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Staples, Inc. (NASDAQ:SPLS)

Q4 2006 Earnings Call

March 1, 2007 8:00 am ET

Executives

Ron Sargent - Chairman, CEO

John Mahoney - Vice Chairman, CFO

Laurel Lefebvre - VP Investor Relations

Mike Miles - President, COO

Joe Doody - President, North American Delivery

Demos Parneros - President, U.S. Stores

Analysts

Seth Basham - Credit Suisse Securities

Bill Sims - Citigroup

Mark Rowen - Prudential Equity Group

Danielle Fox - Merrill Lynch

Matthew Fassler - Goldman Sachs

Gary Balter - Credit Suisse Securities

Armando Lopez - Morgan Stanley

Colin McGranahan - Sanford Bernstein

Brian Nagel - UBS

Joe Feldman - Telsey Advisory Group

Michael Baker - Deutsche Bank Securities

Peter Keith - Piper Jaffray

Dan Binder - Buckingham Research Group

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Staples fourth quarter and fiscal year 2006 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Ms. Laurel Lefebvre, Vice President of Investor Relations. Please proceed.

Laurel Lefebvre

Good morning and thanks for joining us for our fourth quarter and fiscal 2006 earnings announcement. During today's call we'll discuss some non-GAAP metrics such as return on net assets and comparable period measures including the 53rd week in fiscal 2006 to provide investors with useful information about our financial performance. Please see the Financial Measures section information of the Investor Information portion at Staples.com for an explanation and reconciliation of such measures and other calculations of financial measures that we use to analyze our business.

Remember that certain information contained in this call constitutes forward-looking statements for purposes of the Safe Harbor provisions of 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 and referenced under the heading, Risk Factors and elsewhere in Staples' latest 10-K filed this morning. I'd also like to remind you that we have restated our 2005 results to reflect the impact of expense of stock-based compensation and will refer to those restated numbers when comparing our 2006 results to the prior year.

Here to discuss Staples Q4 and 2006 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.

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Ron Sargent

Thanks, Laurel and good morning, everybody. I'd like to start off this morning by thanking the Staples team for another great performance in 2006. Today we reported record sales and earnings for the fourth quarter and for the full year. I'm proud of our people and what we accomplished in 2006. We hit the numbers, we made steady progress on the key initiatives that drive our business and we launched several new growth platforms.

We said at the beginning of the year that we would drive strong sales and earnings growth and we delivered both while investing in future growth ideas. We promised we'd stay focused on execution and we got better at supply chain, customer service, global buying and process excellence. We needed to turn around our European business and we're satisfied that we've set the stage for sustainable progress there. We wanted to build a strong foundation in emerging markets and we forged terrific partnerships in several new, high potential economies. So all in all 2006 was our best year ever and we're in a strong position as we enter 2007.

Just to recap the headlines for the quarter, total sales were up 18% to $5.3 billion with the benefit of the extra week in the quarter adding about 8 percentage points to the rate. Growth in North American Retail was mixed with a 1% comp. We had healthy sales from small business customers with positive traffic and a 3% comp in consumables, but this was offset by weaker sales in technology products which drove a negative 1% in durables. North American Delivery continued its momentum by acquiring new customers, retaining the customers we have and building some exciting new capabilities. In our international results, they were extremely encouraging with the best top line and comp performance in years.

The profit story for the Company? Just as positive. Net income for the quarter was up 22% to $336 million and earnings per share grew 24% to $0.46. Total company operating margin improved 16 basis points to 9.9%.

In terms of highlights for the full year, we had strong performance on both the top and bottom line. Sales for the year were up 13%, or 11% on a 52-week basis. Earnings per share were up 23%, excluding Q3 tax and stock comp adjustments, and up 27% on a GAAP basis. Our North American comp for the year was a solid 3%. We booked $4.9 billion in global ecommerce sales. That's up 28% versus last year and that makes Staples one of the top etailers in the world.

Return on net assets increased to 14.3%. That exceeded our goal of getting RONA 200 basis points above our long term cost of capital of 11.7%; and we generated $637 million in free cash flow after investing $528 million in capital to grow our business.

Throughout 2006 we made significant improvements in customer service to solidify our Easy perception and to further differentiate Staples. Our latest customer research shows that we're widening the gap between us and our competitors and customers perceptions that we make things Easy for them. We also made good progress in '06 with our own brand initiative. We're at 20% of sales while also beating our margin goals, developing innovative products, and exceeding our plan for direct sourcing during the year. We recently announced a new goal of 30% own-brand penetration and plan to launch even more new products in the coming year.

To recap some of our key accomplishments in each business unit: in North American Retail, our core business focused on small business customers remains healthy with good customer traffic and excellent performance in key profit categories like office supplies and ink and copy and print. On the consumer side we had the best back-to-school season in our company's history this year. We added 99 stores in 2006, 23 of those in our newest markets. Our stores in Chicago are performing well and our Miami market entry is off to a great start. We're ready to open about ten stores in Denver this year and we will continue to fill in both Chicago and South Florida. Our productivity for our 2006 new store portfolio was strong reflecting, excellent real estate locations, good marketing, and solid execution. We're also seeing positive signs in our newest growth initiatives like our EasyTech program and our standalone Copy & Print shops.

In North American Delivery, we continued to grow market share by acquiring new customers, supplemented by several strategic acquisitions. NAD continued to improve customer service in '06 with sales, Staples business delivery and contract, both being recognized with certifications from J.D. Power & Associates. We also launched a program to improve our supply chain and delivery and we're making headway and driving efficiency, improving service and building out our distribution network to support growth.

Turning to international, in 2006 we built a strong foundation in Europe. We made good progress in our U.K. retail and French catalog businesses and that has increased our confidence that we can get to our long-term margin goals. We've also invested in high growth markets by expanding delivery operations into Beijing and Taiwan and announced a joint venture in India. All of these efforts have expanded Staples global footprint and will become meaningful contributors to sales and profit in the future.

Looking ahead for the company, our consistent financial performance, coupled with our commitment to new growth initiatives, gives us very good visibility into our future performance. We expect to continue to deliver 10% to 15% sales growth and 15% to 20% earnings per share growth for the next several years.

And with that, I'll turn it over to Mike to review our North American results in more detail.

Mike Miles

Thanks, Ron. Good morning, everyone. Our North American Retail team delivered another quarter of solid financial results. Sales were $2.9 billion, up 14% versus Q4 last year, or 6% excluding the extra week. Same-store sales grew 1% on top of last year's 3% reflecting positive customer traffic and growth in supplies, ink, laptops and computer peripherals and the Copy Center. These gains were offset by lower average order size driven by technology and slightly negative furniture comps.

The fourth quarter is a complex time for us every year with a relatively slow November leading up to Black Friday and the holiday selling season, followed by our back to business focus in January.

Overall, sales to our target small business customers remain solid, with good performance in the supplies categories I mentioned a moment ago, but we were disappointed by our computer sales during the quarter on a couple of fronts.

