementing some of our North American selling initiatives, driving our own brand, as always, that we can both improve the sales and the margins in the European Retail business. The relatively better performance that we're seeing in Germany gives us some confidence to that, but by the same token, we're swimming upstream right now in the macro environment.

Gary Balter - Crédit Suisse AG

And then finally, then I'll get off. Just following up on Matt's question. Is there a change -- like you mentioned that more aggressive pricing in the Contract side, you're implying that, that's not been led by you. Who's causing it?

Ronald Sargent

Joe, do you have any comment?

Joseph Doody

I didn't hear the last. Who's what?

Gary Balter - Crédit Suisse AG

Like why -- where did that start?

Joseph Doody

I think much of it, Gary, is really resistance from customers of taking price increases. So the pressure of trying to pass on, especially in the paper arena cost increases on to customers is as much by some of the select larger customers as it is the industry as a whole.

Operator

And your next question comes from the line of Oliver Wintermantel with ISI.

Oliver Wintermantel - ISI Group Inc.

Ron, in March you guided to a significant margin improvement in International in 2011, can you maybe give us a little bit more detail about what's changed in the last 2 months? When in 4Q, European comps are down 7%, but margins were essentially slightly up. And in 1Q now, comps declined 11%, but margins are down 200 basis points. So what changed? Was the miss more under growth margin or SG&A?

Ronald Sargent

Oliver, in addition to the European Retail deleverage, which was a significant and probably the most significant contributor to the margin performance in International in the quarter, we had 3 other things that were kind of new incremental costs for us. Growth initiatives were a part of it, we're rolling out the mid-market sales force in Europe and we've invested in marketing our new .com site in Australia. We've had significant new expenditures on SAP both in amortization of that and the implementation supply chain. We're opening a new warehouse in Sweden and have a new warehouse management system in Australia and we've had some severance as we've worked to rightsize our G&A. So those expenditures were the second piece. And then the third piece in addition to the Retail deleverage was the gross margins in our European Contract business, which is sort of a similar story to what you've been hearing about in the U.S. I think as we look forward to the balance of the year, we still expect that we will get leverage in the business. We're anticipating better margins in Europe, both as we pass through price increases in Contract and implement some margin enhancement in Retail and direct. And frankly, our performance in April and May on the margin side suggests that we're starting to see those improve. We're going to be more conservative in our investment to growth initiatives and we'll start to realize some of the benefits in those initiatives that we've already made. We'll have a benefit in our Printing Systems division from the restructuring that we did last year, both as we overlapped the cost of that restructuring and as we begin to realize the benefits from it. We expect further upside from China as we had in the first quarter and we'll continue to have in the balance of the year. And we should have reduced G&A. So all of those things contribute to my expectation that in spite of a really bad start, we will have some leverage in the International business in 2011.

Oliver Wintermantel - ISI Group Inc.

Okay. And my second question is just around consolidation. I mean, looking at the results from you and your competitors, it's clear that employment is still a drag, but you could help the situation by closing a lot more stores that are rolling off lease like more aggressively or force consolidation of the space. Could you give us your thoughts about store closures more aggressively that roll off the lease and consolidation?

Ronald Sargent

Yes. I'll ask Demos Parneros to answer you Oliver.

Demos Parneros

So as you know, we've been closing in the U.S. and Canada about 10 to 12 stores over the last couple of years. And as you mentioned, we've got a really exciting opportunity with 500 stores leases coming due over the next 2 years. I expect that with the acceleration in the renewal opportunity that there'll be more opportunities first to close stores. I don't have an exact closing number to share with you at the moment, but I expect it'll grow from the current level. And as Ron mentioned earlier, we're taking the new store openings down so the net number this year is only 10. And while -- again, we're not in a position to talk about next year yet, I'd say that we're really sticking to the plan of being very careful, very selective. The other thing I should mention is that the stores that we are opening are smaller. The stores that we are renewing are being downsized whenever we can do that. So not addressing your consolidation question, but certainly on what we can control from managing our portfolio, I think we're doing a lot of different things to make an impact.

Ronald Sargent

And I guess, the other thing I'd point out is our store portfolio is a pretty darn profitable portfolio and I'm not sure you'd close stores that are very, very profitable.

Oliver Wintermantel - ISI Group Inc.

And about the consolidation in the industry overall?

Ronald Sargent

Yes, it's -- at this point, I don't know that there's anything more that we can add to the discussion. I mean everything that can be said has been said. I think we've been very clear that we would agree that consolidation probably makes sense in this industry. But at this point, our focus is on Staples and running our business, as well as we possibly can.

