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Staples (NASDAQ:SPLS)

Q4 2011 Earnings Call

February 29, 2012 9:00 am ET

Executives

Chris Powers -

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

Michael A. Miles - President, Chief Operating Officer and President of Staples International

John J. Mahoney - Vice Chairman

Demos Parneros - President of US Retail Stores

Joseph G. Doody - President of North American Delivery

Analysts

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

Michael Lasser - UBS Investment Bank, Research Division

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

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

Christopher Horvers - JP Morgan Chase & Co, Research Division

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

Kate McShane - Citigroup Inc, Research Division

Joscelyn MacKay - Morningstar Inc., Research Division

David Gober - Morgan Stanley, Research Division

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

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

Sam Reid - Barclays Capital, Research Division

Joseph I. Feldman - Telsey Advisory Group LLC

Jeremy Ridder Brunelli - Consumer Edge Research, LLC

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2011 Staples. Inc. Earnings Conference Call. My name is Jeff, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Christopher Powers, Director of Investor Relations. You have the floor, sir.

Chris Powers

Thanks, Jeff. Good morning, everyone, and thank you for joining us for our fourth quarter 2011 earnings announcement.

During today's call, we will discuss certain non-GAAP metrics to provide investors with useful information about our financial performance. Please see the Financial Measures and Other Data section of the Investor Information portion of www.staples.com for an explanation and reconciliation of 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' 10-K filed this morning.

Here to discuss Staples' Q4 and full year performance and business outlook are Ron Sargent, Chairman and Chief Executive Officer; Mike Miles, President and Chief Operating Officer; and John Mahoney, Vice Chairman. Also joining us are Demos Parneros, President of U.S. Stores; and Joe Doody, President of North American Delivery; as well as Christine Komola, Chief Financial Officer. Ron?

Ronald L. Sargent

Thanks, Chris, and good morning, everybody. Thanks for joining us today. I'm pleased to announce Staples' fourth quarter and year-end results. Let me start with the headlines. Total company sales for the fourth quarter were $6.5 billion, that's an increase of 1%. Operating margin expanded to 7.3%, and we grew adjusted earnings per share 5% to $0.41 during the quarter. For the full year, sales were up 2% to $25 billion, and adjusted earnings per share increased 8% to $1.37.

During 2011, we made good progress on several key initiatives in North America, and we grew the top line and expanded our operating margin in both North American Delivery and North American Retail. Our international performance was weak, and we faced a number of challenges particularly in our Australian and European Retail businesses.

Our cash flow for the year was very strong. We generated $1.2 billion of free cash flow after investing $384 million in capital expenditures. Additionally, we repurchased over $600 million of stock during the year, and we paid about $280 million in dividends. We also paid down a $500 million bond that matured early in the year. Our solid cash flow reflects the strength of our business, and we remain committed to returning excess cash to our shareholders.

Before we get into our segment performance, I wanted to just take a minute to discuss how we're positioning Staples for the future in the context of our 2011 results. First of all, as it always has, everything starts with the customer. And for 25 years, we responded to the needs with an assortment of products and services, great customer service and a strong multichannel offering. We've been successful at that, and that won't change. But to accelerate growth, we have to continue to evolve, as the needs of our customers change, and we have to take full advantage of our world-class supply chain, our strong store network and our $11 billion e-commerce business.

Our plan for 2012 is built on 5 key objectives: first, we'll continue to invest in our business to drive growth for the future; second, we'll improve store productivity by generating higher sales per store and by continuing to rationalize our real estate portfolio; third, we'll build on our momentum in categories beyond office supplies in areas like services, facilities and several others; fourth, we'll focus intensely on improving profitability in our International business. This is a very high priority for the company. And finally, we'll take advantage of the leadership changes we've made around the world. In short, we'll continue to win by focusing on the changing needs of our customers. These concepts of change in the product lifecycle aren't new to us. The needs of our customers have been evolving since we opened our first store back in 1986, and we continue to actively manage our business to address these changes.

Over the past few years, we've invested heavily to drive growth in products and services in addition to traditional supplies, and I'm happy to report that we're gaining momentum and building critical mass in a number of areas beyond the core. Today, we have a worldwide facilities and breakroom business of over $1.5 billion. We sell another $1.5 billion of computers and tablets and e-readers, and we generate more than $1 billion of sales from our cross-channel, Copy & Print offering.

Within North American Delivery, our promotional products business exceeds $300 million, and in North American Retail, our technology services business is now over $200 million. We also now have a new mobile phone offering in 500 stores across the United States to address an essential need for our small business customers, and we're off to a great start in that area as well.

To put this in perspective, these adjacent businesses combined are now about as big as our global ink and toner business and much larger than our cut-sheet copy paper business. And with very low market share across each of these categories, we're increasingly confident that they will help fuel our top line growth for many years to come.

Throughout 2011, we continued to do a nice job carefully managing our destination categories like ink and toner, which was flat for the year; paper, which was up in the low single digits versus 2010. And as always, there are certain categories like computer media, copy and fax machine supplies and digital cameras, which are in decline. While these categories only make up about 2% of total company sales during 2011, they were down more than $100 million in sales combined. So as we look ahead, our strategy is to accelerate growth in our adjacent businesses and continue to gain share in core office supplies, while at the same time, making steady progress in improving profits.

Now let's take a look at our Q4 results for each of our business units in a little more detail. And I'm going to start this morning with North American Delivery. Sales for the fourth quarter were $2.5 billion, they were up 2%. Q4 was our eighth consecutive quarter of top line growth in NAD. Sales increased in each of our delivery businesses with particular strength in staples.com. Sales of core office supplies were flat in North American Delivery, and we continue to drive solid top line growth in adjacent categories. The facilities and breakroom category was our biggest success during 2011. We continued to gain momentum during the fourth quarter, with sales growth in the mid- to high-teens. We're building critical mass in this category, and it now makes up more than 8% of total North American Delivery sales.

Our promotional products business also performed well with high single-digit sales growth in Q4. In contract, customer acquisition and retention was strong, and top line trends in the mid-market outperformed sales to large enterprise customers. Sales to the federal government remain soft with the top line down in the low -- in the double-digit range versus last year's fourth quarter.

NAD operating margin increased 84 basis points to 9.1%, with improvement across each of our 3 businesses. Lower incentive compensation and improved distribution efficiencies were offset by a modest decline in product margins. Throughout 2011, we made big investments in staples.com to improve customer experience and to accelerate growth. We enhanced our overall site design, we added proactive chat. We expanded our online print capabilities, we launched new iPhone and Android mobile apps, we launched a new tablet app and we also developed back-to-school, holiday and Martha Stewart micro sites. These investments drove improving top line trends, and we built momentum throughout the back half of the year; customer acquisition improved; our print business more than doubled; and we gained share in core supplies, ink, toner, as well as adjacent categories like facilities and breakroom supplies.

Our customer conversion rate also increased as a result of these investments. And last month, we announced the creation of our new e-commerce innovation center, which is scheduled to open in Cambridge, Massachusetts this spring. As the world's second largest e-commerce company, we will utilize the Innovation Center to design and implement new and innovative solutions for the millions of customers who shop on staples.com and in our retail stores.