First, product availability driven by component shortages at one of our vendors adversely affected our sales; and second, our comps in Canada were actually negative during the quarter driven by sharp declines there in average selling prices for computers. The weakness in Canada hurt our overall North American Delivery comp by about a point and we also fell short of plan on our holiday sales in spite of a strong Black Friday. Our digital camera offering in particular missed the mark. But because the sales weakness was in lower margin categories like PCs and digital cameras, Q4 gross margin comps rose 3%.

For the fourth quarter, North American Retail SBU income increased by 11% to $329 million. Operating margin decreased by 30 basis points to 11.3% with improvements in gross profit driven by mix offset by investments in marketing and customer service.

During Q4 we opened 39 new stores in the U.S. and five stores in Canada for a total of 1,620 North American stores at the end of the quarter. For the full year we opened a total of 99 stores in North America with 83 in the U.S. and 16 in Canada, including three standalone Copy & Print shops. We added 11 more stores to Chicago during the year, opened 11 in South Florida on our way to 20 stores there by the end of this year, and already have our first three stores open in the Denver market. We ended the year with 664 new or remodeled Dover stores, or about 41% of the chain.

Turning to our full year performance, sales for 2006 were $9.9 billion, up 10% over 2005, 8% on a 52-week basis. Same-store sales for the year were up 3%. Total year SBU income increased $113 million to $957 million, up 13%. Operating margin improved 30 basis points to 9.6%. We achieved these results while executing on a number of strategic initiatives including a major market entry into Miami, ramping up our Copy Center growth initiative, investing in our tech services offering, growing new retail channels and solidifying our leadership position in core markets. Despite some sales softness in the fourth quarter, our Canadian stores had a solid year on both the sales growth and profit improvement fronts and continue to build upon their strong market position.

Looking ahead to next year, we expect our solid performance in North American Retail to continue as we pursue a portfolio of high potential opportunities. For example, new market entries will continue to be a source of growth on our success and we're building on our success entering markets as the third player. In 2007 we will continue to fill in Chicago and Miami, as we quickly ramp up in Denver. We expect to open at least 100 stores next year.

Own-brand will continue to drive sales at higher margins thanks to our ability to launch new and innovative products. In 2006 we introduced several hundred new own-brand products including more than 200 new school supply SKUs that helped our terrific back-to-school season. We recently introduced the Mail Mate, designed to shred junk mail in the kitchen. Supported by an integrated marketing campaign, we sold hundreds of thousands of Mail Mates. Staples is the largest seller of shredders in North America and as we innovate and highlight the theme of personal security, we continue to grow significantly faster than the overall market.

Shredders were not the only big win for our own brand. We also launched the Staples brand LCD monitor which quickly became one of our top-selling monitors. In the year ahead we'll launch Staples brand furniture collections upgrading the quality and appeal of our assortment.

We've opened three Copy & Print shop test sites in Boston in the past few months and while it's still pretty early, we're very encouraged by the initial success of our standalone Copy Centers and expect to open several more of these in the months ahead. This innovative store format doesn't just give us the opportunity to further expand our store base, it also has served as a source of new insights for us that we've been able to rollout to Copy Centers across the rest of the chain.

We relaunched and rebranded our Easy Tech offering and now every Staples store in the U.S. has an in-store technician to help customers with services such as hardware and software installations, data protection and security, and repairs and troubleshooting. As part of the relaunch we offered free installation of Microsoft Vista and Office to drive awareness and trial of our service. Throughout 2006 we experimented with a number of different concepts to build this business and in 2007, we expect our testing to pay off as we rollout several of these ideas to win share in this highly fragmented market.

Finally, our new retail channels initiative continues to be an incremental source of customers and sales. We completed our rollout in about 1,500 Safeway supermarkets and now have a presence in more than 2,400 supermarkets with additional regional grocery chains also joining the program. We are looking at other retail channels that would get the Staples brand access to complementary customers and are currently running pilots in college bookstores which could be the next frontier for this initiative.

In summary, our North American Retail team had a great year as they continued to drive high performance through their focus on customer service and consistent execution. We'll continue to invest in growing our market share and differentiating our offering as we drive growth and profitability in 2007.

Moving on to North American Delivery, we achieved terrific results again in Q4 and for the year. NAD continued to drive strong top line growth coupled with solid margin expansion and now represents 32% of total company sales and 38% of our profits. In the fourth quarter North American Delivery sales grew to $1.6 billion, a 24% increase versus last year, or 14% excluding the extra week. SBU income of $192 million, or 11.7% on a rate basis, increased 20 basis points versus last year's Q4. For the full year, sales were $5.9 billion, up 19% versus 2005, or 16% on a 52-week basis. SBU income increased 23% to $625 million, or 10.7% of sales. We saw particular strength in categories such as cartridges, cleaning and breakroom supplies and paper.

The gross margin pressure we experienced in Q2 and Q3 from our three new fulfillment centers in Orlando, Atlanta and Beloit is behind us as these facilities ramp up according to plan. While the new FCs hurt our expense rates in the short run, they provide the capacity to sustain our rapid growth and insure great customer service. We'll be opening a new tri-channel fulfillment center in Denver to serve the mountain west region and expect to have it up and running this spring. We're also adding a small fulfillment center in Nova Scotia in 2007 to support growth in our catalog business up in Canada

Our contract business was the fastest growing in our portfolio again this quarter, through both new account acquisition and shared wallet initiatives. We acquired a small Kansas City-based office products dealer, Cross Office Outfitters, during the quarter. The integration is well underway and Cross's strong customer base in the Kansas City market is being converted to the Staples program.

Our online catalog business, Staples Business Delivery, continues to achieve strong sales growth and margin improvement. Customer service continues to shine as evidenced by gains in Biz Rate scores because our revamped web site is performing very well with increased customer traffic and higher conversion rates on Staples.com since the relaunch.

At Quill, new customer growth has been strong and targeted acquisition efforts have been quite successful this year. We drove sales with existing customers through our targeted promotional offers and preferred customer program. Results in our Medical Arts Press business are trending better. Quill remains by far the most profitable business in our portfolio and our Quill associates celebrated 50 years of outstanding customer service and financial results in 2006.

We continue to develop new ideas as part of our initiative to grow our share of wallet. To broaden our offer and add capabilities to drive organic growth we recently made two acquisitions in the delivery space. In our contract business we acquired Thrive Networks, an IT services company based in Concord, Mass., which provides outsourced services to many of greater Boston's leading small businesses. Customers there trust Thrive to maintain their network, provide 24/7 network monitoring and user support and deliver strategic technology consulting and network upgrades. Thrive will initially operate independently and maintain its brand name. We're real excited about this new business and believe providing IT products and services represents an important opportunity for us in our delivery business just as it does in retail with our EasyTech initiative.