Operator

And your next question comes from the line of Brad Thomas with KeyBanc Capital.

Bradley Thomas - KeyBanc Capital Markets Inc.

Wanted to follow-up on the guidance and some of the margin drivers. As I look at the second quarter guidance, it would suggest that perhaps you're expecting margins to play out in a similar way that they did in the first quarter. And then as you look at the back half of the year, perhaps putting yourself in a position for gross margin expansion and SG&A leverage again. I was hoping, if you could just comment, are those assumptions right and what would be the major drivers behind that?

John Mahoney

Yes, I think those are directionally right. And I think you have to remember that the second quarter is our smallest quarter, and therefore, with the relative sales weakness that we've seen and our expectations for that continuing in the second quarter, we would not expect to get much leverage on fixed expenses in the second quarter. As the year goes on, we are faced with easier comparisons. We also have made a number of investments that we think will bring benefit, and certainly you heard what Mike said about International. So I think in the second half of the year, there's a lot of reasons to believe that just with the momentum in the business and the actions we've taken that you could see some of the operating margin improvement that's inherent in our guidance.

Bradley Thomas - KeyBanc Capital Markets Inc.

Great. And then just a follow-up on the Retail opportunity. At this stage, obviously, it sounds like there's been an evolution over the last quarter or 2 in terms of how you're going to think about the Retail segment going forward. How far along do you think you are in that process and how significant of an opportunity do you think there could end up being, as you approach those 500 stores that are coming up for lease, for example, I mean, is everyone a candidate for a reduction in size?

Demos Parneros

Brad, that's a great question, and the answer is no. Not everyone is a candidate. As Ron mentioned, the portfolio is very healthy for the most part and in many cases, it's a no-brainer. We just simply renew our lease and move forward, don't spend a lot of time on it. This is not really a new change for us though. Just as a reminder, 4 years ago, we actually introduced smaller store formants. We've been deploying small store formats for some time now. We've got a 4,000, 10,000, 14,000 and 18,000 square foot store. We've been able to use those appropriately based on markets and competitive situations. So this new change is taking it even a step further. I think our focus has shifted a little bit more from new stores to improving the existing store base that we have. And we mentioned the tech and copy initiatives, we've made significant investments in the Retail store base with those 2 initiatives. We continue to remodel stores and the combination of more training of our associates, sales force and copy center and combination of new product and growth in services in tech, allows us to grow businesses like tablets and PCs. So everybody is just really looking at the big picture and rightsizing the store as the business continues to change in categories, exit [ph] as new ones come into our assortments.

Operator

And your next question comes from the line of Kate McShane with Citi Investment Research.

Kate McShane - Citigroup Inc

I was wondering if you could maybe give a little bit more color. I think your comment was that to Gary's question about what changed the aggressiveness in pricing is the resistance of customers not wanting to take price increases. When did you start to see this happen? Was it during the middle of the quarter? Had there been any hints of customers starting to push back a little bit on price earlier? And also, I'll put my next question.

Ronald Sargent

Yes. This is in regard to Contract, so let me ask Joe.

Joseph Doody

I think, Kate, that normally you get increases from our vendors beginning of the year, so it's a time of implementation of those what's our ability to be able to pass those on. So it's a longer process in Contract than it is in our other business. So our .com and Retail has the ability to change some prices pretty much in line with the timing of the cost increases. And in Contract, in many cases, there's a gap in time of being able to get the agreement from our customers for that action. So you see a little bit of that and if it's going to hurt you, it's going to hurt you more in the beginning of the year, not necessarily consistently throughout the year.

Ronald Sargent

I think it's safe to say that our customers are always kind of reluctant to take price increases from their suppliers as we are from ours. And I think you're starting to see probably a little more aggressive price inflation, I think, from our vendors than maybe we've seen in prior years.

Joseph Doody

Absolutely.

Kate McShane - Citigroup Inc

Okay, great. And is there any way you can break down your 2% Contract growth during the quarter in terms of how much were from share gains or from customer acquisition?

Joseph Doody

Yes, Kate, I can give you an idea, just in a general sense, if you look at our Q1, say versus how we ended last year, we're very happy with our growth from our new accounts, as well as our lost business. Those were in line with where we were, say, in the fourth quarter. But our sales from our existing customers were a little weaker in this quarter, but most of that was due to both state and federal government business. So that did have an impact on a little bit of a weakening in our sales from existing customers in Contract. So yes, we comped at a plus 2 in the quarter. We were up against a plus 2 a year ago, where in Q4 when we comped at plus 3 we were comping over a negative 2 prior. So we did have a nice 2-year growth in our sales growth overall in both NAD and Contract in the quarter of about 300 basis points.

