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Staples, Inc. (NASDAQ:SPLS)

Q3 2007 Earnings Call

November 27, 2007 8:00 am ET

Executives

Ron Sargent - Chairman, CEO

Mike Miles - President, COO

John Mahoney - Vice Chairman, CFO

Joe Doody – President, NAD

Demos Parneros - President U.S. Stores

Laurel Lefebvre - VP Investor Relations

Analysts

Brian Nagel - UBS

Chris Horvers - Bear Stearns

David Strasser - Banc of AmericaSecurities

Danielle Fox - Merrill Lynch

Gary Balter - Credit Suisse Securities

Matthew Fassler - Goldman Sachs

Michael Baker - Deutsche Bank Securities

Colin McGranahan - SanfordC. Bernstein

Mitch Kaiser - Piper Jaffray

Analyst for Steve Chick - JP Morgan

Daniel Binder - Jefferies

Joe Feldman - Telsey Advisory Group

Brad Thomas - Lehman Brothers

Brigitte Neigut - W.P. Stewart

Operator

Welcome to the third quarter 2007 Staples, Inc. earningsconference call. (Operator Instructions) I would now like to turn the call over to Ms. Laurel Lefebvre, VicePresident of Investor Relations. Please proceed.

Laurel Lefebvre

Good morning, everyone and thanks for joining us for ourthird quarter 2007 earnings announcement. Unless otherwise indicated, allnumbers discussed in today's call exclude the impact of special one-time itemsthat occurred in 3Q06 and 3Q07.

We will also discuss some non-GAAP metrics such as return onnet assets to provide useful information about our financial performance. Pleasesee the financial measures section of the investor information portion of Staples.comfor a reconciliation of GAAP to non-GAAP numbers and an explanation of thefinancial measures.

Certain information contained in this call constitutesforward-looking statements for purposes of the Safe Harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Actual results may differ materiallyfrom those indicated by such forward-looking statements as a result of variousimportant factors, including those discussed or referenced under the heading riskfactors and elsewhere in Staples' latest 10-Q, filed this morning.

Here to discuss our future performance and business outlookare Ron Sargent, Chairman and Chief Executive Officer; Mike Miles, Presidentand Chief Operating Officer; and John Mahoney, Vice Chairman and ChiefFinancial Officer. Also joining us are Demos Parneros, President of U.S. Stores;Steve Matyas, President of Staples Canada; and Joe Doody, President of NorthAmerican Delivery.

Ron Sargent

Thanks, Laureland good morning, everybody. This morning I'm pleased to report another quarterof solid performance. Our North American Delivery business again led the waywith another quarter of industry-leading top line growth and steady marginimprovement. Our International business continued to get better. We had strongsales growth as well as impressive operating margin leverage and in our NorthAmerican Retail business, although we were not happy with the top line, we dida good job managing expenses in line with sales, and we grew operating margin23 basis points.

I'd like to start this morning with some of the headlinesfor the quarter. Our adjusted earnings per share increased 17% to $0.42.Operating margin was up 34 basis points over last year to 9% and sales grew8.7% to $5.2 billion. We generated $519 million in free cash flow during thequarter, largely due to improvements in working capital as well as betterinventory management. Year-to-date we're well ahead of last year with free cashflow of $533 million versus $277 million in 2006.

Our North American retail business experienced weak salesduring the quarter. Same-store sales fell 3% and total sales increased only3.2%. While the overall comp for NAR was negative, we did have some good newsin that we had positive comps in our high margin office supplies category.

Our North American Delivery business remains strong. The topline grew 15% and operating margin improved 21 basis points. Good leverage indistribution, as well as growth in high margin share of wallet initiatives,drove the margin improvement.

We also continue to make good progress in our internationalbusiness. Total sales were up 18% in U.S. dollars, or 8% in local currency. Wehad same-store sales that were flat, but that was against pretty toughcomparisons and operating margins jumped 185 basis points to 3.3%.

Also during the quarter we reached an important milestone inStaples' history, we opened our 2,000th store. Today we operate morethan 2,000 stores in nine countries and delivery operations in 21 countries. Ithink it's worth taking just a few minutes to reflect on how far Staples hascome during the last few years.

First of all, our retail business generates excellentreturns. Since 2001 we've developed a terrific service culture, differentiatedour brand based on Easy, we've created a half-billion dollar copy and printbusiness and built a superior supply chain. We've added 450 stores and we nowoperate a portfolio of four unique store formats to take advantage of differentmarket opportunities. We launched the first Doverstore in 2001 and we now operate 750 Doverformat stores. Since 2001, we've added $3 billion of sales. We've tripledoperating profit and we've increased operating margin 500 basis points overthat timeframe in our retail business.

Let's take a look at our delivery business. Our deliverybusiness has also been transformed into the largest, most profitable, mostInternet-penetrated and fastest-growing of any in our industry. We finetuned ourcustomer acquisition model, we’ve developed a well-balanced portfolio ofcustomers and we would argue that we have great visibility into future results.

Supply chain and service capabilities are dramaticallybetter. We've developed several significant businesses that we didn't eventhink about a few years back, businesses like copy and print, Jansan, techservices, and logo merchandise, just to name a few.

In delivery, we've added $3 billion of sales and nearly 400basis points of operating margin since 2001. On the international side, todaywe have a much stronger European business overall. From a fledgling deliverybusiness in two countries in 2001 we've established a delivery platform withscale in 15 European countries. In retail, we've finally cracked the code forsuccess in key markets like the U.K.and Germany. Wehave a terrific team in Asia to take advantage of theexplosive growth occurring in Indiaand China. Salesin our international segment have more than doubled in the last five years and,more importantly, we've built a foundation for long-term, profitable growth andwe're well on our way to achieving our 7.5% operating margin goal for international.

In total, our businesses have produced terrific financialresults. Since 2001, our top line has grown 11% per year on average. Operatingincome dollars have almost tripled and operating margin improved by more than300 basis points. Our earnings per share grew impressive 24% per year onaverage over the same period and our strong performance on the P&L,combined with consistent capital discipline, has driven steady increases andreturn on net assets and that's the metric that we use to measure shareholdervalue. Our RONA has increased 550 basis points to 14%, well above our long-termcost of capital of 11.7%.