Increasing our share of wallet remains a top priority for our SBD business as well and during the fourth quarter we also acquired Cheswick, an industrial packaging supplies company. While Staples already offered some packaging supplies, this acquisition allows us to significantly increase product selection to meet the varied needs of businesses back office operations. Cheswick enables us to grow our offering from a couple of hundred SKUs to nearly 7,000 packaging products. Our customers in SBD, as well as our other delivery business, will benefit from this expanded assortment and we're real excited about both of these opportunities and welcome the Thrive and Cheswick associates to the Staples family.

To wrap up, NAD is in great shape to have another terrific year in 2007. The team remains focused on driving profitable growth. We continue to win in new customer acquisition and retention through our differentiated sales model and we're expanding our share of wallet into high margin categories such as copy and print, cleaning and breakroom supplies, mail and ship and IT hardware and services. Our priorities in this segment are to continue to drive service improvements, to expand our delivery, fulfillment, and IT infrastructure and to improve gross margins through a greater focus on owned brand penetration and improved product mix.

With that, I'll turn it back over to Ron to talk about our international results.

Ron Sargent

Thanks, Mike. We are very encouraged by the great progress we're seeing in our international business, particularly in Europe, where all of our hard work to build a sustainable high margin business is starting to pay off. International sales for the fourth quarter were $719 million, up 27% from 2005, or 11% increase excluding the extra week and currency benefits. The top line improved in both our U.K. retail business and our French catalog business. Those are the key ingredients to keeping our turnaround on track.

SBU income was $39 million compared to $21 million for the same quarter last year, or 5.4%, and that represents an improvement of 170 basis points. Sales for the full-year were $2.4 billion, up 13% from 2005. We grew 8% excluding both the extra week and currency benefit. SBU income was $51 million versus $14 million in 2005. Operating margin of 2.1% improved 150 basis points versus 2005.

On the retail front we saw solid profit improvement and strong comps across the board. Comps in Europe overall in Q4 were 5% and we were particularly pleased to achieve a 5% comp in the UK which is our best comp performance there in more than three years. Our new advertising and direct mail campaigns in the UK drove positive customer traffic in Q4 as well. Now that store execution is on a solid footing, we'll be more confident in expanding our store base and plan to test a smaller store format in the London market later this year.

All of the other countries in the retail portfolio in Europe are performing well. We saw particularly strong results in Germany which showed the strongest operating margin improvement in the entire group.

In terms of store growth, we opened one new store each in the Netherlands and Germany. We ended 2006 with a total of 264 stores in the five countries where we operate stores. In 2007 we plan to open about ten new stores in Europe.

Turning to Staples European catalog, margins there doubled versus last year with solid improvement in the top line, particularly in France. Our Italian business delivered a big improvement in profits and continues to be one of our fastest growers. Overall we continue to be focused on service, supply chain, own-brand, web sites, and systems integration and we're pleased to see that our turnaround efforts are gaining traction.

Taking a look at other international markets, we continue to invest in growing our businesses in Asia and South America. We're moving fast in China, which ended the year with $100 million in sales, which is a tremendous accomplishment for this business as we build our delivery customer base. We're also planning to expand into retail stores with the upcoming acquisition of Pei Pei, the largest office products retailer in the Jiangsu province near Shanghai. Pei Pei has about a dozen stores, a large customer base and strong brand recognition enabling us to further expand our business within China.

At the end of Q3 we closed on our Taiwan joint venture, and in January we announced our entry into India with a joint venture with Pantaloon Retail Limited. Our partnership with Pantaloon, India's leading retailer, establishes a platform for Staples to enter the $10 billion office products market in India. We plan to serve businesses of all sizes through delivery as well as cash and carry operations, offering a wide range of office products from core office supplies to printers to computers. We expect to open three standalone stores later this year and have an office products assortment within many of Pantaloon's big bazaar and general merchandise stores.

Overall we're confident that 2007 will bring continued margin expansion in our international business. Our focus will be to make significant progress in European retail and delivery as we work toward achieving our medium-term goal of 7.5% operating margins. At the same time, we're building a strong foundation in Asia and South America, growing these businesses as fast as we can while maintaining breakeven status.

Now I'd like to turn it over to John Mahoney to give you a detailed look at the numbers.

John Mahoney

Thanks, Ron and good morning, everyone. I'll cover our Q4 and fiscal 2006 results and then provide some guidance on our expectations for the first quarter and for the full year 2007. Let's start with the P&L. Earnings per share of $0.46 benefited from the extra week in the quarter which is worth about $0.05 of earnings for the quarter and $0.04 for the full year due to the differences in share count for those periods.

Q4 revenues of $5.29 billion were up 18.5% versus last year 's fourth quarter. Currency boosted sales by about 150 basis points so local currency growth was 16.9%. The extra week accounted for 8.3% of the growth rate so adjusted sales growth for the quarter was 8.6%. For the full year, sales reached $18.16 billion, a 12.9% increase over the prior year's revenues. Adjusting for the positive impact of foreign exchange of 110 basis points, growth for the year was 11.8%. The 53rd week was worth 2.3% so the adjusted growth rate for the year was 9.5%.

During the fourth quarter, gross profit margin declined by 12 basis points to 29.25% as North American Retail improved due to gross margin benefit from mix and leverage from rent and occupancy costs due to the extra week in the quarter. That benefit was offset by deleverage in vendor promo dollars which we record on a calendar year basis in line with our vendor agreements, so having an extra week in the quarter hurts us on the promo line.

For the full year, gross margins increased 10 basis points to 28.6% primarily driven by improvement in North American Retail offset by investments in North American deliveries fulfillment network earlier in the year and vendor promo dollars spread over the extra week.

For the fourth quarter, operating and selling expenses leveraged 23 basis points to 15.27% versus last year's fourth quarter. For the full year operating and selling expense improved 25 basis points to 16.22%. For both the quarter and the year our results reflect our continued focus on execution, expense management, and leveraging of operating expenses on higher sales, somewhat offset by investments in marketing and customer service in our retail business.

Turning to G&A expense. G&A in the fourth quarter leveraged 8 basis points to 4% of sales as we continue to control expenses. We established a shared services center in Columbia, South Carolina due to open in April this year to consolidate some staff functions for Staples and Quill in a lower-cost environment which will help control G&A costs in the future. For the full year, G&A leveraged 4 basis points to 4.24%, again, with good expense control across the board offset by higher stock compensation expense.

Moving now to the balance sheet. Total inventory turns were up 16 basis points versus last year to 5.92 times as we continue to benefit from the process changes implemented through our Summit Supply chain program and begin to apply those learnings to our delivery business.

To recap our liquidity and financial resources at the end of the fourth quarter, Staples had $2.3 billion in liquidity composed of cash and short-term investments of $1.5 billion and available credit of about $800 million. Cap Ex for the year came in at $528 million, up from the $456 million we spent in 2005. This reflects investments in information systems and distribution and fulfillment centers.

For the full year, we generated free cash flow of $637 million. While operating results came in as expected, working capital was not as strong, primarily due to investments in inventory to drive our mobility and other merchandise initiatives, timing of purchases and payments to and from vendors, some of which were related to the extra week in the quarter, and a shift in mix towards technology where vendor payment terms tend to be shorter.