Kate McShane - Citigroup Inc

Okay, great. And then I just wondered if you could walk us through -- I guess, John, could you walk us through what some of the expense or the cost-cutting opportunities are again this year? And what level or any kind of quantification we can expect for the full fiscal year?

John Mahoney

Yes, well, I think you heard us talk about each of our businesses and I think you've heard in some detail from Mike what we expect in International. So I'm not going to repeat that. The North American Retail business, I think you saw that in the first quarter we leveraged our rent, which was pretty good. That's a big accomplishment. It reflects some of the hard work our real estate team has done in renegotiating leases. We've seen some opportunities in the margin area in North American Retail, as well as we've been able to both add the mix of services to the business, as well as work hard to manage the inventory effectively. In the NAD business, as we continue to successfully integrate Corporate Express, some of the activities that represent duplication of effort, drop-off as each phase of the integration gets completed, we're seeing a lot of that in supply chain right now and expect that, that will probably be the biggest area for savings in the NAD business.

Operator

And your next question comes from the line of Chris Horvers with JPMorgan.

Christopher Horvers - JP Morgan Chase & Co

So I just want to clarify, so on the Contract pricing side, I mean how much of the delta is the shift in strategy in maybe not going after unprofitable Contracts, but using your scale to be more aggressive. And is that an indication that, well maybe in the near term we won't see margin rates wouldn't be as good as they could have been, but over the longer term it's a right NPV decision. Is that how you're looking at it and what's the change?

John Mahoney

I wouldn't say there's a significant change. Again, I point to the fact that one element of the margin compression, if you will, is what I said as far as being able to quickly pass on cost increases. As Ron said, we've seen a little bit more there from our vendors this year, early in the year, and we've been able to pass it on, for example, in Staples.com and we know that our profitability is up and our margins performed quite well there, because of our ability to be able to do that. We anticipate being able to do that in Contract, but it takes longer, so there is some delay. So there's that factor in addition to going after new business, as well as ensuring that we're holding on to our existing business. It's going to be profitable for us, and we're going to make sure that if we lose it, it becomes unprofitable for anybody that were to get it.

Christopher Horvers - JP Morgan Chase & Co

Fair enough. So can you perhaps, Ron or John, maybe reconcile the commentary that we've heard from 2 of your competitors about the trends in the top line, and they talked about March, April seeing sequential improvement versus what you're saying now for 2Q guidance, flat to low single-digit sales growth. Is that Canada and the European Retail business or are you seeing something from what you've heard from them?

Ronald Sargent

Yes. I guess, we were a little perplexed when both of our competitors implied that the month of April was a pretty good month. If you adjust for Easter and do the Easter shift, that mean, April seem to us a lot like March. So we didn't really see kind of a big bounce up from customers or consumption at all if you adjust for Easter.

Christopher Horvers - JP Morgan Chase & Co

Okay, fair enough. And then in the International business, can you perhaps quantify how much was the deleveraged portion of the degradation in EBIT margins?

John Mahoney

Well, without getting into specific numbers, if you think about 200 basis points, 200-plus basis points of deleverage of the factors that I laid out, the European Retail issue was a significant, but not majority component in that. We had a significant number of investments and incremental expenses that we incurred across the business as well.

Christopher Horvers - JP Morgan Chase & Co

And then big picture as you roll up you're saying that margin is going to be up in International for the year. Is that embedded in just the overall company guidance, John?

John Mahoney

Yes.

Christopher Horvers - JP Morgan Chase & Co

And is that -- how much of that is sales? I guess, what's the embedded recovery in comps on the European Retail business that, that's based on.

John Mahoney

We're counting on a recovery from a minus 11 level, but we're not counting on the European Retail business to be comping positively. Most of the margin improvement that we'll get in the back half of the year comes from cost reduction, overlap of expenses we had last year and gross margin improvements.

Ronald Sargent

Our Retail business is about a third of our total International business. Is that fair?

Laurel Lefebvre

25%.

Ronald Sargent

A little less than a third. Okay.

Christopher Horvers - JP Morgan Chase & Co

And then one last question. John, I know you've been historically been more up, Steady Eddie on the buyback, stock's down almost 15% today. So would this perhaps motivate you to be more aggressive in the near term on buying back stock given the cash flow outlook?

John Mahoney

Yes, I mean we've been very careful about our cash flow. And as we've said before, we know what we're going to use it for and when the stock is at much better value, we'll be more aggressive buying it back.