The team that produced these outstanding results isessentially the same one in place today. The key to driving tremendous valueover the last several years has been the team's willingness to try new ideas,to scale the ones that work and take advantage of the abundant opportunities inthe office products market and above all, never lose sight of the customer. Weknow that this approach of executing well, doing the right thing for ourcustomers and investing for the future is a model that has deliveredsignificant shareholder value historically, and we expect that this same modelwill drive value going forward.

While we're clearly operating in a tough environment thathas dampened our overall results, our fundamental philosophy has not changed.This focus on customers and execution helps us do pretty well in tough timesand puts us in a better position to have great results when the environmentimproves.

I'll now turn it over to Mike Miles to talk about thirdquarter results in North America.

Mike Miles

Thanks, Ron. Good morning. Let's start with the results forNorth American Retail. We increased sales 3.2% versus Q3 of 2006 to $2.8billion, but same-store sales declined 3% for the quarter, reflecting slightlynegative customer traffic and lower average order size. We've experienced areal slowdown in the purchase of durable goods which seems to be driven by someof the general economic trends, particularly in the housing market. Furniturehas been weakest, which is a category at retail that is disproportionatelyskewed toward residential customers, with tech hardware and even computers alsodown in the quarter. We had positive comps in our consumables categories --printer cartridges and office supplies -- and copy center continues to be thestrongest growing part of our stores.

Operating income increased 5.4% to $306 million andoperating margin increased 23 basis points to 11.1%. A better mix of high-marginoffice supplies and good labor expense management, slightly offset bydeleverage and rent expense, drove the increase in the operating margin.

In the face of a tough sales environment, we're focused ondifferentiating Staples from our competition by making it easy for ourcustomers and by assorting and presenting a unique and innovative line ofmerchandise. Earlier this month, we began selling Dell computers, printers, inkand toner. We are the exclusive supplier of Dell products in the officesuperstore channel. While the hardware will initially have center stage inadvertising and promotion, we believe the ink and toner consumables alsorepresent a real opportunity to drive substantial new customer traffic.

We are the only retailer offering a full line of Dell inkcartridges and Dell has about 8% of the printer placements in the U.S.We've already enjoyed nice share gains this year with our in-stock guaranteeand compelling ink savings message. Adding Dell further establishes Staples asthe destination for ink and toner.

Recently, we launched M by Staples, a higher-end line ofoffice supplies and accessories. We believe M differentiates our assortment andwill drive sales in key, high-margin product categories. We've gotten a verypositive reaction from our customers, further verifying this line's appeal, andwe look forward to expanding the offering this spring.

In October we launched our security initiative focused onproviding our customers with affordable and effective solutions to help protectthemselves from information security threats. We offer a wide assortment ofsecurity-related products and services including data storage, antivirussoftware and shredders. While the initiative will ramp to its potential overtime, initial results have been encouraging not only in our retail business,but also in Staples' Business Delivery.

Over the next several weeks we will offer our customers anexciting assortment of great tech gifts for the holidays. We kicked off theseason Friday with a circular that featured many of the products that we expectto sell well this season, including laptops, monitors, digital cameras andpicture frames, GPS, and Bluetooth.

Finally, as I mentioned, our copy center continues to be ourstrongest growing category. We're gaining share in this very profitable segmentwhich brings a good mix of business customers into our stores. Based on oursuccess in this space, we continue to test standalone copy centers and openedour first of these in New Yorkduring Q3.

Turning to new store growth, we continue to see good resultsfrom our new stores and we are pressing our advantage with our real estateprogram. We opened 37 new stores in the U.S.and six in Canadaduring the quarter, bringing our total number of stores in North America to 1,715. For the full year, we're on track to open about120 stores in North America. Our new stores in Miamiand Denver are doing well, and in2008 we expect to open about 100 stores, including several standalone copy andprint shops.

Although North American retail sales fell short of ourobjectives during the quarter, we continue to gain share and grow the bottomline. We're confident our strong portfolio of new products will generateexcitement through the end of the year and into 2008.

Turning to North America Delivery, our team deliveredimpressive top line results. Q3 sales grew 14.7% year over year to $1.7 billionwith organic growth of 10%. Organic growth did slow modestly across allbusiness units. Customer retention remained strong, however, sales per customergrew at a more moderate rate. We gained market share in all three businessunits, with strong growth throughout a broad range of product categories andgeographic regions.

New product categories, such as Jansan, printing services,packaging supplies and logo merchandise grew at multiples of the overall rate.Other categories that grew faster than average included paper, computer andchairs. Geographically, we saw particularly strong growth in Denverand Miami, our latest retail marketlaunches.

Worldwide ecommerce sales in the third quarter were $1.4billion, a 14% increase year over year. For the quarter, electronics salesrepresent 86% of total sales in our contract segment and 74% of sales for NorthAmerican Delivery overall.

SBU income increased 17% to $187 million, or 10.9% of sales.Gross margin improved through supply chain efficiency, increased utilization ofthe new fulfillment centers, expansion into new, higher margin categories suchas logo merchandise, and better paper margins in contract as we've cycledthrough the impact of higher costs.

We made significant investments in new growth platforms suchas contract copy centers, salesforce, American Identity, and Staples Industrial,while still posting a 21 basis point improvement in operating margin. Alloperational and service metrics remain solid. Quill just received the J.D.Power and Associate Customer Satisfaction award, so now each of our three deliverybusiness units has been recognized with this award this year.

Our success in NAD is all about winning new customers,retaining existing customers, and increasing share of wallet. We have built abetter mousetrap for acquiring new customers. Our supply chain and servicehelps retain them and our expansion into new product categories drivesincreased share of wallet. We expect to drive strong growth and steady marginimprovement for the rest of the year and into 2008, regardless of the marketconditions.

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

Ron Sargent

Thanks, Mike. We were very pleased with our performance inthe international business. Sales for the third quarter were up 17.8% in U.S.dollars, or 8% in local currencies versus last year's $690 million. SBU incomeincreased 164% to $23 million, or 3.3% of sales which was a 185 basis pointimprovement over last year's Q3 results.