Looking ahead, we have solid plans to drive continued top and bottom line improvement in North American Delivery during 2012. We'll continue to gain share in core office supplies, while accelerating growth in adjacent categories. We'll invest in sales force training, marketing, price impression and promotion to drive awareness and build on our momentum in facilities and breakroom supplies. We plan to grow this category by more than $100 million in 2012.

We'll make significant progress migrating legacies, Corporate Express, customers over to our new and improved ordering platform, staplesadvantage.com. We'll invest in additional e-commerce improvements, with a goal of delivering the best end-to-end shopping experience for business customers. And we'll continue making investments to improve the performance and efficiency of our NAD supply chain network.

Moving on to North American Retail. Sales for the fourth quarter were $2.6 billion, that was an increase of 3% compared to Q4 of 2010. Fourth quarter same-store sales were up 2%, and comps were stronger in the U.S. than they were in Canada. We saw a slight improvement in traffic year-over-year, with average order size driving the majority of our Q4 comp growth.

Our performance in North American Retail during the fourth quarter was solid. Sales of core office supplies increased in the low single digits, and we continued to build momentum in adjacent businesses. Our high-margin EasyTech and Copy & Print business both comped above the house, and we saw strong double-digit growth in our expanded offering in facility and breakroom.

We also saw a very strong demand for technology products. Over the last few years, we've expanded our assortment and made big investments in store remodels, associate training and marketing to strengthen our offering and drive improved customer awareness. The good news is that these investments are starting to pay off. During the fourth quarter, we achieved strong top line growth and categories like tablets, e-readers and mobile phones. This was supported by a solid holiday season and the introduction of Apple products, including the iPad 2 in our Canadian stores, late in the third quarter.

Turning to profitability. North American Retail operating margin was 9.1% for the fourth quarter, that was up 99 basis points year-over-year. This reflects higher product margin, leverage of fixed expenses on higher sales, as well as lower incentive comp, offset by ongoing investments to drive growth in our adjacent categories. During the fourth quarter, we opened 14 stores, we closed 5. And for the full year, we opened 31 stores and closed 14. We ended the year with a total of 1,917 stores in North America, and that includes 1,583 in the United States and 334 stores in Canada.

Throughout 2011, we made great progress with our real estate strategy. During the year, we re-negotiated more than 150 leases and successfully renewed 90% of them below option rent. In 2012, we have another 150 leases up for renewal, and our real estate team is working hard reducing square footage where it makes sense and ensuring that we continue getting the best deals possible.

Looking ahead, we're only planning to open a handful of new stores in select markets this year. We're also planning to close an equal number of stores as leases expire. As a result, we expect no net store growth in North America during 2012. We feel good about our plans to improve store productivity in 2012. To be successful here, we don't need to hit home runs, instead, we'll take advantage of the investments we've already made over the past few years and win by hitting a bunch of singles and doubles.

We'll increase marketing efficiency to drive customer traffic and build further awareness of our technology offering. We'll continue to add account managers and drive customer acquisition to accelerate growth in our Copy & Print business. We expect to drive solid top line growth in newer categories like mobile phones and our expanded assortment of facility and breakroom supplies. We'll benefit from the investment we've made to train our retail associates on our new and improved service model by driving increased customer conversion. And we'll reinvigorate the core office supply assortment with our new Martha Stewart Home Office product line. This exclusive line shows how we're leveraging our scale and expertise to offer new solutions and attract new customers to Staples.

Let me wrap up by telling you that we recently added 2 strong players to our North American Retail team. Mike Edwards, a retail industry veteran, who most recently served as President and CEO of Borders, joined Staples as our new Executive Vice President of U.S. Retail Merchandising. We also hired Alison Corcoran as Senior Vice President of U.S. Retail Marketing. Alison is a seasoned marketing executive, who has served as Chief Marketing Officer at BJ's Wholesale Club and more recently at Sears Canada. We're excited to have Mike and Alison join the Staples team and look forward to each of them helping us make progress against our goals in 2012.

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

Michael A. Miles

Thanks, Ron. Good morning, everyone. Staples international reported fourth quarter sales of $1.3 billion, a decline of 4% in local currency, 5% in U.S. dollars.

Taking a closer look at our European office products business, sales were down about 3% in local currency for the fourth quarter. While this represents sequential improvement from Q3, sales across Europe have suffered significantly through the current economic crisis. Delivery continues to outperform retail with relative strength in contract, which grew year-over-year.

Our new mid-market sales teams in the U.K. and Germany are off to a great start. We continued to gain traction and differentiate our offer using the best practices that have fueled our success in North America. While this is still a small piece of our European contract business, we're very excited about this long-term growth opportunity.

Retail same-store sales in Europe were down 9% with particular weakness in durable categories like computers and printing hardware, which declined in the double digits. While trends in our European Retail business remained tough, our core supplies business performed better than the house with sales of ink, toner and paper down in the mid-single digits, while office supplies comped down about 1%.

We also saw solid performance in our European Copy & Print business, which grew year-over-year. This helped improve our gross margin rate in European Retail during the fourth quarter.

Turning to Australia, sales in local currency were down in the mid-single digits, and profitability was weak. We saw sequential improvement compared to the third quarter but still had inconsistent service early in Q4, and our selling model has not been as productive as planned. Jay Mutschler formally took on his new role as President of Staples Australia and New Zealand late in the fourth quarter, and we expect to get this business back on track in 2012.

This year, we'll introduce a mid-market sales force initiative based on the U.S. model and our successful launch in Europe. In our high-growth markets in Asia and South America, overall sales improved, and we did a good job reducing operating losses versus Q4 of last year. We've made progress expanding gross margins in China and Argentina, and the productivity of our sales teams in these markets continues to improve.

Turning to profitability. International operating margin for the fourth quarter declined 173 basis points to 2.5%. This decline was driven by deleverage of our distribution and delivery expense, as well as deleverage of rent expense on lower sales in our European Retail business. We continue to carefully manage our costs and partially offset these headwinds with reduced marketing and G&A expense.

2011 was a very difficult year for International Operations. Coming into the year, we had plans to drive solid operating margin improvement in a flat sales environment. The deteriorating macro trends in Europe had a negative impact on our results, and we also had execution issues both in Europe and Australia.

As Ron noted that at the beginning of the call, our plans for 2012 in international revolve around very tight expense management and improving our profitability. We'll do a better job selling core office supplies and services to business customers and continue to de-emphasize our assortment of lower-margin technology. We don't plan to grow our store count during 2012, and we will be extremely disciplined in how we deploy our capital.

Most significant difference between the profit rate in North America and International is G&A. And our need to reduce G&A in our International business has only increased with the softer sales environment. We have opportunities to consolidate subscale business units and operations, centralize functions currently dispersed throughout multiple countries and to reduce the number of layers we have in the business.

We're taking action to rightsize our expense base, and earlier this month, initiated significant headcount reductions in both Europe and Australia. These moves will help improve our cost structure, lead better results from functional expertise and streamlined decision-making. We expect that these headcount reductions, and associated severance expense will be a headwind to international profitability during the first half of 2012, but will have a favorable impact on the bottom line going forward.