Operator

And your next question comes from the line of Daniel Binder with Jefferies & Company.

Daniel Binder - Jefferies & Company, Inc.

It's Dan Binder. A couple of questions. As I look at the Street's numbers for the back half and your guidance, it looks like the biggest deviation is really the front half. And I know you've talked about margins getting better in the back half. I'm just curious, not to beat a dead horse here, but if the Delivery business is requiring you to be more competitive, whether its customers resisting price or retention issues to keep accounts, I'm just kind of curious what's going to change on that front, particularly if there's competitive response to any of this in the back half?

Mike Miles

I feel confident, Dan, that we are passing on cost increases that take longer, as I say, in the Contract world and we will continue to be doing that throughout the year. So I think we will see benefit from that. Our comparisons were much more difficult in the first half of the year than they are in the second half of the year. So from a comparison standpoint, we were up against 27% growth in op income in Q1 versus plus 3% and a minus 7% in the last 2 quarters of the year last year. And we've taken a lot of actions and I feel quite confident that we are going to see leverage in the business overall for the year, and it will come primarily in the second half of the year based on the actions we've taken and are underway with currently.

Daniel Binder - Jefferies & Company, Inc.

And 2 other questions -- just curious how you're feeling about your inventory content. And then also, we've been hearing there may be some disruptions in printer-related supplies and hardware due to the Japan issues. I'd be curious if you're running into that at all.

Ronald Sargent

Yes, those 2 are somewhat connected. Our inventory is up a little bit this quarter and basically it's some buy-in to kind of get in front of any disruptions in the supply chain, because the tsunami and earthquake in Japan has affected some of our vendors, so we wanted to make sure that we had to cover for our customers. I don't know, John, do you have anything to add?

John Mahoney

I maybe can be a little bit more granular on that. In U.S. Retail, we've got investments in some new categories. We've got -- tablet computing is brand new to us, so we've got increase there. The same thing for mobile phones and e-readers. We've also begun to rollout more facilities product in our stores, all of those things have resulted in somewhat of an increase. And we have a small amount of safety stock associated with Japan in the Retail business and we've even had some buy-in of back-to-school product from Egypt in order to be able to avoid disruption that may come with problems in Egypt. In the NAD business, it's much more tied to Japan issues and there has been a fairly substantial amount of inventory, but I would think that almost all of the increase in inventory are tied up in the issues I just related.

Daniel Binder - Jefferies & Company, Inc.

Okay, great.

Operator

And your next question comes from the line of Colin McGranahan with Bernstein.

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Just wanted to come back to International and really I think it's important that we understand kind of the magnitude of the margin pressure here. So I know you're reluctant to quantify too many things, but if we take the 216 basis points, can you help us understand first like how much of that is Retail; how much of that is Delivery? And then you kind of give us a laundry list of items in there: Contract margins; there's some severance; obviously fixed cost deleverage, SAP, your own investments. Can you give us a rank ordering or an order of magnitude there, because obviously it's the source of most of the miss here and really pretty disappointing relative to the expectations for a big margin improvement in that segment this year.

Mike Miles

Yes. Colin, I think it's important that we keep in mind that improvement in International margins is not going to be sort of a straight line. I think we want it to absolutely improve year-over-year, but there are going to be quarters where we have big steps forward and quarters where we don't. This was, as I said, always going to be a quarter where we didn't have a big step forward, and the European Retail being down 11% made it a big step backward unfortunately. And as I said before, that is probably the biggest element of the 4 things I laid out. And there's -- there are a number of factors as you can imagine in 20-plus countries, lots of moving parts. But as I say, the 3 other issues beyond the European Retail business in terms of deleverage were the growth initiatives, the new expenditures that we're making kind of in the business infrastructure like SAP and supply chain, and then the gross margins in our European Contract business. And I think those were -- I mean, those are roughly equal in weight between the 3 of them. And in terms of the improvement for the year, I think what you're going to see in addition to a more conservative approach to the growth initiatives and better margins in Europe is a significant improvement in the Printing Systems division, which is obviously not a core business, but is big enough that when we have a big swing there it affects our overall number. And we had a significant investment in restructuring expense in the second half of last year that will have a benefit in terms of lower costs in the second half of this year and in addition, we won't obviously have the restructuring expense. Plus China, where we halved our losses in 2010 from 2009, and we expect to do that again, half last year's losses in 2011. And more of the benefit of that is in the second half of the year as well.