In European retail we drove strong overall profitimprovement with good gross margin comps, even with moderate growth on the topline and flat comps overall. In the U.K.,we continue to sell more to business customers and as the business customer miximproved, we again saw positive comps and a nice pick up in gross margin.Better buying, increased own-brand penetration and more efficient distributionoperations also helped margin.

We recently closed two distribution centers in the U.K.and we replaced them with a single, state-of-the-art facility. As we know, thistype of integration can be difficult, but this time the transition was flawlessand I think that reflects great team work on the part of our European as wellas our U.S.supply chain teams.

Turning to store growth, during the quarter we opened onenew store in the Netherlandsand we closed one store in the U.K.to end Q3 with a total of 266 stores in Europe.

On the delivery side, both the top and bottom lines grewnicely. We increased customer satisfaction. We improved the perfect ordermetric and we drove higher web penetration. We've successfully completed theupgrade of JPG's website in Francewhich includes a better search engine and improved functionality. Customershave responded very well to the new website and we'll complete similar upgradesto the websites of all of our other delivery businesses in Europebefore the holidays. Similar to European retail, our investments in European delivery'sdistribution and supply chain are starting to pay off. Delivery's bottom linewas its best third quarter performance in four years.

Outside of Europe, we're making greatprogress in our businesses and we're particularly pleased with our developmentsin China and India.China continuesits explosive growth in Beijing.We've opened the first two Staples UPS Express stores and expect to have twoopen in Shanghai before year end. Theseco-branded Staples stores combine office supplies and document processingservices from Staples with packaging and international shipping services fromUPS. We've also opened two additional Staples stores in Chinabringing the total number of retail stores to 28.

In India,our delivery operations to contract customers are off to a great start. We'vejust begun retail operations in Bangalorewith our partner, Pantaloon. The first 2500-square foot Staples brandedstore-in-store opened inside a big bazaar hypermarket and we just opened thefirst large format standalone Staples branded retail store.

In South America, our deliverybusiness in Argentinais strong. In Brazil,while results there have been a little disappointing, we've been focusing oncustomer service and recently added guaranteed next day delivery, which is akey differentiation point in the Brazilian market.

In summary, we're encouraged by the strong sales andoperating income results in our International segment. We remain very focusedon margin improvement in Europe and rapid growth in Asia.We're confident that we can maintain our momentum and achieve our operatinggoal of 7.5% in the next two to four years.

Now I'll turn it over to John Mahoney to review ourfinancials.

John Mahoney

Thanks, Ron. I'llreview the financials and explain what drove our results and then wrap up withsome guidance for the fourth quarter as well as for 2008. However, before I dothis, I want to quickly review the one-time items from Q3 2006 and Q3 2007which are laid out in our earnings release. As I talk about the P&L, I'llexclude these items.

Last year in Q3 we recorded a $10.8 million expense or $8.6million net of taxes to reflect the correction of measurement dates for paststock option grants. Also in Q3 2006, we recorded a $33 million reduction inincome taxes related to changes in estimates regarding issues settled duringthe quarter.

A few weeks ago, we announced the settlement in a wage andhour class action lawsuit concerning our California-based assistant storemanagers. The settlement allows Staples to avoid further expense anddistraction from lengthy litigation. As a result, in Q3 2007 we recorded a $38million expense, or $24.3 million net of taxes.

Turning now to our Q3 results. Total company sales of $5.2billion were up 8.7% versus last year's third quarter. Excluding currencybenefit in our Canadian and other International businesses, sales grew 6.1%. Grossprofit margin increased by 48 basis points to 29.13% during the quarter.Improvements in supply chain in North American Delivery and a lower mix oftechnology in North American retail and international drove the increase.

We're seeing nice leverage in our distribution costs as ournew NAD fulfillment centers are performing well. Deleverage and rent expense onsofter sales in North American retail partially offset these gains.

Operating and selling expenses for Q3 deleveraged 9 basispoints versus last year's third quarter at 15.94% of sales. All threebusinesses did an excellent job managing expenses while continuing to invest innew growth ideas. We're particularly proud of our retail store teams, which didan excellent job flexing labor with sales while maintaining high levels ofcustomer satisfaction.

General and administrative expenses and the rate of salesheld essentially flat at 4.08% as we carefully managed expenses and madeprogress in our European cost structure. Variable compensation expense was acontributor, as we're accruing for bonuses at a slightly lower rate than lastyear.

Moving on to the balance sheet, total inventory turns weredown 9 basis points versus last year to 5.7 turns. Our supply chaincapabilities continue to improve and we've made substantial progress in workingcapital this year by refocusing on our Summit Supply Chain discipline. Wecontinue to buy ahead of demand, but we're getting better and inventory levelsare nearer our plan.

At the end of the third quarter, Staples had $1.8 billion inliquidity, including cash and short-term investments of $1.0 billion andavailable lines of credits of about $800 million. Year-to-date Cap Ex came inat $316 million, down from the $352 million we spent for the same period in2006, primarily reflecting decreased investment in fulfillment centers,partially offset by increased investment in new stores.

With operating cash flow of $849 million, we generated $533million in free cash flow year-to-date. During Q3, free cash flow was $519million. For the year, we expect about $550 million in capital expenditures andmore than $800 million in free cash flow.

During the third quarter, we repurchased 8 million sharesfor $181 million and now have approximately $1.25 billion remaining on our $1.5billion authorization. Our diluted weighted average shares outstanding declinedby just under 21 million shares year over year for the quarter. Return on netassets for the year improved to 14%, up 20 basis points compared to the end ofthe third quarter a year ago. This includes a 30 basis point negative impactfrom a legal settlement.

Looking forward to the fourth quarter, excluding the impactof the extra week in Q4 2006, we expect low double-digit total company salesgrowth; a flat to slightly negative comp and high single-digit sales growth inour North American Retail business; mid-teens growth in our North AmericanDelivery business; and high single-digit sales growth in local currency in international.As a result, we expect to achieve Q4 and full year EPS growth of approximately15%, excluding the extra week in 2006 and special items in 2006 and 2007.