During the fourth quarter we repurchased a total of $237 million of Staples stock, or about 9 million shares. This brings our total 2006 repurchases to about $750 million, or about 30 million shares. Our share repurchase program has been effective in reducing our share count as weighted average shares outstanding declined by 11 million shares year over year. About $600 million remains on our current share buyback authorization.

Based on our strong 2006 performance and expectations for continued earnings growth, Staples board of directors has decided to increase our annual cash dividend to $0.29 per share, to shareholders of record on March 30th, payable on April 19th. This is a 32% increase from the dividend we paid in 2006. Last year's dividend increase was also 32% compared to 2005.

In terms of our expectations for full year 2007, we expect to achieve 15% to 20% earnings per share growth after excluding about $0.04 of earnings from the extra week in 2006 and excluding the tax and stock comp adjustments from the third quarter, or a range of $1.43 to $1.49, in line with expectations and consistent with our previous guidance.

On a GAAP basis, reflecting the $1.32 of GAAP earnings we reported, this equates to a range of 8% to13% earnings growth. We expect low double-digit growth for the total company on the top line and high single-digit growth on a GAAP basis. This includes new store growth in our North American retail store base and a positive low single-digit comp.

For North American Delivery, we expect to grow revenues in the mid teens, or a couple of points lower on a GAAP basis excluding the extra week. In international, we expect revenue growth in the low double-digits in local currency.

We expect to invest approximately $550 million in capital in 2007 and we expect free cash generation in excess of $700 million in 2007.

In terms of specific Q1 guidance, we expect high single-digit growth in the top line which would normally be low double-digit adjusting for the 53rd week calendar shift. With 2006 ending a week later, we're swapping a higher volume February week for a lower volume May week in the first quarter, which will cost our North American Retail business a couple of points of growth. As a result, we expect mid single-digit sales growth in our North American retail business with a low single-digit comp. We expect mid-teens growth in our North American Delivery and high single-digit sales growth in local currency in international for the first quarter. Q1 earnings per share are expected to grow 15% to 20% consistent with the current range of analyst estimates.

In our international segment, operating margin in the first quarter could be flattish due to certain investments we're making and some timing issues but we do expect significant margin improvement for the full year in our international business.

With that, I'll turn the call back over to our conference call host to moderate the Q&A.

Question-and-Answer Session

Operator

Our first question comes from the line of Gary Balter - Credit Suisse.

Seth Basham - Credit Suisse

Hi. Good morning. It's actually Seth Basham for Gary. A couple questions for you. First maybe you could shed some light on the investments in marketing and customer service and retail. What exactly were those? How much will they cost and will they dissipate going forward?

Mike Miles

I think we made a number of investments in the fourth quarter tied to the number of new store openings that you saw. We had the bulk of our new store openings, or at least in terms of the heaviest quarter of new store openings, in the fourth quarter and that was also the quarter that we entered Miami, and so there's a significant amount of marketing and labor associated with those entries. As well, as we continued to ramp up our services business, the copy center and the tech service business and that's a very high margin business but it's a little more labor intensive than our normal retail businesses.

Seth Basham - Credit Suisse

Do you expect those costs to continue for the next couple quarters or is it more of a fourth quarter phenomenon, so to speak?

Mike Miles

Well the new store openings was a little bit lumpy in the fourth quarter, the Copy Center and tech services, especially the Copy Center initiative, has been ongoing for a long time and that's a continued transition in our business and it's very profitable for us but you get the benefit in the gross margin line and you pay a little bit more on the labor cost line.

Gary Balter - Credit Suisse

This is Gary. I'll just add one question. I've been cautious on asking questions on calls after an experience on another call. But international is stronger than you expected or than we expected at least. Does that start changing your thinking about where the upside is for margins longer term?

Ron Sargent

We are very pleased with our performance in Europe in particular, we're really pleased across all of Europe in virtually all geographies, we saw good strength. UK and France, they're growing again. We're seeing strong results in Portugal, Netherlands and Germany in retail, and on the catalog side, particularly Spain and Italy. We do expect to make continued progress in 2007 and I think it's increasingly clearer that that 7.5% operating goal that we've aspired for that business is within reach. I should also mention that both China and Argentina had very good years in 2006 but our plan there is to grow them very rapidly but not expect a lot of profit contribution to come out of some of these high growth markets.

But in terms of opportunities, we feel very good about our international opportunity. I think 2006 was a nice turnaround year for us and we expect to build on that in 2007.

Operator

Our next question comes from the line of Armando Lopez - Morgan Stanley.

Armando Lopez - Morgan Stanley

Thanks. Good morning, everyone. Just two quick questions. One just a follow-up on the international margin. Could you talk a little bit about are there additional cost cuts or things that you need to do there to take additional cost out of the business or now is it just continuing to ramp up on the sales line and leveraging what you already done?

Second, on that part maybe if you could mention what the FX impact was on the profit line?

Ron Sargent

Let me tell you, the biggest opportunity for us is going to continue to be to drive the top line in our international business. We've got some fixed cost in place and the nice thing is we're starting to see some good pick up in sales, the economy seems to be pretty good in Europe. We're seeing great success in China and particularly Argentina.

In terms of expense, our nature is to always think there's opportunities in expenses and our international business is no exception. I think that expense driver will primarily come from better integrating systems, looking at some shared services, so I do think there's some opportunities on the expense line but probably the biggest opportunity going forward is the top line and that's why we're so pleased to see the top line start to move.

John Mahoney

The operating income effect on the total company, and that includes both Asia as well as Europe, was about $4.5 million on the operating income line. So we'll really calculate that assuming that we had a fixed rate in this quarter versus last year's fourth quarter.

We aren't in a position where cutting expenses is necessary in Europe, so it's not really belt tightening. It's really improving our execution so that the cost of running our business goes down compared to sales because we get more efficient whether it's in supply chain or whether it's in marketing productivity. We learned a lot about that in the UK this year where sharing some best practices across the company really gave us tremendous productivity both in those two categories in marketing and supply chain particularly.

Operator

Our next question comes from the line of Bill Sims - Citigroup.

Bill Sims - Citigroup

Thank you. Good morning. First, can you comment on the impact that your renegotiated relationship with HP will have on sales and margins? Are we going to see a shift in the two categories or any color you could provide us there?

Mike Miles

Bill, I assume your question's about the transition that we're making with our ink business.

Bill Sims - Citigroup

Correct.

Mike Miles

We're always negotiating every year with different vendors but there's been some discussion this year about a transition that we've made from own-brand ink in that category and I think as you know, we don't think of the Staples brand as a generic, and so we really require that our brand perform at least as well as OEM products. As we look at the improvements that both HP and other OEMs are making with their proprietary technology in ink and toner, we can see the day when it's not going to be economic for us at least to offer Staples brand quality that's comparable to OEMs and, frankly, we're kind of getting ahead of that and making a transition out of own-brand ink in a couple of our categories there.