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Okay. Two follow-ups there -- first, given that the Retail deleverage on fixed cost deleverage is the biggest single item, isn't there ability to lever down hours and costs on a quarterly basis given the big disappointment? And this wasn't new. I mean, you were running negative high single-digit comps last quarter. I understand there's some rent deleverage but don't you have more flexibility on payroll and other costs?

Mike Miles

Yes, we do and we're being aggressive there. The rent is a bigger factor in Europe than it is even in North America, the U.K. in particular being sort of 2x what we have from a rent standpoint in North America. But we have an opportunity there and we also have an opportunity to improve the gross margin in our Retail business there which we're working on. But with a minus 11, that's a lot of headwind and I think the most important thing we can do is figure out how to get that number back closer to zero and then ultimately growing it.

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Okay, and then second follow-up is Printing Systems still losing money at this point after the restructuring?

Mike Miles

Sales in that segment are -- continue to be soft. We saw a little improvement year-over-year in the first part of last year, but order portfolio has been pretty weak over the last couple of quarters. And I'm not banking on that business to get better because of improved sales. It's a cost reduction and year-over-year story in terms of the improvement.

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

And given that the long-term outlook for Printing Systems is, shall we say, less than robust, why are you in that business today?

Ronald Sargent

You know how we got into it, and getting out of it would require somebody else who is interested in being in it. I think the challenge for us is we feel like we've implemented a number of cost improvements in the business, which are not yet in its numbers, and it will be a more attractive business 6 months from now than it is today.

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Okay. Final question, back in North America, Copy & Print, the plus 4% growth seems like not one of your better growth rates in the last couple of years; and given that the investments you've made there with feet on the street, advertising and marketing, is there anything you can talk about why that business isn't growing more quickly at this point?

Joseph Doody

Yes, we feel the same way actually. The only thing I would say about the marketing -- the majority of our marketing in the last 6 months or so has been focused on, particularly TV, has been focused on tech, and we've relied on the sales force to drive the Copy business. That said, of the 200 people, probably less than 50 are comping over themselves. So we're a little bit in the start-up mode. I think we figured out a few things at the start of the rollout and are in better shape today. But we agree that we need to accelerate that a little bit more quickly.

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Do you still think you can earn a return on that investment?

Joseph Doody

Absolutely, yes. We're committed to Copy & Print. And in addition to the sales force, we are seeing good results from our combined sales force and remodel store metrics, so again, the rent is not as good as we'd like, but we believe in that.

Operator

And your next question comes from the line of Michael Lasser with UBS.

Michael Lasser - Lehman Brothers

If the new environment becomes the -- or if the current environment becomes the new norm where white-collar unemployment remains stubbornly high and the competitive atmosphere remains aggressive, are you satisfied with the profitability and scale of the overall business today? Or do you need to -- do you see the need to make any more aggressive changes to adapt to this new norm and what could those be?

Ronald Sargent

Yes, I'll weigh in, then I'll ask John to do the same. One, I don't think today's norm is the new norm. I lived through several recessions in my business career and I think this recession is slowly getting better and I think it will continue to get better and I think, the most encouraging thing is the job growth has been better the last 8 months. So am I happy with our profitability of our business? No. I mean, we have long-term goals in each of our businesses that profitability rate is substantially higher than our current rate. And at this point, we're not even back to our all-time highs that we saw prior to recession. So do I think we need to kind of rethink, restructure, redo the business? No. This is a very successful business that's going to continue to be successful, and I think we are doing the right things, but sometimes macro events and investments to deal with the macro events are going to have a short-term impact.

John Mahoney

And I'll just add to that, that we've got a long history of changing with our customers, whether it's in the Contract environment, where we're adding lots of new lines of business to bring to Contract customers, to leverage our fixed expenses and our facilities and assets. And I think we're not standing still waiting for the economy to come back, we're trying to make sure we leverage our assets with a more robust offering. Similarly in our storage businesses, we're trying to make sure that we sell the products and services that drive productivity for our small businesses, whether it's the things like EasyTech or Copy & Print, which are straight services, or the bundles of tech products that come with tablets and services and different storage solutions. So I think we're well equipped to deal with serving both small business in the Retail business and medium, small and large business in the Delivery business to help them become more productive.

Michael Lasser - Lehman Brothers

Okay. And then on the International side, I think the goal at the beginning of last year was to have the Printing Systems division in China break even, and it sounds like those goals still remain elusive. So does that suggest that the International business is just becoming a lot harder to predict? And how much confidence do you have in the margin outlook for the remainder of the year given that it seems like it's very important to the overall organization?

Ronald Sargent

Mike?