We remain cautious about the economic climate driving theweak sales trends we've seen throughout 2007 and expect this to continue for atleast the first half of 2008. For the year, we expect to achieve highsingle-digit sales growth for the total company; a low single-digit comp inNorth American Retail; low to mid-teens revenue growth in North AmericanDelivery; low double-digit sales growth in local currency in international; andlow teens EPS growth.

Our business and our industry remain strong and we'reoptimistic about our long-term future. We continue to gain share and we expectthe industry to grow faster than GDP. As a result, our long-term expectationsremain unchanged. We expect to return to 15% to 20% EPS growth driven by 10% to15% sales growth with operating margins expanding to 10% and RONA continuing toimprove as the economy returns to a more normal pattern.

Despite some softness in the market, we have a solidbusiness that's performing well overall, but that offers plenty of opportunityfor improvement. During tough times, you can often see weak spots in yourbusiness that might get covered up when sales are booming. Today we canidentify some of the areas that we can fix and build a better business.

The last time we were faced with a challenging economicenvironment during the 2001 recession, we did the same thing. The steps we tookback then to improve our business fueled tremendous growth, as Ron described atthe beginning of the call. So while the economy is weak, we are taking theopportunity to get to work on the things we can control, focusing on ourcustomers and new growth ideas that will drive outstanding results when theeconomy strengthens.

Thanks for your time this morning and now I'll turn it backover to our conference call operator for Q&A.

Question-and-AnswerSession

Operator

Your first question comes from the line of Brian Nagel - UBS.

Brian Nagel - UBS

Congratulations on a nice quarter in a real toughenvironment. With respect to the gross margins -- you touched a little bit onthis in the prepared remarks -- but wesaw the biggest gross margin improvement in several quarters. Help meunderstand better what changed here in Q3 versus the prior quarters as far asdrivers of gross margin?

Ron Sargent

I'll mention a coupleand then turn it over to John to give you the color commentary. I thinkbasically the story was around mix got better and consumables comp’d positivelyversus durables that comp’d negatively and as you know, we make a lot moremoney on the consumables side than we do on the durables side. I think Canadahelped us a bit on the gross margin as well.

John Mahoney

I think that's right. Really across the board we did apretty good job on gross margin. Canada'smargin helped our North American retail business. I mentioned the improvementswe've seen in supply chain areas; we're cycling against the new facilities thatcame online last year in our NAD business, and they've improved nicely and arehelping show nice improvement in our gross profit year over year in thatbusiness.

Our international businesses as well have done a nice job oftending to all the elements of their margin, both in terms of the mix ofproduct that they drive, a little bit less technology, as well as doing somenice things in supply chain and buying to help see their margin improve aswell.

Brian Nagel - UBS

As far as the retail, the negative 3% retail comp, yourcompetitors talked about a much more challenging back-to-school season. Didback-to-school weigh disproportionately upon the comps in the quarter?

Ron Sargent

To the contrary. I'll ask Mike Miles to answer that one.

Mike Miles

Good morning, Brian. Actually, I thought our back-to-schoolwas pretty solid. The issue for us in the comps really was in those durablecategories. This was our second year of doing the Hot Buys and some of thosepenny items that really drove a lot of traffic and we felt like we have thatpromotional strategy pretty well worked out. I'd actually add that to the listof things that John and Ron just mentioned about gross margin. Where some ofour competitors were getting into that for the first time, I think it was oursecond time around for that and it led to us having a fairly successfulback-to-school; to the extent you can say anything was real successful in aquarter when you had a negative 3 comp.

Operator

Your next question comes from Chris Horvers - Bear Stearns.

Chris Horvers - Bear Stearns

As we think about momentum within the quarter both on the deliveryand retail side, first on delivery you mentioned it did soften in all threesegments. Is that something that was at an increasing rate in the quarter ineach month? As you think about the retail comp estimate for 4Q, it is up to zeroto down 1 versus negative 3. Is that simply comparisons or is that alsosomething you're seeing in momentum?

Ron Sargent

In terms of the comp, it was choppy so there were no trendlines to the comp in the third quarter. As Mike mentioned, back-to-school,which happened in the first half of the quarter was okay but it wasn't anythingthat got us to the positive comp. But there was no real trend down or up, itwas really choppy depending on the week. I think that's true of our NorthAmerican Delivery business as well.

Your second question was on the fourth quarter?

Chris Horvers - Bear Stearns

It was retail comp, why you have a better comp outlook in4Q.

Ron Sargent

Frankly, when youlook at the two-year trend, it's about the same. This quarter we had acomparison against a 4 last year and in the fourth quarter our comp, if youremember, is a 1%. So if you look at the two-year trend, it's about the same. Sowe're not assuming we're going to get a lot better, we're not assuming we'regoing to get a lot worse. That's why we came up with that zero to 1 for theexpectations for Q4.

John Mahoney

That said, I think that the team in North American Retailhas really worked hard with the merchandising initiatives and a better plan forholiday. Last year we felt we were disappointed with our holiday sales and weexpect that we're going in with a lot of things that customers are going tofind very attractive.

Chris Horvers - Bear Stearns

Just to follow-up on theNorth American Delivery comp, you saw a general softening 3Q versus 2Q, but itwasn't incrementally worse in each month of the quarter? Is that fair?

Joe Doody

Yes, that's generally fair. As Ron said, it's pretty choppyweek to week and throughout the quarter. We certainly saw a softening all theway around. We're very satisfied with our account acquisition, very satisfiedwith our account retention. Just in general, fewer orders from our customersthroughout the quarter.

Chris Horvers - Bear Stearns

As you think about the standalone copy center it seems likethey are performing very well. Looking forward and thinking about thelonger-term opportunity, how would you quantify that and what share of thenormalized hundred store openings do you think they might contribute over time?

Ron Sargent

Chris, they tell meI'm too optimistic about this whole subject, so I'm going to ask Demos toanswer that question.

Demos Parneros

Thanks, Ron. Actually,I'm optimistic on the subject as well. As you know, we have four standalonecopy stores open at this time; three in the Bostonarea and we just opened our first one in New York Cityjust a few weeks ago. Honestly, we're pleased so far, but again only fourstores, it's fairly early.