Beyond streamlining our cost structure, we're also leveraging the strategies behind our success in North America to get the top line going in international. We'll continue to grow our mid-market contract offering in Europe. We'll increase our mix of higher-margin Staples brand products and bring our international penetration rate more in line with our rate in North America. We'll expand our high-margin, Copy & Print offering in our European stores. And finally, we'll take a hard look at all of our international assets to ensure that they fit with our long-term strategic objectives.

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

John J. Mahoney

Thanks, Mike. Good morning, everybody. For the fourth quarter, total company sales increased 1% versus last year to $6.5 billion. The foreign exchange impact from a stronger U.S. dollar hurt the top line by about 30 basis points during Q4. Our fourth quarter GAAP earnings per share on a fully diluted basis increased 8% to $0.41 versus the fourth quarter of 2010. Excluding $6 million of pretax integration and restructuring expense during the fourth quarter of the last year, adjusted earnings per diluted share grew 5% year-over-year.

Gross profit margins for the fourth quarter was flat compared to the prior year at 26.8%. This reflects lower distribution and rent expense in North America offset by deleverage of distribution and rent expenses in our International business. SG&A decreased 48 basis points versus last year's fourth quarter, primarily due to reduced incentive compensation and lower depreciation expense. Excluding integration and restructuring expense in Q4 of last year, total company operating margin increased 48 basis points during the fourth quarter to 7.3%.

Our effective tax rate for the quarter was 34%. This was 740 basis points higher than our tax rate of 26.6% during last year's fourth quarter mainly due to the renewal of certain tax provisions late last year that reduced our tax rate for the full year in 2010. Capital expenditures for 2011 were $384 million compared to the $409 million that we spent on capital last year. With full year operating cash flow of $1.6 billion, we generated $1.2 billion of free cash flow for the year.

During the fourth quarter, we repurchased 7.8 million shares for $115 million bringing our total shares repurchased during 2011 to 37.3 million or $605 million. The weighted average shares outstanding used to calculate diluted earnings per share for the fourth quarter was 692 million shares. At the end of 2011, Staples had approximately $2.5 billion in liquidity, including cash and cash equivalents of about $1.3 billion and available lines of credit of about $1.2 billion.

Turning to our outlook. Last year, we provided investors with both quarterly and annual financial guidance. This year, we're only going to focus on our annual expectations and provide more color on the strategic drivers of our business. This more closely aligns with how we set and measure progress towards achieving our annual company-wide objectives.

For 2012, we expect slow growth in the U.S. economy and for the demand environment in Europe to remain soft. We plan to continue gaining share in core categories like paper, ink and toner. We're excited about the launch of Windows 8 during the back half of 2012, and the trend in PC shipments will be important to our top line throughout the year. We also expect demand for tablets, e-readers and smartphones to remain very strong.

Based on these assumptions, we expect total company sales for the full year to increase in the low single digits and diluted earnings per share for full year to increase in the high single digits comparing to adjusted diluted earnings per share of $1.37 in 2011. Please keep in mind that this guidance includes the modest favorable impact from the 53rd week in 2012, as well as the modest unfavorable impact to both top and bottom line as a result of a stronger U.S. dollar. We also expect our effective tax rate for 2012 to decrease to 32.5%. This is a result of the shift of our geographic mix of taxable earnings primarily in Canada where we expect to increase the foreign tax rate differential that helps reduce our effective tax rate.

During 2012, we'll deliver another year of solid free cash flow and generate more than $1 billion. Our cash priorities remain the same. First, we'll continue to invest in the business. Investments we're making to improve our supply chain and enhance staples.com are great examples of how we're leveraging our financial strength to drive growth and further differentiate our offering. Second, we'll remain focused on maintaining a strong balance sheet and a solid credit rating. And finally, we'll return cash to shareholders through dividends and share repurchases. We also plan to repay our $325 million note, which matures in October of this year in cash.

Thank you for your time this morning. I'll now turn it back over to Jeff for moderating Q&A.

Question-and-Answer Session

Operator

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

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

First question. We heard from you today that sales teams have at least stabilized, if not improved here in your core businesses. And your competitors have said something similar, as they reported their fourth quarter results in the past couple of weeks. So the question I have is, as you look at the business, I mean, to what extent do you think this stabilization reflects the better macroeconomic data we're seeing? And more important than that is -- I mean, if you could maybe talk to some of your contract -- with some of your contract customers. Do you think this is really the bottom we've been waiting for, of which we could see better demand trends in the office products category going forward?

Ronald L. Sargent

Well, let me preface my comments by saying I'm not an economist. As John mentioned, for guidance and planning purposes, we're going to assume a slow-growth economy in North America, and we're going to assume a no-growth economy in Europe. But I got to tell you, Brian, in our business, things are starting to feel little better especially in North America. Retail comps in the U.S. are a bit better. Consumables sales seem to be improving. Staples.com is gaining some nice traction, which is really the small business health index, I guess. And our growth initiatives are finally becoming growth initiatives. This is, I think, also supported by some good macro data that's coming in on white-collar jobs, GDP growth, housing consumer spending, industrial production. And I think even Europe looks a little more stable in 2012 than, certainly, it did last year. So I guess the summary comment would be that I'm cautiously optimistic that the economy is slowly starting to turn after 3 years of recession, and small business seems to be leading the way. So I think that's a moderately positive harbinger of things to come.

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

Great. And I guess, a follow-up question maybe for Mike on the European businesses. You talked about some of the expense cuts you've made there recently. But I guess the other question, if you look at the results today, it seems like the real weak spot remains in the retail side, particularly in the U.K. What point do you take a more aggressive attack there to rationalize some of those operations?

Ronald L. Sargent

Mike?

Michael A. Miles

Yes. Well, Brian I think to your point, we've had several years now of negative comps in Europe. As we look at the business though, we still see reasons to believe it's the right place for us to be over the long term. From the standpoint of customer research that confirms the appeal of the superstore concept, the importance of multichannel, and the fact that we see a lot of room for improvement in things like copy center and tech services and own brand. And when you look at the sort of what's behind our comp right now, it's really the technology categories: computers, printers, tech hardware that's driving the declines. We're down almost 20% in those categories in the fourth quarter versus modestly positive in that space in North American Retail. So our office supplies business there is not as sick as the overall comps might suggest. And our sales per square foot and our gross margin rates in Europe are pretty comparable with what we doing in the North American Retail. So, clearly, this feels to us like a business that we need to fix rather than a business that we need to be looking to get out of. Obviously, as leases come up on stores that are unprofitable, we're taking a hard look at those -- or as we have opportunities to exit specific locations. But we're profitable in every single one of our countries except Belgium. And we're profitable in the vast majority of our stores. So we haven't yet come to the conclusion that any kind of wholesale change to the strategy to participate in European Retail makes sense. It's much more of an effort to fix the business that we've got today.

Operator

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

Michael Lasser - UBS Investment Bank, Research Division

A couple, actually. Number one, can you talk a little bit more about the gross margin performance in the fourth quarter? Last year, during this time, you got smacked pretty hard, and we would have expected a little bit more recovery, given some of the temporary factors that impacted the margin rate in the fourth quarter last year, so what restrained it this year?

Ronald L. Sargent

John?