Mike Miles

Yes. I guess, Mike, to start with where you started, Printing Systems will break even this year and China has not been -- it's not been our goal to break even in China in 2011. It is certainly our goal to break even in China over the next several years. But it's also important that we put in the right infrastructure for growth there and get that on the right path. And I think to your larger question, I think we have pretty high confidence in a lot of the cost levers that we're looking at and the factors that I've described. As I mentioned earlier, from a gross margin standpoint, our European gross margins in April and May have looked like what we're expecting for the balance of the year. Certainly, that big X factor for us is the European Retail business and we're working hard, but we obviously aren't making progress there at the moment. And until we do, we'll have pressure. But as I mentioned, my expectation that we will leverage the International business overall for the year is not based on a big turnaround in International Retail.

Michael Lasser - Lehman Brothers

Okay. Good Luck.

Operator

And your next question comes from the line of Stephen Chick with FBR.

Stephen Chick - FBR Capital Markets & Co.

A couple of questions on North American Delivery. I guess for Joe, the Miami printing acquisition that was made in the fourth quarter, do you have -- of the 1.5% local currency growth, do you have what that added to the growth rate for the quarter?

Joseph Doody

I don't have it off the top of my head. Well, I can say that our Printing Systems see growth in dollars that would be about between $15 million and $20 million on our base of business for the quarter.

Stephen Chick - FBR Capital Markets & Co.

Okay. Yes, that's about what I think we estimate as well. So all right, so call it the growth rate might have looked more like, call it 80 basis points or whatever. A little bit of a deceleration from last quarter; and if I just look at the NAD growth as reported, 2.3% to 1.5%, am I right? It sounds like that was all related to the government deceleration whereas Contract, Quill and Staples.com all accelerated on the top line, is that right?

Joseph Doody

Yes.

Ronald Sargent

Yes, that is. And again, first quarter this year, we're comping over a stronger first quarter of last year than we did in Q4. So if you say that we decelerated from Q4 to Q1, keep in mind, on a 2-year basis, we accelerated about 300 basis points overall. Again, all-in with the acquisition and FX, et cetera, but still I think a positive sign in spite of some of those headwinds in the government sales, not just federal government, but state and local was also a big cutback in growth as well.

Mike Miles

Steve, the precise number was $18 million.

Stephen Chick - FBR Capital Markets & Co.

Okay. All right. And then on the NAD margins, so the deleverage for the quarter, can you talk about what -- or the 43 basis points, how did that look between Contract versus say Quill and Staples.com? I don't know if you can quantify that.

Joseph Doody

Roughly speaking, SPD, Staples.com grew earnings faster than sales, sort of a double-digit sales growth -- I'm sorry, profit growth on a low single-digit sales growth. Quill deleveraged slightly and a bigger deleverage in Contract.

Stephen Chick - FBR Capital Markets & Co.

Okay. So it sounds like the deleverage or the margin on Quill and Staples.com actually got a little better sequentially. Can you -- you spent a lot of time on the competitive landscape within Contract. Can you talk about what you're seeing with the quill.com and the Staples.com businesses competitively?

Joseph Doody

Yes, I think, generally speaking, it's a marketplace that we have done well in, in terms of our small business customer. We're still challenged in terms of growth in Quill and that's still where we're making some investments. So that's why there's a little bit of deleverage there because we're still investing and trying to get that growth to be more positive, that's just basically flattish, slightly positive. But competitively, we feel we line up quite well in that small business environment and expect to continue to see low single digits to mid single-digits growth certainly in Staples.com here throughout the rest of this year with greater growth in the bottom line for that business.

Stephen Chick - FBR Capital Markets & Co.

Okay, that's helpful. And then last question, if I could sneak one in here, the total company gross margin contraction, the 22 basis points, maybe for John, can you speak to what the 3-segment businesses did from a gross profit standpoint?

John Mahoney

Sure. I mean, you heard that both NAD and International struggled on the gross margin line. We actually saw some improvements in NAR.

Stephen Chick - FBR Capital Markets & Co.

I was hoping for maybe a little more numbers associated with -- of the 22 basis points. And if NAR was up a little bit, do you know what the split or the down for say, NAD and International?

John Mahoney

Sure. I guess, this is not our practice to quantify the details of gross margin by each one of business units.

Operator

And your next question comes from the line of Joscelyn MacKay with Morningstar.

Joscelyn MacKay

I wanted to dig in a little bit more, if you will, on a lot of the questions people have asked on the International margin. But mine is a little bit more of a long-term outlook. So given your more conservative stance regarding 2011 and the particular weakness abroad, is there any change to that long-term operating margin goal for the entire company of 9%? Or really particularly that 7.5% International margin goal, in looking at the buildup that you referred to at your Analyst Day of where the cost savings would come from, whether it's leveraging or SG&A savings?