We're learning a lot, I can tell you that. A lot ofinteresting learnings coming from those stores, not only for that business butalso for our base business, and we'll have a small percentage of next year'sgrowth plan dedicated to more standalone copy stores.

Operator

Your next question comes from David Strasser - Banc ofAmerica Securities.

David Strasser - Banc of America Securities

As you look out at the competitive environment, like overthe past weekend, and you think about the holiday season do you think it's moresignificant/less significant than it was last year, at least the start of it?

Ron Sargent

My belief is it'salways competitive and this weekend was no exception to that.

Mike Miles

I think it's getting a little earlier in the morning onFriday mornings, but other than that I think it's pretty much the same story. Rememberfor us, the holiday season is not really our core business, it's something thatwe participate in, but we make most of the money in Q4 in January and so wedon't want to get too carried away with this past weekend one way or the other.

David Strasser - Banc of America Securities

Changing the topic to international, you talked about youhave a 3.3% operating margin now, wanting to get to 7.5%. Maybe I misunderstoodit as you were talking about it. Is that in retail specifically? Does thatinclude contract? Either way, any sense of a timeframe for that type of change?

Mike Miles

We've talked about it in total international and thatincludes Europe, where you'd expect to be a littlebetter than that because of the maturity of the business; you'd expect it to bea little lower in Asia where you're really in growthmode. But we've said in the next two to four years we think that the SBU incomethat we report for all of international should start to spike up. I meanobviously, fourth quarter's our best quarter of the year for international.We'll see where we are three months from now. But we think the next two to fouryears we'll be in that 7.5% operating profit for all of international.

David Strasser - Banc of America Securities

As you look at the comp, the comp on the two-year basisslowed a little bit Q2 to Q3. Was it an economic issue or anything that jumpedout at you sequentially in that period?

Mike Miles

No. I mean we did have certainly tougher comparisons. I cantell you we were a little disappointed with our same-store sales because youwant it to be lightly positive, but we did have tougher comparisons. We were upagainst a 5% in Q3 versus a very low comp in Q2. But in terms of the Europeaneconomy, I think given where we are in terms of our small share, I don't thinkit really makes a lot of difference. You've got some countries that are doingbetter, some that are worse, but when you look at the marketplace in Europe,particularly where you've got great fragmentation of the market, I don't thinkthat a deteriorating economic climate should keep us from growing or keep usfrom improving our performance. The things that we need to do, things likebetter buying, things like reducing our G&A, improving our supply chain,more own brand, that doesn't require a good economy for us to do well inEurope.

John Mahoney

I'd just add that I think one of the key things,particularly in the UKhas been focusing on the business customer. We have improved the mix so wearen't quite as promotional with some of the technology products as we havebeen in the past, which is certainly part of what drove the higher comp last year.

I think going forward the objective is to have the same sortof healthy consumables-driven business in Europe that wehave in North America.

Operator

Your next question comes from Danielle Fox - Merrill Lynch.

Danielle Fox - Merrill Lynch

If comps stay negative in 2008, is there any more room oncosts at retail? You mentioned that weak demand creates opportunities toidentify areas of improvement so maybe a related question to the costs atretail would be whether or not you could give us some examples of where you'vefound some opportunities?

John Mahoney

As we've discussed in the past, we have a planning range ofrevenue growth. We always believe that there are opportunities to get better.Some of the things that we've done with process improvement in the company,organizational structure including our shared services center in SouthCarolina, as well as some of the initiatives on buying better -- not justproducts, but also the other things we use in our business -- have driven realproductivity in our cost structure year after year.

As we look at 2008, we're not planning for a robust comp. Weare planning for it to get better and historically we've been able to leverageour expenses down with sales within a normal planning range. I would expect thesame thing would be true for 2008.

Ron Sargent

When you look at thelast time we had negative comps, which I guess was 2001, we continued toimprove profits because the comp driver was really technology where we didn'tmake much money. As long as your core business, your core office supplies arecomping positively like they did this quarter for us, we ought to be able tocontinue to grow profits.

Danielle Fox - Merrill Lynch

You also mentioned that Miamiand Denver stores performed well.I'm wondering if there was anything else that was noteworthy from a regionalperspective that you noticed for the stores or the delivery business?

Demos Parneros

Danielle, Miamiand Denver continue to grow nicelyas we add stores in those markets. We have a nice balanced portfolio of storesthere and they continue to ramp as planned. The other geographic note that I'dmake is just a little bit of the softness in the Southeast and West Coastmarket -- California, Arizona,Florida, in particular -- would be the ones that I'd call out asslightly off the rest of the average.

Danielle Fox - Merrill Lynch

Did any of those patterns change relative to the secondquarter? Did they intensify or do you see any incremental weakness in some ofthe markets that had been strong? I'm just curious what the change was quarter toquarter.

Demos Parneros

I think the trend began in Q2. It also got slightly tougherin Q3; not significantly, but a little bit. It hasn't improved yet.

Operator

Your next question comes from Gary Balter - Credit Suisse.

Gary Balter - Credit Suisse Securities

Where is the store in New York City?

Ron Sargent

38th and Madison.

Gary Balter - Credit Suisse Securities

I'm actually near there.

Ron Sargent

Stop by thisafternoon and make some copies.

Gary Balter - Credit Suisse Securities

Is it as good as the Canadian stores? When we go throughoutresults, like the combined North American Delivery, could you break down Canadaand the U.S.?The Canadian economy obviously is much stronger. How much did that help interms of the results that we're looking at?

John Mahoney

You're talking aboutjust in the delivery business alone?

Gary Balter - Credit Suisse Securities

Retail and delivery.

John Mahoney

I think as you know, the delivery business is much smallerup in Canada.We don't have a contract business in Canada.It's certainly not significant to the NAD results overall. We haven't brokenout the Canadian results separately in the past. I think you can do the same sort of thing on storecount for North American retail.

Canadahas been a great business for us and continues to perform well, but I would saythat the performance in Canadahasn't been materially different than the U.S.retail business, and therefore I wouldn't say that our business is any betterbecause we have Canadathan it is otherwise. The U.S.retail business is performing along with NAR.