We don't think that will have an adverse impact on sales because we're, as we've been doing for years, looking for innovative ways to bring value to our customers in that category which is what they're really interested in. This year it was the $3 coupon for used cartridges. We've got some other things that are in the works for 2007 and we're pretty confident that that will allow us to continue to gain share in ink and toner as we did in 2006.

Bill Sims - Citigroup

My next question is for John. Just a little bit of a modeling question. Gross margins were down 12 basis points during the quarter. Excluding the deleverage from vendor promo dollars, would gross margins have been up? Was vendor promo deleverage that significant?

John Mahoney

What the we're talking about is we're getting one less week of vendor promo money in the fourth quarter compared to what we would have gotten another year so the impact on earnings is about 8% or something of that 53rd week. So I think yes, gross margin would have leveraged had we had comparable promo dollars in the quarter but all of the other things I mentioned were also significant as well.

Bill Sims - Citigroup

Can you comment on the competitive landscape on the delivery side? It seems like a lot of your competitors have been struggling in the last quarter or so. When you look at your own business, is the growth coming more from market share gains? Do you see an increase in transaction sizes and maybe a comment on your perception of the overall health of the economy and business out there, if you could stretch that far?

Ron Sargent

We continue to be very excited about our delivery business and the guy who leads that business, Joe Doody, I'll ask him to answer that question.

Joe Doody

Thanks, Ron. Well, first of all, competitive nature of the marketplace, it's always been a competitive marketplace and it continues to be such, but we see rational pricing in the marketplace and we continue to drive to offer value to our customers.

That being said, we are gaining share across the entire market, be it small, medium, or large businesses. Not only that but we're also driving share of wallet improvements that are in fact driving business with existing customers to higher levels as well.

So it's a combination of all. I think the market continues to be healthy. We see good confidence among our customers, so we feel very bullish that we will continue to see the type of growth that we've experienced over the last couple of years.

Ron Sargent

In regard to the economy, I think it's a little difficult for us to assess the economy in real time. All indications are that the kind of the moderate steady growth that we've seen is going to continue. It looks like job growth has been very steady, about 100,000 jobs per month in the last several months. We're seeing positive customer comps. I think technology has been a little slow particularly during December, but in terms of the economy I think in six months I'm going to know a lot better how the economy is currently doing.

Operator

Our next question comes from the line of Mark Rowen - Prudential.

Mark Rowen - Prudential Equity

Thanks. Good morning, everyone. Ron, I'm going to follow-up on the economy even though you're not going to know for six months, but the last time you comped at 1% was I think the third quarter of '02 when we were sort of coming out of a recession. Does it feel at all like that? I know you were very careful to say that it's just technology and just furniture and big ticket items, but does it have any feel at all like that period?

Ron Sargent

Yes, I can kind of give you my view of that. Just first of all to correct the comp number, I think we had a 1% comp earlier in 2006, the first quarter of 2006, we had a 1% comp.

Mark Rowen - Prudential Equity

My mistake.

Ron Sargent

So nobody wants a 1% comp but we had one in the first quarter as well as the fourth. We did see a slowdown in tech sales in December, as Mike mentioned there were certainly issues around product availability. I think PC manufacturers were in the midst of converting to Vista, and consumers were either waiting for Vista or they were spending their holiday money on flat screen TVs rather than on office technology products.

I think the other thing I just should note in Canada, as Mike mentioned, our sales are more tech driven so their negative comp sales pulled down North American retail comp sales to 1%, so to be clear, we're certainly not happy about 1% same store sales in Q4 but as a rule, we don't chase sales at the expense of earnings.

I think the good news is that our comp sales came back in January as well as a return of our business customers from the holidays. I think the economy feels like it's felt the last couple of years, nothing like what we felt back in 2001-2002 timeframe.

Mark Rowen - Prudential Equity

Did the launch of Vista reaccelerate the technology business for you?

Ron Sargent

Well, the launch of Vista occurred in our 53rd week so that was not in our comp sales at all.

Mark Rowen - Prudential Equity

But I mean beyond that.

Ron Sargent

Beyond that, we're not going to provide any first quarter guidance.

Mark Rowen - Prudential Equity

The other question I had was can you give us sort of a read on how the South Florida rollout is going and is there anything different about that market given that it's Office Depot's home market? Is there anything different about that than rolling out in Chicago as far as proximity to existing stores that you're opening or anything like that ?

Ron Sargent

Well, Demos has led the charge. I'll let him answer that question.

Demos Parneros

Hi, good morning. The South Florida, Miami rollout in particular has been a good one so far for us as has been mentioned before. In terms of the differences between these rollout and others , what I would say is that Miami density has presented for us challenges in getting real estate simply because there's less available and less available in the box size that we're looking for.

That being said, I think our team has done a really excellent job at getting us very good locations, eight locations in the entire market. As we mentioned before, off to a nice start down there and are continuing the charge to get to 20 stores in the short-term. One of the things that I'm personally pleased about is the very strong team that we've put together down in South Florida has just done an excellent job and our customer service metrics are actually best in our company right now so I know we've taken a lot of pride in that. Other than that, I think it's still fairly early and we'll just continue to work hard down there.

Mark Rowen - Prudential Equity

The stores that you've opened and the ones that you plan to open, are they compared to Chicago, are there more competitors nearby, say within a two or three mile range than in the Chicago rollout that you had?

Demos Parneros

Yes. There are actually, you know, we've gone into both Chicago and South Florida as a third player and so they are both very competitive markets. I'd say that Miami in particular, we are a little bit closer to the direct competitors, primarily because of the density, once again, that that market presents. But that's a challenge, yet it's also a benefit because it's a very good potential market for us.

Operator

Our next question comes from the line of Matthew Fassler - Goldman Sachs.

Matthew Fassler - Goldman Sachs

Thanks a lot and good morning. I'd like to go back to the first quarter again. You mentioned the year ago first quarter of ‘06 and during that quarter, I believe there were some specific issues related to tax software and to furniture. Given that those seem to be kind of one-off issues, do you see any obstacles in your way given these comparison to a pretty strong first quarter retail performance? Was there anything lingering from Q4 that could sort of neutralize that easy compare?

Ron Sargent

I'll ask John Mahoney to answer that one, Matt.

John Mahoney

Hello, Matt. I could reread my guidance to you I guess. We're feeling pretty good about 2007 overall and I think more specific visibility is something that we try and keep to ourselves, so I'd say that we expect to have a low single-digit comp in the first quarter. We're working hard to make sure that our merchandise mix continues to be exciting and drive customers to our stores and traffic is important part of what we're doing. We saw very nice traffic in January and we hope to continue to drive that kind of traffic in Q1 which we hope will result in pretty solid sales increase.

Matthew Fassler - Goldman Sachs

Fair enough. Just a couple financial follow-ups. The two acquisitions that you made and any others I don't think you had many others in delivery over the past four quarters, but what would the aggregate revenue be just roughly from the non-comparable businesses in delivery?