John J. Mahoney

Sure, Michael. Yes, I mean, I think that -- as I tried to outline, there was a difference between gross margin performance in international and in North America. We saw strong gross margin performance in both the North American Retail business and through most of NAD with some exceptions in the Contract business. So I think we did see a strong recovery in gross margin compared to the significant markdowns we took to clear out our technology inventory, and largely in the first -- in the fourth quarter last year, in particular, the U.S. Retail business. So I think when you look at the overall mix, it did come in flat. But that it's a tale of variety of different elements that got us to flat with the strong performance throughout most of the North American business.

Michael Lasser - UBS Investment Bank, Research Division

Okay. It seems like -- not all that was in North American Retail that was lost was regained? So was the delta due from investments?

John J. Mahoney

Yes. I mean, I think that as we tried to outline -- we saw some categories that are declined significantly that our small part of the business but caused a dramatic decrease in sales. The categories that Ron mentioned, like computer media and digital cameras. That cost us more than $100 million in sales in the past year. So some of the investments we've made in categories like mobile phones, in facilities and breakroom are getting to be big enough, so that they can make a difference in the total sales of the company, and that's what we expect to drive our ability to get the top line growing a little bit faster during 2012 in spite of what was said is gaining share and supplies, but with a relatively slow growth economy in North America, and as Ron said, no growth in Europe. So I think the things that we've invested in are starting to bear fruit and give us optimism for the long-term. And we're just waiting to see how that all fits together for 2012, because -- as we saw it last year, what you think at the beginning of the year with so much of our business in the back half doesn't always portend what the year will bring.

Michael Lasser - UBS Investment Bank, Research Division

Okay. And one last one from our end. Looks like the guidance for 2012 is implying only slight margin improvement for the year, despite the addition of the 53rd week on a low single-digit sales increase. So a, can you give us some sense for what sort of economic conditions have to exist for the overall sales rate to creep up in the mid-single-digit range? And if that's unlikely, over the long term, what can you do to re-engineer the business perhaps to generate more leverage, more margin expansion on a low-single-digit type of top line increase, given that it seems like the operating environment that currently exists is going to be there for a while?

Ronald L. Sargent

As I said, that's -- for planning purposes, it always makes sense to be very conservative in you're planning. I don't think there's any upside in us for being too aggressive on our full year earnings guidance, given the current economic environment, because I don't know what the future's going to bring. I think probably last year was a great example of getting ahead of ourselves, and we paid for that. I think our industry is currently a bit out of favor, although that maybe seems to be changing. But I think that too will change, as our top line gets going again and as we get more people back to work. I don't know, John, you want to...

John J. Mahoney

Well, the only one thing I just like to add to that is that we generate $2 billion of EBITDA, and we wind up spending a lot of time talking about issues around the margin like things like the tax rate. And they really are dwarfed by relatively small changes in the operating results. And as we are -- at a time when we have a lot of moving parts, we've got growth businesses that are kicking in, and we've got some businesses that are not growing as fast. So when you think about the relatively small changes in the core or in the bulk of the operating business, some of the things that we focus on, on the margins are less important. And so I think I would encourage you to be thinking about what some of the macro trends that we've highlighted like the impact of Windows 8, for example, on PC sales or the impact of -- the tablet market will have on the business, coupled with the success we have in our new growth categories, like facilities and breakroom, are much more important to how our year will come out than the other items in the margin that tend to get called out.

Ronald L. Sargent

And I think we remain confident that we'll continue to grow earnings per share. I mean, this year, I think our earnings per share were up 8%, and that was on top of last year. Earnings per share were up 11% in 2010. And we think we'll continue to operate our business in such a way that we'll be able to grow earnings per share, no matter what the kind of economic climate we're faced with.

Operator

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

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

First, John, I guess, this is your last quarter as the CFO. I know you're not leaving the scene entirely, but congratulations. It's been a pleasure working with you over the years.

John J. Mahoney

It's been great working with all of you folks.

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

First question for Mike. Obviously, the margins in the International business have been really frustrating. It sounds like you're going after the cost a bit more aggressively. But what is the magnitude of that, both in kind of the near-term 2012 impact? And then longer-term, how much cost can you really take out? Can you give us a quantification of what you're aiming for there?

Michael A. Miles

Well, Colin, we're -- you've seen the roadmap that we've got for improving the profitability in the International business. And as disappointing as 2011 was, we still think that, that roadmap holds validity. And in fact, now I think we would add to that road map the bounce back of the Australia performances as things that we would count on to improve the performance of the business. But it's that's the same stuff, and it's the same basic order of magnitude in terms of G&A, supply chain, more Staples brand products, reducing the losses from some of our higher-growth markets and then the mix of our business. In terms of what we're doing in the short term, in Europe and Australia, the magnitude of the reduction is double hundred people, and it's roughly split between Europe and Australia. We're in the midst right now of notifications and consultations with Works Councils in Europe, so I'm sure you can appreciate, we can't really be specific about the magnitude or the timing of expenses. But we think that it will be a noticeable headwind for us in the International P&L from first half of the year. But in the long term, we think that there are 150 basis points of upside to where we are today in international profitability coming out G&A. And as I said, that's the biggest piece of the gap and profitability between North American results and the international results. So I think that's -- we're still focused on the same things, and as you've said, it's been a frustrating year, but it hasn't really changed our assessment of where the upside lies.

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

Okay. And then similar question for Ron, when I listen to your objectives and listen to the plans for 2012 and beyond, there's a lot of investment continuing. And clearly, you've made some investments and be reaping the benefits of that. I mean, I think that's a strategy that's worked for you well in the past, but in a potentially a little bit of a different environment going forward. I'm not hearing anything about cost opportunities or ability to drive better leverage with that top line. Why is that not at the table at this point?

Ronald L. Sargent

I think it is on the table. I just don't think it's a core element of our strategy going forward. I mean, I think we've done a pretty good job, kind of operating our business very carefully in good times and bad times, and we're going to continue to do that. And you can be sure there are several significant cost objectives and cost priorities that we'll be undertaking as a business. So the fact that I'm not highlighting that should not be an indication that we're not looking at cost very aggressively.

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

Okay. Final question for Demos. Are there any plans for looking at a much smaller format store as an option in North America?

Demos Parneros

Actually, we've been on the smaller store track for some time now. I was actually look up a few numbers this morning. And strangely enough, we just don't talk about it a lot here. We have over 100 stores that are 14,000 square feet or less operating today and have been for some time. As you know, we experiment with our 4,000 square-foot stores for our Copy & Print initiative. We have over 100 stores within our short radius of in New York City that are essentially undersized stores. So I'd say that we've got -- we're, actually, underway in small store development. We have several formats that we've been using both in urban and rural environments. And as I mentioned at the start, as the leases are coming to -- and they're roughly 500 over the next 3 years, we have an opportunity to downsize. If we cannot downsize efficiently, we basically move, and basically take a smaller space. So that's been an effort that we've been undertaking. But overall, we've got an excellent portfolio, and I think our plan's working well in terms of reducing size, reducing rent and becoming more efficient from a per-square-foot basis.

Operator

Our next question comes from the line of Greg Melich with ISI.

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

Just wanted to follow up on the European restructuring or international restructuring. How much of that do you think would be a cash cost? And it sounds like when you do these things, they're not -- they're just baked into your guidance in terms of ongoing costs. Just want to confirm that.