Gary Balter - Credit Suisse Securities

So the minus 3 compwas consistent in Canada?

John Mahoney

Yes.

Gary Balter - Credit Suisse Securities

When we look at your stock price and we look at your balancesheet and we look at the competitor's stock price, how have your thoughtsevolved in terms of the potential to use your balance sheet a little bit moreaggressively to either do something with your own stock or do something to helpconsolidate the sector?

John Mahoney

As we've said on a number of occasions, we believe thatthere's advantages to maintaining flexibility in our capital structure and thatflexibility can either be for restructuring the balance sheet to some degree orfor thinking about acquisition opportunities.

To date, our acquisition opportunities have focused on thesmall tuck-ins that have driven new categories, particularly in our deliverybusiness. We said that any opportunities that would come about from asignificant acquisition would be looked at in the same way we look at capitaldiscipline for any other investment we'd make. We would consider anything likethat opportunistically should the opportunity arise. I don't think we commenton any specific acquisition activity.

Gary Balter - Credit Suisse Securities

I was just hoping youwould on this call.

Ron Sargent

How's that for anon-answer?

Gary Balter - Credit Suisse Securities

That's pretty good.I'm used to that. Just one last question to clarify the guidance because somepeople misunderstand low-teens to mean 10 to 12. Low teens based on my kids is13 plus?

Ron Sargent

That's what I calllow-teens.

Operator

Your next question comes from Matthew Fassler - GoldmanSachs.

Matthew Fassler - Goldman Sachs

First of all, you've clearly gained significant share insupplies as your competitors have been talking about negative comps in thatcategory. Can you talk about levers that you think you pulled in that categoryin particular, vis-à-vis other promotional activity, the impact of your loyaltyprogram, any merchandising changes that you might have made in the store thatwould help explain that share grab?

Mike Miles

Yes, I think there are a couple things going on there, Matt.Certainly the back-to-school program helped and as I mentioned earlier, I thinkwe feel like in spite of the fact that our promotional strategy duringback-to-school was copied by some of the competitors, that we still were ableto extend our lead there.

I think more importantly with our core business customers ona daily basis we continue to drive share both through our rewards program,which as you know has been refocused on supplies -- paper, ink and toner andthe copy center -- and also specifically through the ink business which wecontinue to gain share in and which has a nice basket of supplies.

We think that the addition of Dell to the mix will help uscontinue that trend because now we're tapping into a whole group of customerswho have not yet had a retail alternative to get ink and we believe thatthey'll buy a basket of office supplies when they come in to get their ink ortoner.

Matthew Fassler - Goldman Sachs

Can you try to quantify the impact of the change to theloyalty program, let us know whether they were measurable, and any early readon the success with Dell?

Mike Miles

It's way too soon on the Dell front to talk about anysuccesses. We've seen good initial sales and we're pretty confident on thatbecause we also had a pretty nice, although more limited business, in the[resale of] Dell ink before we got the OEM product in the stores.

The rewards program is something we're still working on. We'repleased with what we've seen to date but it is still something that I thinkcontinues to be an opportunity for us.

Matthew Fassler - Goldman Sachs

A little more color on some of the moderation in growth insales per customer in the delivery business? If you could just clarify -- youmight have said this -- whether that's in the large customer business orwhether it's across customer sizes and also what impact that's having, or ifit's having an impact on the mix of business by product category.

John Mahoney

First of all, as far as across customers are concerned, itwas pretty consistent across all customer sizes where we saw modest softening,and that, as I said, was in purchase volume from customers.

That being said, among the largest customers, Fortune 1000,I think it's fair to say that we are seeing maybe a little bit bigger drop offthere simply because in some instances we're finding some of our competitorsare winning some of those accounts which we would say are probably at moreunsustainable pricing levels; and as such, we continue to be very muchdisciplined in our approach to these customers and so we'll see a little bitfurther drop off in terms of that. It is fair to say that the large accountsegment is not our fastest growing segment right now.

Operator

Your next question comes from Michael Baker - Deutsche Bank.

Michael Baker - Deutsche Bank Securities

Joe, can you discuss the acquisition pipeline in the deliverybusiness? Your guidance in the fourth quarter is still at 15%; next year, lowto mid-teens. How are you thinking about the organic growth versus theacquisitions, both in the fourth quarter and into next year?

John Mahoney

We continue to see the vast majority of our growth beingorganic growth as it has been in the past, and as well, this past quarter. Sowe don't see that changing at all. We don't forecast acquisition activity intoour growth, so we're looking at our existing business base, our view into thefuture. As I said, we're very satisfied with our account acquisition and ouraccount retention during this last quarter and that has continued to beextremely solid. We view that when we look towards next year continuing to be verymarket-leading growth, low to mid-teens.

Michael Baker - Deutsche Bank Securities

So to clarify that,low to mid teens doesn't necessarily include acquisitions? That really is anorganic outlook?

John Mahoney

Incremental abovewhat we have today, yes.

Michael Baker - Deutsche Bank Securities

The extra week last year was $0.04 I recall? I just want toclarify that.

John Mahoney

Yes.

Operator

Your next question comes from Colin McGranahan – Sanford C. Bernstein.

Colin McGranahan - Sanford C. Bernstein

Just following up on the NAD a little bit more, I think youused the words “strong visibility” and growth regardless of the environment. Ijust want to understand your confidence there in obviously what is an uncertainenvironment? Is that based on the account wins that you've already got, theretention rates that you're seeing and the growth of some of these adjacentproduct categories like Jansan and industrial that are fairly early on in theirmaturity that gives you that incredible visibility into next year?

Ron Sargent

I'll ask Joe to provide feedback. I think it's all of thosethings plus it's the confidence that we have in our team.

John Mahoney

Well said, Colin. It's all of those and as you said, in someof those growth initiatives that we've invested heavily in, they are still inthe very early stages and we expect to be reaping bigger rewards from them nextyear and into '09 than we have in '07.

So whether it be the local products, whether it be our copyand print initiative, our Jansan initiative, our mail and ship initiative, allof those are still continuing to evolve and we do expect increasing growth fromthose than we've seen in '07. So that's the visibility that I think we have, aswell as our continuing acquisition machine across all of our businesses in NAD,combined with outstanding retention.