John Mahoney

Although we made those acquisitions and there was one we made in the fourth quarter they were all made fairly late in the quarter, Matt. So if you look at our actual organic growth, we had only about 30 basis points of benefit in the fourth quarter which was our lowest quarter of the year from acquisitions, so for the full year, we had about 1.5% of benefit from acquisitions but in the fourth quarter we had only about 30 basis points, so our true organic growth in the fourth quarter was 13.9% to be exact.

Matthew Fassler - Goldman Sachs

As we think about the contribution as you have the full quarter can you give us a rough sense of the revenue dollars that you acquired?

John Mahoney

Yes. We're looking at roughly percent or so of our total sales right now.

Matthew Fassler - Goldman Sachs

Finally John, for other companies that have had sort of seasonality impact from the calendar shift, clearly you talked about a bit of a hit in Q1. Do we need to adjust our revenue expectations for any other quarter as a result of that change in the week?

John Mahoney

No. I think it's only the first quarter that will be impacted by that. I think as you know the calendar that tries to match up all of the holidays and this 53rd week and same number of days in the quarter makes it complicated to explain in many ways, but the idea is to try and have the same number of days, have all of the holidays and comparable quarters and in our particular business, because of the seasonality, as I mentioned, switching a high volume week for a lower volume week tends to impact the first quarter and it should be comparable after that.

Operator

Our next question comes from the line of Danielle Fox - Merrill Lynch.

Danielle Fox - Merrill Lynch

Thanks. Good morning. John, I was wondering if you could follow up with a little more detail on the working capital outlook for '07 and maybe also just talk a little bit more about why working capital wasn't quite as strong as you had hoped for 2006 and what will change?

Was that a function of some of the new distribution capabilities that you rolled out or I think you mentioned timing in your prepared remarks. But I was wondering if you could just provide a little bit more detail on what happened in '06 and what might be different in '07 if we should expect it to be a greater source of cash in '07.

John Mahoney

Right. I think as you think about our working capital you think about receivables from vendors primarily, inventory and accounts payable as the drivers of where we are. Let's take them one at a time. Receivables from vendors, during the holiday period we tend to use more coupons and other one-time programs that vendors need some specific performance documentation for, so we're in the process of getting all that to all of our vendors and getting it collected so our receivables from vendors were up fairly substantially in the fourth quarter.

On the inventory side, we did have a little bit of an investment in our delivery business so our turns were somewhat flat for the year. Retail improved somewhat maybe not as much as we think that there's an opportunity for, and then I guess the other element is we did build inventory to be able to deal with the Vista launch and have enough product available for customers so our inventory at year end, given the Vista launch in the 53rd week, was a little bit higher than it would be on a normal year end close.

And on the accounts payable side, I mentioned that mix is an issue. That's probably the biggest issue we have. Our supplies vendors tend to give us better terms, longer terms than our technology vendors give us. Therefore, as our mix shifted a little bit more towards technology over the course of the year, we saw that our days payables went down a little bit coupled with the fact that our regular payment cycle meant that 53rd week we made a number of large vendor payments to our large tech vendors.

All of those conspired to create a working capital at the end of the year that was lower than we had hoped for, but doesn't really change our view of our ability to manage working capital or to drive the free cash flows going forward.

Danielle Fox - Merrill Lynch

Ron, you mentioned in your responses to one of the other questions the impact that Vista had on technology demand, I'm wondering if over time you would expect it to be a positive catalyst and what your experience has been in the past with similar launches. Do you see the biggest impact post- launch and do you typically not participate heavily in the actual launch immediately? What your experience has been and what you might expect this time?

Ron Sargent

Sure. Let me ask Mike Miles to answer that one.

Mike Miles

Danielle, I think Microsoft has commented that Vista might not be fully living up to its hype and I think we're probably seeing some of that from a software standpoint. It has been a nice catalyst for hardware sales and for us, it's also been a nice opportunity for us to highlight our EasyTech service as we're having a pre-installation offer. I don't think this has been a huge event for the industry but I think it is on balance. It will be a positive over time even if it was a little bit of a negative for us in the fourth quarter.

Danielle Fox - Merrill Lynch

Thank you.

Operator

Our next question comes from the line of Colin McGranahan - Sanford Bernstein.

Sarah for Colin McGranahan - Sanford Bernstein

Hi. This is Sarah calling for Colin. I just wanted to follow-up on gross margin. I was hoping you could give us a little more detail on the North American delivery margin and maybe what the impact of the fulfillment centers was or will be and also can you talk about how you look at gross margin for '07? Thanks.

John Mahoney

We mentioned that in the early part of the year as we opened our fulfillment centers in Atlanta, Orlando, and Beloit we had some start up costs and some duplicate costs for running the old facilities and new facilities at the same time and that impacted our gross margin for the full year. We've seen that improve as the year went on to the point where we saw some improvement in those costs in the fourth quarter year over year.

Therefore, we expect that our delivery margins will be able to continue to expand as we go into '07, and overall, we think that that business is beginning to absorb the capacity that they had. So we're optimistic going forward that gross margins will be solid in the delivery business going forward through '07.

Similarly in the retail business, we've talked a lot about the issues that impacted our retail margins in the fourth quarter primarily promo money, but overall, in the fourth quarter, our retail margins did improve. They leveraged year over year, so we would expect to see improvement in our gross margins throughout '07.

Colin McGranahan - Sanford Bernstein

Just want to jump in here for a second. It's Colin. Cash and equivalents is about $1.5 billion or $2 a share, and I think you've got $200 million of senior notes coming due in August, so the debt for the company has declined from $700 million to $500 million and if you pay those off, down to $200 million is that something you're planning to do or will you refund that?

In the current environment which a lot more active shareholders, private equity, do you feel it's still a good idea to hold 8% of the market cap in cash on the balance sheet and why?

John Mahoney

I think that we will continue to look at how the market looks in terms of what we'll do with our debt as it comes due if there are opportunities where we could refinance it. We think that keeping some debt outstanding is an important thing for us to just keep active in the debt capital markets. Clearly, we don't target $1.5 billion as the amount we want to keep on our balance sheet.

Over the last couple of years have said that we have some plans for tuck in acquisitions which would use some of our capital. We spent less of that in '06 than we would have expected. Some of things we did like the Thrive acquisition for example, which gives us new capabilities entry into a market that will help us grow our tech services business and delivery are things that we would expect to do.

We've kept a little bit more powder dry than we should in terms of keeping more cash on the balance sheet, but the combination of our share buyback program, our dividend and what we would do with tuck-in acquisitions over the next several years we would hope would be able to bring our cash down. Given the relatively good returns that we're seeing on those kinds of investments, we would think that that would keep some our shareholders happy with our ability to continue to drive good returns and strong cash flow.

I think when you look at any particular point in time, looking at the amount of cash you have on your balance sheet , it's difficult. We tend to look over a period of time and expect that we would have over a period of time cash much lower than what we have today.