Michael A. Miles

Yes, that's right. It's -- sorry, Greg, it's Mike. We have that in the full year guidance. I'm sorry if I didn't say that. And most of the expense that we're talking about in this case is cash expense. Most of this is severance expense, and in Europe, that's a pretty expensive proposition, as well as Australia. There's -- it's a little bit different environment than we have in the U.S. in terms of doing headcount reduction.

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

But in your prepared comments, Mike, I think you suggested look more aggressively at the overall assets you have internationally. That would be something potentially in addition to just the headcount things you discussed today. Is that fair? Or am I reading too much into that?

Michael A. Miles

No, that's not included in what I've been talking about, and at this point, we haven't got any specific plans to do any -- make any major changes. As I said, we're looking certainly at all of our stores and other real estate in Europe, as well as business units that aren't making money. That's been one of our sort of strategies from the beginning, is to not participate in businesses that we don't see being profitable for us in the long term. And we've taken action on the couple of those over the last couple of years. There isn't anything that's kind of right at the top of the list right now, but if that changed, obviously, we'd let you know.

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

Great. And North American Delivery, nice to see the 2% growth there. Could you give us some more color as to -- was that growing customer count? Was it customers that you had, that were spending more? Give us a little more color on the development there.

Ronald L. Sargent

We have Joe Doody, who's here to answer that one.

Joseph G. Doody

Yes, Greg. Well, we don't get the specific in terms of giving out those numbers. We did a little bit more back when we had some declines back in '09. But generally speaking, we're definitely getting some traction, as Ron indicated, with a small business customer. That's driving good growth. We had a little bit deceleration in contract in the quarter but still a positive growth there. And we're find -- we're entering the new year, I will say, with some great customer acquisition momentum that we achieved throughout the latter half of the year. So whether it be our Quill business, our dot-com business, our Contract business, U.S. or Canada, we feel real good about our customer base and the acquisition efforts that we have going for us in terms of new accounts, so good strength there offsetting some weakness within existing customers. And as Ron indicated, the biggest weakness there is federal government and public sector.

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

Okay, great. And Ron, in your comments, I think you mentioned this e-commerce innovation center that's going to open this year. Just give us a little more details on what the real goals of that group's going to be.

Ronald L. Sargent

Sure. Let me just give you a little bit of the background. I think everybody knows that today Staples is the second-largest e-commerce company in the world after Amazon. And a couple of weeks ago, what we did is we announced the creation of an e-commerce innovation center in Cambridge, Massachusetts at Kendall Square, and that's really the heart of kind of technology development and growth here in Massachusetts. The office is going to house teams responsible for designing and implementing new e-commerce solutions for the millions of customers who shop our websites and our stores. Throughout 2011, we certainly increased our investment to drive growth of Staples.com. That seems to be paying off nicely, and this is going to continue through 2012. And what the innovation center will do is to kind of support that momentum that we're building in the dot-com business. It will include some folks from IT, product management, usability and creative associates. It's really trying of take a page out of some of the work that's being done out in Silicon Valley, but it's a lot easier to find terrific talent in this area, in a kind of urban downtown environment close to MIT than it is out in the burbs in Framingham, Massachusetts. So it's really trying to get those people out of here and into even more creative kind of vibrant environment.

Operator

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

Christopher Horvers - JP Morgan Chase & Co, Research Division

First question here is what do you think the right trend rate is in sales in both North American Retail and North American Delivery? Presumably, mix towards things like tablets and eReaders and the growth in those categories lifted December. And then you had January, you had a pretty easy compare given the snow last year. Similarly on NAD, the weather comparison was pretty easy in January, although it looks like, sequentially, that business slowed a little bit. So maybe could you help us think about -- I know you're not providing quarterly guidance, but what the right trend is on the top line in these divisions and any quantification of the, not monthly, but maybe how the mix and the weather compare played out?

Ronald L. Sargent

John?

John J. Mahoney

Well, I think that, as we said, we indicated what we expect for sales growth for all of 2012, and that's clearly based on the trends that we saw coming out of the business. We often talk about the fourth quarter as being kind of choppy because of the different elements of the months that we see. We see November is more of a normal month. December tends to be very consumer oriented, and then January is back to business. So I think looking at all of those elements of the business, we decided to -- what we thought about all of 2012. So I think that, yes, we did see a great mix of holiday sales. We were aggressive. We had a really hot offering for customers, a lot of creative new things there. But when people came back in January, we saw the trends with our business customers continue so that it formed the basis for what we would think about all of 2012.

Ronald L. Sargent

Just to give you a little more color commentary on the NAD business, I think the weather certainly impacted our North American Retail business last year. NAD, it looks like it hit us to the tune of a little less than $20 million last year. So wasn't quite as big an impact on our NAD business as it was on our Retail business.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Okay. And then on the Internet, following up on the international severance point, curious how much of an impact is actually based into the guidance for the year. And from an operating perspective, wouldn't you call this out as a onetime event to get to the right underlying profitability in the business?

Ronald L. Sargent

Mike?

Michael A. Miles

Yes, Chris, I guess as I said, it's hard for us to be specific about the number based on the fact that we're still doing works council negotiations and consultations, and it's not really a good strategy to have that number kind of out there. It is in our full year guidance. And I think we see these expenses as things that we're going to continue to have in the International business for the next several years, and so -- although we'll call them out in the quarter if they're significant. I'm not sure that they're that extraordinary relative to how we're going to have to run the business over the next several years.

Ronald L. Sargent

Chris, I think as just a matter of philosophy, we hate onetime charges, and we certainly do have onetime charges every quarter. But we basically, for the most part, flow them through. We understand how occasionally you're going to have onetime charges and certainly, the most recent example was the Corporate Express acquisition. But in general, unless it's truly significant, we'll just flow them through the operations.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Got you. And then finally, quick follow-up, but did you happen to mention what you thought D&A would be this year?

Ronald L. Sargent

John?

John J. Mahoney

No, we didn't -- for 2012, we didn't mention a specific number, but I think if you take a look at the cash flow statement in the 10-K, it's pretty easy to predict where we're going to be. It'd be consistent.

Operator

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

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

A couple of questions. First of all, I promise I had this question in mind before you decided not to do quarterly guidance, but -- so I'm not trying to get around your policy. But as you think about the cadence through the year, I remember as we approached last year, sort of the view was that some of the investments would have a bit of a bulge in the numbers in the first part of the year, and then will start to pay off and show up through operating leverage over the second half of the year. And that's essentially the way it played out. How would you think about the cadence in terms of timing and investments and payout as you move through 2012? And I guess, international, the international charges are part of it, but anything else to be aware of there?

Ronald L. Sargent

John?

John J. Mahoney

Well, I think, obviously, Matt, we're -- we have a fair degree of cyclicality anyway. The first and the second quarters are much lower revenue quarters than the third and fourth, and so there is some leverage on the fixed expenses in the back half of the year anyway, which makes it -- the impact of any essence we make at the beginning of the year more significant. I would say that, overall, we'd expect the same trend that we saw last year. International is one example of that. But there are other things like getting into the Cambridge center and some of the things that we're doing in the NAD business to add sales force for our growth initiatives. So I think the combination of the revenue base per quarter, coupled with wanting to get things into play so that they impact the whole year, does have the same sort of trend in our expectations for 2012.