Colin McGranahan - Sanford C. Bernstein

More broadly, just on the general '08 outlook, I know your retailcomps obviously get a lot easier as you go into '08. Can you talk about whatyou've embedded just in terms of your top down macro view, given yourexpectations for positive low single-digit retail comps and high single-digitrevenue growth overall?

John Mahoney

As I indicated, we're not expecting the climate to changethrough the first half of '08 and we're expecting to see the second half of '08become a period of recovery. We're certainly not counting on the economy to geta lot better in order to achieve that. I think you're right. We do have easiercomparisons but as I mentioned, our team is also working really hard to try andidentify new growth initiatives in categories that are consumable, that we expectcustomers will need to replenish regardless of the state of the economy. Ithink Mike talked about a number of those.

Colin McGranahan - Sanford C. Bernstein

Yesterday the stock was below $20. I think it would probablybe up a bit today. But you have $1 billion of cash on the balance sheet. I have a hard time understanding that unlessthat is an explicit move to preserve some flexibility. I mean, why would youkeep $1 billion of cash with your stock cheaper than it's been on a valuationbasis, ever, on an absolute PE?

John Mahoney

I think our strategy regarding returning cash toshareholders has been to take our cash flows and return it both in the form ofdividends and in terms of regular share buybacks, which we believe is the bestway to add value for our shareholders. We've seen many occasions when companieshave regretted large share buyback programs and as a result, we think that slowand steady is going to win the game in the end.

We don't think we have an opportunity to add tremendous valuewith a single one-time event, and so absent some change we would expect tostick with our strategy.

Colin McGranahan - Sanford C. Bernstein

I think you bought back $180 million in the current quarter?

John Mahoney

Yes.

Colin McGranahan - Sanford C. Bernstein

So on an annualized basis that's about $720 million. That'snot even using your free cash flow, let alone deploying the excess $1 billionin cash. So it seems like slow and steady is maybe a little too slow here.

John Mahoney

We appreciate thefeedback.

Operator

Your next question comes from Mitch Kaiser - Piper Jaffray.

Mitch Kaiser - Piper Jaffray

You talked about weakness in computer. Listening to some ofthe CE retailers -- Best Buy, Circuit City, for example -- talked aboutthat category being a real strength. Could you talk about what you're seeing onthat side of the business?

Ron Sargent

Sure. Probably thebiggest trend on the computer side is the evolution from desktop to laptop. Imean, if you look at our comps for the quarter I think we were slightlynegative on computers but laptops were positive, desktops were negative. SinceI think our mix of desktop is a little higher than maybe some of the others,that probably affected us.

I think the other issue that's affecting the computercategory is the selling price of computers, and that's been a trend not onlyhere in the U.S.but particularly in Canada,where the SP is down.

Obviously, we like selling consumables that have some marginin them more than computers and we try to monitor sales to the extent that wecan so that our mix does improve quarter to quarter. We like computers. Wedon't love computers. We love all the things that come with selling computers;all the attachments and the accessories and the ink and the cables and allthat.

Mitch Kaiser - Piper Jaffray

So you see your mix evolving over time from desktop tolaptop, then?

Ron Sargent

Yes.

Mitch Kaiser - Piper Jaffray

100 stores next year, I think you were saying 120 this year.Why are you lowering that number? Could you comment on the mix of new versusexisting markets? Thanks.

Ron Sargent

That's not really aconscious decision, to lower or to increase. We basically say 100 every yearand when we have an opportunity to get good stores quicker, we'll put them inthe mix. We'll do about 100 inU.S. and we'lldo about 20 in Canada.So that's where you got the 120 this year. Next year, our planning assumptionis about 100 new stores. It might be a few more. It might be a few less. But interms of new markets to existing markets, I would say the bulk of the storesnext year are going to be in existing markets and I think probably 10%, 15%will be in new markets, something like that.

John Mahoney

Sounds right.

Operator

Your next question comes from Steve Chick – JP Morgan.

Analyst for SteveChick - JP Morgan

First, you mentioned that you benefited from lower variablecomp in the quarter. How much did that help?

Ron Sargent

I think right off thetop of my head I think the variable comp was maybe 10 basis points; 15year-to-date is what the variable comp is. Basically we're not going backwards,we're just accruing to basically our results and that's about 15 basis points.

Analyst for SteveChick - JP Morgan

If you could talk about your consumer, are they trading downto private label brands, especially in office supply where you had positivecomps?

Ron Sargent

Well, you could arguethey're trading up to private label because we feel pretty great about thequality of the product. We've had a “steady eddy” approach, I guess, like we doa lot of things in terms of Staples brand. We think the opportunity's probably30% of our sales at some point, last year we were at 20%.

I think you'll see a steady progression over the next fewyears to get us to 30% and we're continuing to see that this year. We don'treport every quarter, but we're doing some things like launching a higher end,higher quality line of office supplies called M. It's early days, but I thinkthat's going to be a big idea. Last year, the hottest binder we had in ourstore was the Better Binder, which was a Staples brand product. The one-touchstapler is another one of those innovative new things.

For an industry that does not have a tremendous number ofbrands, we think the Staples brand is really the right alternative for ourcustomers and the fact that we're continuing to grow it would indicate that thecustomers agree.

Analyst for SteveChick - JP Morgan

Regarding your softness with computers, is your switch toDell a move to combat this in maybe some of the aggressiveness that you've seenfrom competitors in the segment?

Ron Sargent

No, not really. Ithink the Dell relationship is one that we've been really working on for thelast several years, in fact. We think Dell creates a great opportunity andgives our customers more choice and we love the fact that there's not a lot ofplaces you can buy Dell in retail. But it's early days. I think we justlaunched Dell on the 11th of November. It's early days, but we think Dell is a greatbrand and a great alternative to go with some of the other great brands we havein that category.

Operator

Your next question comes from Daniel Binder - Jefferies.

Daniel Binder - Jefferies

First, just given your view that the environment could betough in the first half of '08, is it fair to assume that your guidance fornext year is more back-end weighted in terms of the comps being positive?