Operator

Our next question comes from the line of Brian Nagel - UBS.

Brian Nagel - UBS

Thank you. Good morning. I just want to ask a quick question again on the retail comp. It slowed in the fourth quarter after decent gains in Q2 and Q3. Did anything change in the competitive environment with respect to some of these bigger ticket sales that could have weighed upon your comps in the fourth quarter, particularly say with furniture?

Ron Sargent

Yes. Demos, your perspective?

Demos Parneros

I don't think that I've seen anything material to talk about with respect to the competitors, particularly with furniture. I'm not sure what their comments have been about their furniture business but I know that they have not been very successful in furniture either, so we do not attribute it to any sort of competitive activity.

John Mahoney

I'd just say that particularly in furniture, Mike talked about the fact that we've got some exciting Staples brand furniture coming out, so our business has been fairly solid in chairs. Our collections have continued to not perform as well as we would like them to. That represents an opportunity for '07.

In the tech area, I think Ron mentioned very clearly, we aren't going to go out and pound computers at low prices and no margin to consumers so we try to stick with our strategy focused on the small business customer and to the extent that others are chasing that consumer market, that would be different. We haven't added a lot of consumer electronic sorts of SKUs into our mix to just try and drive that consumer; we have stuck to the small business customer.

Operator

And our next question comes from the line of Joe Feldman - Telsey Advisory Group.

Joe Feldman - Telsey Advisory Group

Good morning, guys. Just wanted to ask about EasyTech a little bit and to check on how the rebranding of the EasyTech was received in the market and your opinion. Also what additional investment you think you need for '07 and beyond, whether it's in terms of staffing or just any new ideas of ways to get the technicians out there.

Ron Sargent

Well, let me just make a comment and I'll ask Demos to talk about EasyTech. In terms of additional investments, our philosophy is to earn your right to grow, so we'll invest in the business if the business continues to do well and we won't if it doesn't, but we're pretty optimistic about it. I don't see any kind of additional investments over and above the margins that come with EasyTech.

Demos, do you want to talk about the launch?

Demos Parneros

Yes. We've talked about this before. It's a very strong margin business for us and the earn as you go model is something that we're comfortable with and are used to here. We sort of did the same thing with our copy initiative. I'm very excited about this initiative. This is something that customers are pulling for. They want this. They need it. There's a lot of anxiety out there with respect to the personal identity and personal security, data security. I feel very good about our effort to get associates trained in every single store so we're up and running.

As Mike mentioned before, we did some promotions with Vista with free installs on Vista. With Edo things like free tune ups, et cetera. It's early on at this point. I'd say so far so good and we'll push it hard as a good growth idea for next year.

Joe Feldman - Telsey Advisory Group

Again on the Easy Tech, what about the competitive pressures you're seeing? I know that for example, Best Buy's Geek Squad target is more of a consumer as opposed to the small business guy, but they're going all over the place. We've even heard that they are now testing at some locations in Kinkos stores and just if you are seeing any incremental competition there?

Demos Parneros

For us, it's very early in the game. This is such a big fragmented market, it's really not having an impact on us at this point and I think our priorities are to get this up and running and to take care of our customers and we've got the perfect customer for this business.

Joe Feldman - Telsey Advisory Group

Got it. Thanks. The other question I wanted to address was international. With India and China, thank you for the detail that you did provide earlier but also, what's your strategy for the coming year there? I mean, and with stores that you're opening, are they going to be branded as Staples, rebranded as Staples or in India with the new Pantaloon joint venture, the standalone stores, are those going to be Staples stores? How do you start to develop the brand in those markets?

Ron Sargent

Obviously, we're trying to build a global brand and in India, the stores will be called Staples, and Pei Pei I believe will do the same thing there, although we haven't even closed on that deal yet. Obviously, we think the Staples brand is a great brand and it means office supplies and it has global applications and I think we're going to be heading in that direction to the extent that we can. We obviously don't want to disrupt the long term names, but I think we'll evolve to a Staples brand globally over time.

Operator

Our next question comes from the line of Michael Baker - Deutsche Bank.

Michael Baker - Deutsche Bank

It looks like if you take out the extra week this quarter, the earnings growth was I think about 10% or 11%. The margins might even have been down, yet your guidance suggests that the earnings will be back to 15% to 20% on a 52-week basis next year and margins will be up. You've articulated a lot of things that happened in the quarter but broadly speaking, what does give you the confidence that you satisfy that kind of rebound next year? Or is it really just not having the weakness in technology and the vendor payments, etc.

John Mahoney

I think that while we calculate the impact of the 53rd week just to try and be clear, we think that the business overall is healthy and all the trends that we saw, we can't just look at the fourth quarter. We need to look at the whole year and when you think about the success we've had improving our international margins, the real strong business that we've seen in North American delivery coupled with very solid growth in the North American retail business, we believe that our objectives are very achievable and we have a road map to get there and are confident we'll be able to sustain the results we predict.

Ron Sargent

I think we've been very clear that we had a lot of moving parts and I think a lot of them will drive the top line and thus drive the bottom line and whether that's own brand or direct sourcing in the retail business, whether it's the Copy Center, some of the new markets we're entering, mobile tech, new retail channels, I think all of those, we feel pretty bullish about going forward and then delivery, that's been a growth machine for the last several years. We expect that to continue.

New categories are coming down the pipe, whether it's mailing and shipping or tech services. We talked about in the past and contract continues to roll right along. We got opportunities on the supply chain in the delivery business and then when you look at the growth in our internet business, I'm not sure exactly where we stack up but we're probably one of the top two internet retailers in the world.

Europe, I think we've talked a lot about Europe this morning, and we feel very comfortable about continuing to make progress in 2007 in Europe so it's hard for us to be specific about this initiative equals this amount of margin improvement, but I think what you're hearing this morning is we're pretty optimistic about continued great results in '07.

Operator

And our next question comes from the line of Peter Keith - Piper Jaffrey.

Peter Keith - Piper Jaffray

Hi. Good morning, everyone. This is Peter Keith actually calling in for Mitch. Just wanted to ask a little bit on the Copy Center business, within the stores I know there's a medium term goal of getting to about $600,000 in revenue per store. Could you kind of just give us some idea of how you guys are trending to that goal?

Ron Sargent

I think we started around $300,000 and I think last I heard we were at $380,000 close to $400,000 per store. I would say we're on track with our growth plans. We've had strong comps over the last few years. We've continued to add capability in our assortment. We've added across the chain digital equipment. We've added services like e-mail to all stores, web submission, color wide format which is a really fast growing part of our business.

Some of the other less glamorous business, like six or seven different kinds of binding, so it's a building process there. We've spent quite a bit of time and effort on training our associates, so I'd say the plan is moving along as expected.

Peter Keith - Piper Jaffray

How might you be expanding that into your other segments such as delivery or international?