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

Got it. And then secondly, I have a couple of questions, couple of follow-ups on the Contract business. One, if you could just sort of size the government business for us? It's been a drag, I think, for you and for your competitors all year. Size that and talk about your expectations there. And then finally, you spoke in the release about product margins being down in NAD. Any color on that would be great.

Ronald L. Sargent

Joe?

Joseph G. Doody

Yes. Yes, 2 things: One, fed gov is very small for us, 2%-ish, so less than -- far less than 5% of our business in Contract, but it's down very heavy double digits, Matt, but we're pretty much done comping over that. So expectations are it'll probably stay sort of flattish this next year, so we won't see the hurt from that, that we did this past year. Second question was on product margins, a slight decline there. I think we indicated it, and probably the factors there are, again, in facilities and breakroom. We needed to continue to be sharp on price there to make it a destination category, not just a convenience category, so there's some element of that in there. And probably the other is just pricing pressures that continue throughout the year from large enterprise customers not willing to accept the cost increases. So those would be the factors I'd point out.

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

And Joe, once you're through the ramp in facilities and breakroom, how does that product margin compare to the house?

Joseph G. Doody

Equal to.

Operator

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

Kate McShane - Citigroup Inc, Research Division

I was wondering if you could update us on how many more stores are left to remodel and invest in for your technology initiative. And remind us where you are in your mobile phone rollout. And then just as an addition to that, can we expect a higher profitability from the mobile phone business than the company average?

Ronald L. Sargent

Demos?

Demos Parneros

Sure. The first question is where we are on our remodel. So we've remodeled to this point roughly 1,000 stores in the U.S. with respect to our EasyTech buildout, and really, we don't have a set remodel program where you would certainly go in and just change out the whole store. We actually have been very selective at choosing initiatives by store and by markets. So we're about 1,000 stores in on that one and 500 stores on the mobile phones. First, plan's to continue our goal is not to immediately get to chain but to be opportunistic and to be careful about phasing future remodel efforts. The mobile phone business is really less than a year old in terms of its ramp, so we are seeing good progress. We are really nailing down the operating model there, and when we're ready, we'll just continue to expand stores there. Same goes for EasyTech. And we do EasyTech -- it's really about the EasyTech services business, as well as our PC and tablet presentation within the stores. So I would say that there's no specific store number that we're working with at the moment and basically, being careful with our capital, using it where it makes sense.

Ronald L. Sargent

And regard to margin rate, Kate, I mean, you could argue that mobile phone margin rate is lower than the store average, but frankly, it's all incremental, and we had the space, and it's incremental margin dollars.

Kate McShane - Citigroup Inc, Research Division

Okay, that's great. And then my second question, which, I think, has been asked a couple of different ways is Mike highlighted that there was 150 basis points of opportunity in SG&A and International. And I just wondered how much of that opportunity was being included in the 2012 guidance.

Michael A. Miles

Yes, Kate, I can't really get that specific on that, partly because we're trying not to give line item business unit guidance and partly because it'll also depend a little bit on how the sales work out and how much of our fixed component G&A we're able to leverage. As the year plays out, we'll give you more color on the magnitude of the reductions that we've done and the savings that we've achieved from them so that it'll be apparent how much of that we're getting as a result of this step in the G&A reduction plan.

Operator

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

Joscelyn MacKay - Morningstar Inc., Research Division

I was wondering if perhaps Demos could give us an update on how things are going. I mean, I know the fourth quarter had very positive traffic and sales volume. But for the year, we're still looking at as flat same-store sales growth, so I was wondering if we can just get an update on where things are going in the top line in Retail.

Demos Parneros

Well, sure. We've covered a lot of the key initiatives that are growing. The one thing I'd say, by the way, is that traffic was slightly positive in Q4, and a lot of our increase came from improved average store, which really speaks to much better conversion and great service in our stores, something that we've been focused on all year long. So we've talked briefly about tech categories, the explosion in the tablet and reader business. I think there was a lot of discussion about heavy cannibalization to the PC business. We've actually hung in there nicely and had a good year with our PC assortment and our PC business. We also talked about a lot of exciting news coming in that area with Windows 8 launch coming later in the year, which is highly anticipated. Our services businesses continue to ramp nicely. We talked about Copy & Print, our sales force out there. Our EasyTech services business in North America is really growing nicely, well above the house. And then there's a good pipeline of sales, I guess, we're constantly testing and doing different things in our stores. So we're excited about the plan that we have, and we didn't talk about back to school. We had a nice back-to-school season as well. So holiday, back to school, the key seasons have been strong. But really more importantly, it's that we have a very balanced plan to drive sales, top line, manage margin, obviously, very tight expense control, and we're really hoping to gain additional momentum with things like mobile, things like facilities, things like the tech categories that we've talked about today.

Joscelyn MacKay - Morningstar Inc., Research Division

Great. And just one quick follow-up, just on the higher tech sales. I mean, I know your peers have been talking about constantly reducing tech sales due to lower margins, and I know Staples has been able to mitigate those lower product margins with just improved efficiencies. But going forward, I guess, how do you, I guess, make the investor comfortable with the idea that perhaps increasing tech sales is going to come at the expense of margin expansion potential?

Demos Parneros

Right. I think what should make you more comfortable is our history and our track record of being very disciplined in the way that we manage our business. If you think about how we manage our inventory and how we distribute goods to stores, we're very careful about which stores we put what product in. We've been careful with our promotions. We've worked very closely with our vendors there. If you look at the in-store experience, we've been, again, very, very focused on training our associates to do a good job at selling not only the hardware but really selling the entire solution. And we've been highlighting our servicing businesses quite a bit over this call and other ones, but really it's been selling to customers what they need and making sure that we sell a complete solution. And that's the difference between just selling product and selling complete solution to customers. And that really is the balance that we need when selling hardware, which is traditionally lower volume -- lower margin, excuse me.

Ronald L. Sargent

And Joscelyn, when you look at the biggest driver for profitability in Demos' business, it's all around sales per store. And to the extent that we can take that $5 million average store up to $6 million even with technology, it's all incremental. A lot of it flows to the bottom line given the fixed cost nature of Demos' business.

Operator

Our next question comes from the line of David Gober with Morgan Stanley.

David Gober - Morgan Stanley, Research Division

My first question is on the free cash flow guidance. And just looking at 2011 and the $1.2 billion that you generated, just wondering given that you are expecting earnings to grow high-single digits, if there's any reason you can't outperform 2011. And maybe stated another way, is there any significant change in the CapEx profile this year in terms of investments in the business?

John J. Mahoney

I think when we talk about free cash flow at the very beginning of the year, there's a whole bunch of things that will enter into that. Working capital's obviously one of them. What CapEx is going to be is one of those things but also thinking about the various investment opportunities that we create. So we -- I mean, we, I think, want to get people generally comfortable with the idea that we continue to expect to generate strong free cash flows. But as the variety of opportunities that present themselves during the year come forward, we don't want to get too tied into too precise a number. But obviously, over the years, when we've grown earnings, we've grown cash flows as well.