Ronald Sargent

Sure, mike?

Mike Miles

Yes, Joscelyn, I would say that we're still pushing on the same levers to drive the margin improvement in International, and it still looks to us like G&A is the biggest opportunity. And in fact, in Europe this year, we've implemented the first steps of the new organization there that will enable us to take out functional layers and over time take out about 20% of our G&A. We still see margin as the second most important lever and between centralized buying in Europe, leveraging our global relationships and using more own brand, we think that's a big idea. And we're already getting good progress on own brand penetration in both Europe and Australia. Then supply chain, mix of business and reducing loss makers, all continue to be levers that both have potential and that we're continuing to make progress on. As I mentioned, China's probably the biggest opportunity in the loss-making category and we're making good steady progress on that. And as I've already talked about, Printing Systems will be a nice upside in the back half of this year. So I think we still see the same levers and the same ultimate endpoint or at least a medium-term objective. And I think, as I say, the thing that we've got to get squared away because it's a huge drag for us is the European Retail situation.

Ronald Sargent

And Joscelyn, in regard to company-wide number that 9% goal is still in place.

Joscelyn MacKay

Okay, great.

Operator

And your next question comes from the line of Michael Baker with Deutsche Bank.

Michael Baker - Deutsche Bank AG

So definitely a bigger picture question. I guess the question, is there a structural issue do you think in your space maybe losing share to other channels? The reason why I asked is as much as employment maybe is a little sluggish, over the past 6 months, white-collar employment is up about 3%, almost exactly the average growth rate that we saw in 2005, '06 and '07. So employment is coming back to some degree, yet you and all your competitors are weak. I wonder if you're losing share maybe to Amazon or something along those lines? And as part of the question, I'll tell you we've done a pricing study and if you just pull up pen, random, ink and toner cartridges, Amazon is significantly below you guys. How do you deal with that?

Ronald Sargent

Yes, we obviously done our own analysis on channel shift and I guess we started doing this back in the late 90s when .com was going to take over the world and we were going to have to close all of our stores. And I think that's the same kind of discussion is occurring today. We've done some kind of market share analysis 2008, 2009, 2010. We haven't done it. NPD has done it. It's a little hard to get kind of Amazon data specifically. So how NPD does it is they basically they have a category of e-commerce retailers and I guess interestingly enough the second largest of those e-commerce retailers is Staples.com and quill.com. So it's a little hard to parse out Amazon versus everybody else. But it's basically everybody who sells office supplies and what we're finding is that there does seem to be a channel shift in Retail from on technology and business machines. A lot of that stuff, whether it's coming from Best Buy or Staples or OfficeMax or Wal-Mart seems to be shifting from retail channels to Internet channels. And again, we're picking up a little of that as part of Staples.com and quill.com. What we were happy to see is that e-commerce does not seem to be gaining much share in some cases they've lost a little share in core office supplies, things like paper and office supplies and facility supplies. So I think, is there a channel shift going on? I think, it is, but I think it's more on the technology and business machine side. We don't see it as much on the Retail side. Maybe it's just because I've been in Retail for almost 40 years. But I don't think stores are going away. I think people like to shop in stores, people like advice in stores, people like the immediacy of if I need it now in stores. Do I think the Internet channel is going to continue to grow? I do, just like it has grown for us. I mean, when you think about our business today of the $25 billion, I guess over $10 billion is done online. So I think we'll be the beneficiary, as well as maybe the share giver on the Retail side for business machines and those types of things. But I think that's why we feel like we've got to beef up our technology offering and really become this trusted advisor to our customers because people need help with technology and that's why we're investing in technology in our stores. That's why we're investing in the Copy & Print business in our stores, that's why 9% of our store sales these days are services. So do I understand the shift? I do. But do I feel like we have a plan to deal with the shift? I also do. And frankly, we think we are gaining share from other retailers as well.

Michael Baker - Deutsche Bank AG

So just as a follow-up, just so I'm clear, so the part of that business that you think is vulnerable to the online channel, business machines and the like, do you think that's the small and large businesses buying those products online now? Or do you think that's more of the retail customer who previously would have come into your store to buy a ink and toner cartridge or printer or something like that and is now buying that online?