Joe Doody

We're in the process of rolling out a copy alternative for our primarily focused on our contract customers, overflow copy services that are sent to a closed door facility, we turn them around and deliver to them the next day, integrating that into our operations, so that is something that we're in the stages of rolling out. We've got multiple sites up and operating and as Ron said, it's prove it and pay as you go and that's exactly what we're doing with that program as well.

John Mahoney

From an international perspective, our stores in the UK and Germany in particular have begun to emphasize some of the quality initiatives that John Burke and his team put in place when we first started executing our copy and print strategy in our U.S. stores. I think that the next issue will be to drive the kind of awareness that we drove following our ability to demonstrate we can serve customers effectively there so I think that will be a big driver of growth in those markets as well.

Peter Keith - Piper Jaffray

Okay. Thank you for that feedback. I just have one last question and I know there's been a lot of discussion around technology sales during the quarter, but just as you compare December to January, and I know you talked about some product unavailability in December and things like that. Did you actually see that pick up in January as that month progressed?

Ron Sargent

Yes. January was a better month than December as really our customer count came back. Our small business customers came back to work. December is much more of a consumer promotional time and probably a great year for buying a flat screen TV but we didn't sell any.

Peter Keith - Piper Jaffray

Okay. Great. Thank you very much, guys.

Operator

And our next question comes from the line of Dan Binder - Buckingham Research.

Dan Binder - Buckingham Research Group

First, you mentioned in your comments on Europe that the catalog operating margins doubled. I'm just curious, did that have anything to do with any kind of lumpiness in prospecting or is it a sustainable double? That's the first question.

The second question is related to North American Retail. You talked about Canada being a drag. You talked about this Vista launch maybe having a little bit of a drag as we. I was wondering how much you attribute to the Vista launch and should we expect Canada to continue to be a drag?

Ron Sargent

A lot of questions there. Certainly the catalog business in Europe, no, I don't think there was anything kind of terribly unusual about the fourth quarter in terms of progress.

I think John alluded to the fact we are making investments in the first quarter so you shouldn't be expecting any big improvement in operating margin or operating margins rate in Europe in the first quarter, but no, I don't think there's anything that we're doing in our catalog business that would preclude us from continuing to make good progress next year.

Like I said, the top line is going and as John mentioned, it's all about execution and I think we're executing better and better as the months go by. In terms of Canada?

Mike Miles

In terms of Canada, as Ron said, we do two times as many computer sales up there as a percentage of our mix versus U.S. and so when ASPs are under pressure like they were in the fourth quarter, it has a much bigger impact on that business, and we're really looking at that more as a one-time event. I think in Q1, we've got Vista capable PCs which tend to be more powerful and higher ASP, higher sales price, and also they've launched Apple computers in the stores in Canada which are a higher selling price product, so I think the Canadian business as we said, they had a good year and we expect them to continue to be a strong performer for us.

Dan Binder - Buckingham Research Group

With the stepped-up store expansion in North America in recent years, I'm just wondering, are you seeing an increased level of competitive cannibalization in the store base where you got some competitors opening up a bit more in the northeast and mid-Atlantic?

Mike Miles

No, not really. It's interesting when you look at some of the markets that historically have been considered the most heavily stored like Orlando and Dallas and Atlanta, those have been some of the better comp sales growth Markets in the chain. So I think that to the extent we've had pressure on the comps, it's been more related to some of these product lines issues than its been to new store opening activities.

Dan Binder - Buckingham Research Group

On the receivables, John you mentioned vendors needed certain documentation to collect on those receivables. I'm assuming you don't view any major risks there in terms of whether they accept that documentation?

John Mahoney

No. We have a great team in our vendor promo area that is very precise in making sure that we have all of our contracts documented and takes a look at how we performed against those contracts. So for example, making sure that we only record receivables for the amount that the vendors have agreed to even if we may have used more coupons in the selling process in the store, so we have no risks on collectability there.

Dan Binder - Buckingham Research Group

And then on the delivery business, great job. With that said, I notice there was a very slight deceleration quarter to quarter. Did that have more to do with the less of an impact that the acquisitions had on the top line growth rate?

Joe Doody

Yes, Dan. A little bit of that but again, when you look at it over the last two years, our two year sales growth has been between 28% to 35%, and this quarter, it was 32.5%, so I think we're in the range of solid mid-teens type of growth on a year-over-year basis and that shows up and has for the last eight quarters and I expect it to be there each of the four quarters of this coming year as well.

Dan Binder - Buckingham Research Group

In terms of own -brand and maybe lumped into that global sourcing, what would you expect the rate of progress to be this year as you venture towards that 30% mix? Maybe in that commentary you can include what you're doing with owned brand and global sourcing for the other divisions as well.

John Mahoney

We've said that our 30% target is a long-term target. We've got a lot of activity developing new products. We have hundreds of new products this year. I expect we'll have a lot of new products next year. The exact progress we make, we wouldn't want to predict. It will be one of the drivers of improving margins. That's one of the reasons we're confident our gross margins will improve in '07, but on both fronts there's a lot of activity and we'll see improvement exactly how much, we'll see as the year goes on.

Dan Binder - Buckingham Research Group

Is the private label being pursued as aggressively in international and delivery as it is in North American retail?

John Mahoney

Absolutely. Own-brand is probably a higher rate in North American delivery than it is in North American retail, and in Europe, it's probably not as high as North American retail but it's getting there fast.

Dan Binder - Buckingham Research Group

Great. Thanks a lot.

Operator

And our last question comes from the line of Anthony Tacumbe - FTN Midwest Securities.

Anthony Tacumbe - FTN Midwest

Good morning. Thanks for taking my question. Just had a question about the delivery business in Miami. I know that when you had first started to open retail stores in Chicago, you had a 91% increase in your delivery business as a benefit from the increased advertising. I was wondering, first off did you see a similar sort of bump up in your delivery business in Miami and if you could give a quick update on that and what that Chicago number was for 2006?

Joe Doody

Anthony, first of all, in Miami, yes we are seeing a great growth in the Miami market, not just with the Staples business delivery which very much aligns with our retail but also in our contract and our Quill business. So our overall NAD business in Miami was extremely good last year, about 2Xour growth rate for our overall business.

As far as Chicago, we continue to see great growth in the Chicago market on SBD as well in concert with our entry into the Chicago market so extremely satisfied there as well.

Operator

And ladies and gentlemen, this does conclude the question and answer portion of today's conference call. I'd like to turn the presentation back over to Mr. Ron Sargent for any closing remarks.

Ron Sargent

Thank you. I'd just like to close by again thanking our 74,000 associates for delivering great results in 2006, making our company's 20th anniversary just a banner year. In North America we delivered the best sales growth and margins in our industry with plenty of ideas to make us even better. In Europe, we made great progress in turning around our business last year and in Asia and South America, I believe we set the stage for future success.

Looking ahead, the team is working hard to accelerate our growth while remaining every bit as disciplined about driving returns and margin improvement.

Thanks again for joining us on the call this morning. We look forward to speaking with all of you again soon.

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Source: Staples Q4 2006 Earnings Call Transcript
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