David Gober - Morgan Stanley, Research Division

Okay. I guess and just another question on the guidance commentary. Ron, when you talk about slow growth in the U.S., I was just wondering if -- obviously, we had a lot of lumpiness last year. Would you categorize slow growth as kind of bumping along the bottom and or staying where we are? Or would you assume that things maybe returned to what they looked like a little bit earlier in 2011 versus what seem to be some more positive data points more recently?

Ronald L. Sargent

Yes, Dave, I'm not sure I'm smart enough to know. It's -- I think it does feel like we're -- in terms of giving our guidance, we are going assume kind of slow growth, but kind of how do you define that? I don't know if that's kind of 2% GDP growth or 3% GDP growth or -- and the big wild card is what's going on with gas prices and how will that affect GDP in the second half of the year. So I'm not sure I can be a lot more specific than I've been.

David Gober - Morgan Stanley, Research Division

Okay, sure. And just a follow-up for Demos on the Retail business, when you look at the fourth quarter comp, it seems like there's definitely a lot of positive underlying fundamentals in terms of the core office supply business, the tech services, and Copy & Print business is comping above the house average. I guess when you look at it, it seems like parts of the tech business that Ron outlined are definitely what have been dragging down the business. Is there anything that suggests that those will recur? And then is there still enough in some of those kind of tech software and other businesses to continue to drag the comp the way that it did in 2011?

Demos Parneros

Well, there's been a constant flow of categories outgoing, declining, and then of course, our job as a team is to go out there and find new categories to replace -- to find ones that are good and make them better. And we've been able to do that. Our services, for example, combined is roughly 10% of our total sales. If you just look back a few years, that was a much smaller number. We didn't have an EasyTech services business at all in North America a few years ago. Today, it's sort of a little [indiscernible] . It's growing. So I think from a product standpoint, it's our job to see -- to bring in products that customers are looking for, continue to ride the key waves. We've talked about Windows 8 as one of the ones coming forward. Tablets was the business that we exploited over this past year. We just need to be really on top of our game and bring in products that make sense to our customers and make tough decisions on categories that are in decline. We're not afraid of those categories. They have been happening for many years and continue to find the right balance between margin expenses, and that's we've been able to do. So it's -- the challenge to our team is to have great execution and really outperform our competition. That's what we've been focused on over the past -- really for a long time at Staples. But specifically, over the last few quarters, it's really no different in my view than it's been in the past. There have always been categories in decline. We just have to be open-minded about them and be creative with our solutions.

Operator

Our next question comes from the line of Dan Binder with the Jefferies & Co.

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

I have few questions for you. One, do you have any buyback assumptions in your guidance? And if so, what that might look like? That's my first question.

John J. Mahoney

Yes, well, I think we've been clear on what our priorities are for our cash flows. We didn't provide any specific guidance on the buyback. And I'll go back and remind you that the -- if we went from 0 to what we bought back this year, it isn't all that consequential to earnings per share in the context of our overall results. So I think you can expect that we'll continue to have the same priorities that we had this year.

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

Okay. And Ron, I think you mentioned that paper was up low-single digits. I was curious. Is that sales or units?

Ronald L. Sargent

That would be sales dollars.

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

How did units look?

Ronald L. Sargent

Units, I think would probably be much more flat or maybe even down a bit. I don't know. But it's certainly dollars that is up in the kind of low singles.

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

Okay. And then my next question is more of sort of a philosophical question about your long-term view on gross margin, and that is to say that if we look at the 3 player -- the 3 big players in this space, you had OfficeMax with margins down, seemingly investing in price; Office Depot taking a lot of margin; and then you guys kind of mixed, I guess, margin's up with Retail, down a little bit at Delivery. I guess, my question really was what your view is given the competition in the space, both the bricks and mortar and online, what your -- what you want to do longer term with the gross margin gains that you may get from sourcing a private label or mix. Do you think that it's more likely that we invest that for top line, and we assume gross margin are sort of flattish at these levels? Or do you think there's more direction one way or the other?

John J. Mahoney

I think that first of all, Dan, the market drives pricing. We have to be competitive in the marketplace and a lot -- a number of you do price studies, and I think you can see there's ups and downs. But overall, prices there within a fairly narrow range certainly within the office superstore categories. We've also talked about the value proposition versus Amazon and Costco and Walmart over the years, and we remain competitive with all of them with the overall value proposition. I think the reason that we tend to be able to earn better margins is that our cost structure is slower. And over time, you say philosophically, we'll be able to take it to the bottom line or will we reflect at lower prices. And I guess, the answer is the market will determine that. And as we've told you in the past, customers don't decide where to shop just on price. It's certainly important. You have to be trusted for price. But all of our customers don't necessarily decide to shop where the lowest price exists.

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

Okay. My final question is related to new categories. Obviously, you've diversified the business through the years with services in the last few years in particular with the GMCM [ph] business. I'm curious, as you look forward, are there any sort of new emerging categories that you see opportunity. And I know that your main wholesalers, they've diversified that's industrial. I don't know if that's got space in your mix over time. I was just curious if there's anything out that you're looking at that now.

Ronald L. Sargent

Yes, it seems like every time we talk about new categories of growth, it's like 6 months later, we see our competitors talking about those new categories of growth as well. Certainly, there are and we're working on a lot of different things to kind of position us better for the future, realizing we got to get the top line going again. But in terms of being specific on what those are, I'd rather invest and grow them before telling our competitors what our next new growth initiative is.

Operator

Our next question comes from the line of Anthony Chukumba with BB&T Capital Markets.

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

Just had a question on technology, and it seems you got a lot of success with Novo PCs and tablets. I was just wondering -- I mean, what -- how much progress are you making in terms of also attaching high-margin accessories to that products -- to those products? I know that's something that's very important just from a gross margin perspective.

Ronald L. Sargent

Now let me ask Demos to talk to that.

Demos Parneros

Sure. Thanks, Ron. Well, clearly, we would not be in this business if we couldn't do a good job at selling a complete solution to customers, which was -- also allows us to have a margin that allows us to be in that business. So if we're in a business that simply sells the hardware, we'd be out of that business pretty quickly. What we're focused on is really what the customer's looking for. And our merchant teams done a really nice job at getting the right assortment for what our customers are looking for, both in the hardware as well as the overall solutions, which is not just the attached product, but it's really. These days, the services that need to go along with that, whether it'd be our tech support or extended service or what have you. And we've put a lot of effort and a lot of focus with our store teams in training them and really given the tools they need to be able to talk to customers comfortably and to connect with customers, so they can provide them with what they need, not what something that we're trying to push. So I think we really had a good approach with starting with the customer, and that's really enabled us to sell a much better market basket, which then translates to a better margin overall for the business. And I think everybody understands that, but it's a little harder to do it than to just say it. And I'm proud of the way that our teams have been performing there.

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

Okay, that's helpful. And then just one follow-up you specifically brought up the iPad 2 that you had in your Canadian stores, I guess at the end of Q3. I know I'm sure you're loathed to talk about specific products but I guess, just the early results from the iPad 2 in Canada give you more optimism that you will eventually be able to sell the iPad in your U.S. stores.