Ronald Sargent

Yes, it's hard to know. I mean, obviously when you talk about lots of dollars you got to have some medium businesses and you got to have some large businesses, so it's not just the small companies. But given the data we have from NPD and again, this is from the fourth quarter of '08 till the fourth quarter of 2010. We can't parse that out nor do we know exactly what online competitor it's going toward. And we know our online business has grown nicely over the last few years as well.

Operator

And your next question comes from the line of Aram Rubinson with Nomura.

Aram Rubinson - Nomura Securities Co. Ltd.

A question first on Canada, we've never heard anything about the best news from Canada over the years, and in the 10-Q, you mentioned something about lower margin rates there. I'm just wondering if there's anything worth calling out on that front, maybe an update on how things look in a market that's less saturated would be great.

Ronald Sargent

John?

John Mahoney

Yes, I think Canada has historically been very locked with U.S. progress. As you know, they do have a little higher margin than the U.S. And I think their economy recently has been driven an awful lot by mineral resources and particularly in the western part of the country. So we have seen a little bit of a slack in demand and as a result, we've seen a little bit of a deleverage in the operating margin rate there. We mentioned that there the Retail sales were slower than they were in the U.S. and I think that's really made the difference. Joe had mentioned that in NAD, the Delivery business has continued to be pretty strong.

Aram Rubinson - Nomura Securities Co. Ltd.

And just the last thing, Ron, if you look back at the Corporate Express transaction over the years, maybe just look backwards and give us a full perspective on how the acquisition fared against your objectives, and whether or not it makes more or less likely to want to do kind of big deals in the future.

Ronald Sargent

Yes, I'm probably not going to talk about big deals in the future on a quarter where you're $0.03 short of what your guidance was. But I can talk to you about Corporate Express and if I could do it again, obviously, you -- maybe your timing might have been a little bit different given the recession that has happened afterwards. But if I can do it again, I certainly would. I mean, we consolidated the industry which is very significant. The strategic fit was very good. We weren't in Contract in Canada and now we are. We weren't in Contract in Europe and now we are. The big synergies are in the U.S. where they had a Contract business and we did as well. And the synergies that we espoused as part of the deal, the $300 million, we have delivered those in spades. I think the integration has gone really flawlessly. I mean a lot of the integration in North America is finished at this point and now we're just running our business. Europe still got -- still has some integration to go. But do I feel good about the Corporate Express acquisition 3.5 years later? Yes, I'd do it exactly the same way if I had to. Obviously, if I had waited maybe 18 months, I could have gotten it cheaper. But no, I think it's been a good deal and I think it has really helped separate us strategically and scale wise.

Aram Rubinson - Nomura Securities Co. Ltd.

Good luck, guys.

Operator

And the last question comes from the line of Joe Feldman with Telsey Advisory Group.

Joseph Feldman - Telsey Advisory Group

So just kind of a one more big picture sort of attacking the same issue everybody else is, historically, covering you guys for a long time, you had always talked about profitable sales, not going after irrational market share gains. And again, I'm just curious, it seems to me like you did start to get -- go after market share in an unprofitable manner, and I'm curious as to why that was? I mean, and then even coming out of the fourth quarter, it sounded like you had talked about there was a little incremental discounting that we wouldn't see in this quarter. And just wondering if it's a change in thinking from you guys or how we should think going forward? Because again, in that small business, if I look at what OfficeMax and Office Depot and some of the other competitors have put up in terms of sales, you're clearly outpacing them and your sales were generally as a lot of us expected. So maybe you could respond.

Ronald Sargent

Let me just try to respond to that. I think your basic hypothesis is flawed that we haven't changed our strategy at all. That when you look at the quarter, I mean the miss was primarily International performance and that really wasn't a change in strategy. It was I think partly economy and partly execution and I think we have a plan to address those issues. When you look at our Retail business, I think our Retail business held up pretty well in the quarter and I think the other miss, from my perspective, was contract margin, but that wasn't -- we're going to change our strategy and get aggressive and do anything to take share. We're pretty disciplined, analytical company and we haven't changed. I mean, I think the margin impact were some investments we made in the business, some inflation that we're seeing from our vendors are really focused on retaining the business we have. And obviously, we always want to grow the top line. But in terms of a change of strategy, not happening here.

Joseph Feldman - Telsey Advisory Group

Got it. That's very helpful.

Ronald Sargent

Okay. Thank you, Joe.

Joseph Feldman - Telsey Advisory Group

Okay. I appreciate it, guys. Good luck.

Operator

And at this time, there are no further questions in queue. And I would like to hand the call back over to Mr. Ron Sargent for closing remarks.

Ronald Sargent

Thanks, everybody. I realize we went a little later this morning, but I think we had some explaining to do. 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, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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