Demos Parneros

Sure. Yes, I think our team in Canada has done a great job at really executing the plan overall with Apple, not only selling the product, but as we've mentioned before, really selling complete solution. And I know the feedback from Apple has been very favorable with our Canadian team, so they've done just a fantastic job up there. As far as extending that out to other markets, that's something that we'd like to see. We'll update folks on that when we have more.

Ronald L. Sargent

Yes, we are already selling the product in places like the Belgium and The Netherlands and China and India as well. So we're hopeful for the future as we think this kind of gives -- gives Apple an in with the business of customer, as well as locations that maybe kind of are nontraditional for them.

Operator

Our next question comes from the line of Alan Rifkin with Barclays Capital.

Sam Reid - Barclays Capital, Research Division

This is Sam Reid, pinch hitting it for Alan. We noticed that you all were able to reduce expenses at about 90% of the 150 lease renewals that you had this year. We were just kind of trying to get a sense of how sustainable you see that number as being and if you -- and just sort of how that translates into your margins. If you could just kind of highlight on that.

Demos Parneros

Sure, love to. Just to reiterate on upcoming lease renewals, in 90% of the cases, we're able to get savings on the option to rent, so the rent going forward. As far as how long we think we can do that for, hopefully, forever. I wish it was that easy, but every one is a special situation. Obviously, it's been a soft commercial real estate market. There's a lot of inventory on the market right now. And I think we're a great tenant for our landlords, and they want us there. Our customers want us to be there. So it's a case by case, but we'll continue to be aggressive in meeting our objectives, which are to reduce our rent expense; downsize, so we can get less more footage; lower square footage stores where possible; and we have a prioritized sort of list of our objectives. If we don't get #1, we go for #2. But we've got a big opportunity in front of us to really reshape the entire portfolio. One of our key strength is our dot-com business and how well it works with our Retail business. And so we are able to be very effective with our smaller stores. And with 500 lease renewals over the next 3 years, we think it's a great opportunity for us to make more progress there.

Operator

Our next question comes from the line of Joe Feldman with Telsey Advisory Group.

Joseph I. Feldman - Telsey Advisory Group LLC

I wanted to ask about the complexion of sales geographically. And I know you gave us kind of the broader regions in International, but within Europe specifically, I mean, did you notice much of a difference between Northern Europe or Southern Europe or any of the different economies that are there?

Michael A. Miles

Yes, we do. And it's always you'd expect like places like Portugal are terrible, and places like the Nordics have done pretty well. The U.K. and France have been soft for us, maybe a little softer than what the economy would suggest, but otherwise, I think our sales in Europe sort of look about like what you'd expect. And frankly, our issues in Europe tend to be more related to our channels as opposed to the geography. So within the Contract business, we're relatively solid across the continent, and our Retail business is relatively weak across the continent, with countries even like Germany and The Netherlands not performing particularly well right now in spite of the fact that I think those economies are relatively healthy compared to the economy in Europe overall.

Joseph I. Feldman - Telsey Advisory Group LLC

And then one other question, Ron, can you correct me? I may have misheard what you said. I thought earlier you just made a comment that you are starting to see a little bit of small business formation out there. And I guess, could you just clarify that comment? Or maybe I misheard it but...

Ronald L. Sargent

Yes, I don't have economic data to share with you. But typically, coming out of a kind of a recession in our business. You start to feel it a little, soonest with the small business, and that affects your dot-com business. It affects your retail business in terms of traffic is now slightly positive again. So I think that's kind of the best indicators I could give you is that, typically, when you come out, you start small, and we're starting to feel that a bit. And I'm sure there are some great economic data about small business formation, but I don't have it at my fingertips.

Operator

Our final question comes from the line of Jeremy Brunelli with Consumer Edge Research.

Jeremy Ridder Brunelli - Consumer Edge Research, LLC

Mike, just a quick question to beat the horse one more time, at the Analyst Day, you had talked about the opportunity in International around G&A restructuring, and you said, I think, at the time that you were kind of in the third inning. So the question is are you still in the third inning. And when do you think -- what's the outlook to get into that elusive 7.5% target? I think you had said it would be about a 5-year plan at the time.

Michael A. Miles

Yes, I think unfortunately, Jeremy, we probably took a step back in 2011, and I think that will -- it makes that 7.5% goal that much further out. I think all we can do is work on the stuff that's within our control. And with respect to that, I do think that we're making progress on the G&A front, particularly in Europe, and this gets us more into the middle innings of the ball game, but we're still -- still have a long way to go. Ultimately, we're going to need some sales recovery from where we are today to get ourselves to that 7.5%, but I think we believe that we've got some levers in our control in terms of the mid-market program, as well as some of the retail turnaround ideas that we've got that should ultimately get sales moving in the right direction again. Obviously, it would be nice to have a little help from the European economy stabilizing as well.

Jeremy Ridder Brunelli - Consumer Edge Research, LLC

Right. And then aside from the sales and I think you said execution issues in Europe and Australia, where there any other factors that kind of surprised you from the Analyst Day over this time period?

Michael A. Miles

There have been a lot of surprises over the last year .

Jeremy Ridder Brunelli - Consumer Edge Research, LLC

I mean, to the negative that kind of delayed the goal?

Michael A. Miles

Yes, I think the -- probably of the stuff that is within our control, you named the stuff that has been most significant. I think the European economy, as I say, has taken a divergence from where we are in North America that we didn't anticipate, and that's probably been the biggest factor of all of them in terms of just how bad the second half of 2011 was for us from a P&L standpoint.

Jeremy Ridder Brunelli - Consumer Edge Research, LLC

And then question for Demos, you talked about Windows 8. A lot of excitement on the ultrabook at the CES, so wondering when do you think you'll be getting kind of a full assortment in the stores. And then can you remind us of the impact maybe comparing to the Windows 7 or the Vista experience, not just for the software category but for PCs, peripherals and anything else ancillary?

Demos Parneros

Let's start with that one. I think I would have to double check this number. I think was actually less than 1% impact on our business, and it really depends on the impact of their release. I mean, Vista was not as big a deal. We think Windows 8's really exciting. I mean, I think just the quick demos that we've seen are really exciting. I mean there's a lot of buzz in the marketplace around that product, so we're going to be ready to go and we'll be a feature player within the Windows 8 space -- sorry, oh, the ultrabook. Sorry about that. Yes, so the ultrabooks are actually in stores today, so we're starting to really sell the product right now. It is fantastic product, which specs beautifully versus some of the it's competitive product that's out in the marketplace today in terms of size and performance at much a lower price point. We really feel excited about the potential for this product. So it's thinner. It's as powerful. It's a sleek-looking product and more fully performs. So we'll see what happens as we ramp up with that and then bring in Windows 8 later on the year.

Operator

Ladies and gentlemen, that will conclude the question-and-answer portion of our event. I'd now like to turn the presentation back over to Mr. Ron Sargent for closing remarks.

Ronald L. Sargent

Just to wrap up, I'd like to thank the Staples team for delivering a really solid fourth quarter and setting us up with good momentum as we enter the new year. I'm confident in our plans to drive growth and improve productivity in North America, as well as our plans to get International back on track in 2012.

So thanks for joining us this morning. I apologize for being a little over our allotted time, but we look forward to speaking 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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