John Mahoney

We're thinking about the year as a whole at this point. Wehaven't really completed our budget process and don't really know what toexpect. I think as you looked at the results on a comparison basis, you'dexpect that as the comparisons get easier the comps would get stronger. I thinkit's too early for us to make a call. We are expecting continued weakness inthe first half though.

Daniel Binder - Jefferies

You talked about the things that benefited gross margin. Iwas wondering if you could touch on a couple of things that I suspect have beena little bit of a headwind, particularly what seems to be a little bit morepromotional activity, certainly at the retail level. You mentioned a little bitmore pricing, a little tougher pricing on the large accounts in delivery. Howare you handling that promotional activity?

The second part of that question pertains to vendor support.I think unlike some of your competitors, a lot of the parts of your businessare still doing pretty well. Are you still able to hit these vendor hurdles inorder to get the support needed to hit your plan for the year?

Mike Miles

Dan, I would say although some may have asserted that theenvironment's gotten a lot more promotional at retail, we've not been a lotmore promotional ourselves than we were a year ago and so I think we've beenable to basically maintain the same kind of pricing structure and promotionalstructure at retail that we've had. In delivery, as you know, we won't gochasing unprofitable business, to the extent that that happens at differentpoints in time, it's probably more of an issue for us on the top line than itis in our margin, because we're just not going to go after unprofitablebusiness.

With respect to vendor support, that's something that weobviously measure closely and manage closely every quarter and so far I thinkwe've been able to do a pretty good job driving sales of the products that havea good profitability mix, whether it's the overall margin or with the back-endadded in. So, again, that's helping us sustain the margin numbers that you'veseen.

Daniel Binder - Jefferies

Would you anticipateany kind of investment buys from an inventory standpoint to meet certainhurdles at year end?

Mike Miles

No, I don't think so.There's always a vendor here or a vendor there where you might adjust your planslightly, but you shouldn't see anything major at the end of the year aroundthat on the inventory line.

Daniel Binder - Jefferies

Lastly on the gross margin, you mentioned, I think, that Canadahad helped the gross margin performance somewhat. Is there any kind of priceoptimization activity going on there that's helping it? Is it just mix as well?

Mike Miles

It's mix. They'vedone a little pricing in Canada in certain parts of the business, but basicallythey have seen the same phenomenon up there around computers in particular thatwe've seen here and their office supplies mix is up significantly relative towhere it was a year ago compared to computers, which is a bigger business forthem than it is here in the U.S.

Operator

Your next question comes from Joe Feldman - Telsey AdvisoryGroup.

Joe Feldman - Telsey Advisory Group

I was just hoping you could discuss the back to businessperiod and how you may be approaching that differently from last year. Similarto Dan's question, any opportunistic buys that you might have heading into thatperiod, or things you'll be doing differently?

Mike Miles

We've been working closely with some of our major suppliersto make sure that we have a great back to business season this year. Forcompetitive reasons, I don't want to get into the details of what our plans arefor January, but we are excited about that and we think it will be a strongfinish to the fourth quarter.

Joe Feldman - Telsey Advisory Group

Also, can you talk a little bit about CapEx for '08? I mayhave missed it on the call, but I know you're still looking at $550 million for'07, but was just kind of curious what you're thinking for '08.

John Mahoney

I think for '08 we'dexpect CapEx -- again as I mentioned, we haven't finished our budget process --but it would be in the $500 million to $550 million range. We'll give you morespecific guidance when we have it.

Joe Feldman - Telsey Advisory Group

The one last thing was just private label penetration, wheredoes it stand at this point and how much should it help with the gross marginthis quarter, if at all?

Ron Sargent

Well, I think theprivate label penetration continues to grow, but it grows at a very steadyrate. It's not something that's dramatically different quarter to quarter. LikeI said we expect to increase private label penetration a couple hundred basispoints every year and I think we're probably on track to do that.

Operator

Your next question comes from Brad Thomas - Lehman Brothers.

Brad Thomas - Lehman Brothers

On the back to business period that's coming up, do you getany sense that any of your customers are putting off some expenses until nextyear and that there could be a little bit of a pent-up demand as we get into2008?

Joe Doody

Brad, you always get that. Almost every year we seecompanies getting into their fourth quarter and getting tight for purchases soholding things off in December, waiting until after the first of the year. Soour busiest week is always the first week of January. It's back to the job,it's back to changing file cabinets around, and it's a new budget in manycases. So they've delayed, and that's traditional. I can't say that right nowwe see any more of that going on, it's hard to really judge. But it seems toalways be there and it gets even more there once you get closer to the end ofthe calendar year.

Mike Miles

The only other thingI'd add on the retail side is that it appears that maybe some of the biggerticket furniture purchases may be put off a bit. But everyday things like paperand ink cartridges people are obviously coming in for, but you can hold on alittle bit longer for some of the bigger ticket goods.

Brad Thomas - Lehman Brothers

After a quarter like this where you have margins coming inon the stronger side and comps maybe a little bit on the softer side, I knowyou're gaining share in supplies but how do you think about getting moreaggressive within your pricing in some of the other categories like furnitureand tech?

John Mahoney

Our experience is that the elasticity of some of thosebigger ticket items isn't great, so turning highly promotional doesn't seem toincrease sales and as you know, we're interested in driving gross margindollars so we try and think about how we're going to optimize our gross margindollars.

Brad Thomas - Lehman Brothers

John, you had alluded to the recession in 2001. I waswondering if you could talk about some of the similarities and differences inthe environment and the competitive landscape from what you saw back thenversus what's going on right now.

John Mahoney

It's been kind of interesting, every recession tends to bedifferent. In 2001, right after the election when the election was up in theair for a while, demand seemed to fall off a cliff, particularly for thecapital goods items. We think largely because capital was not available tosmall businesses after the dot-com bubble sort of burst caused that and itcaused relatively weak demand for really about six quarters at that time in ourbusiness.

We have seen this be much slower. Over the course of thesummer, I think there was a lot of uncertainty and Ron mentioned that we hadchoppy sales. It seemed to follow the news cycle. When there were bad stories,sales were bad and when that tailed off a little bit, sales improved a littlebit. I think as capital became less available throughout the summer and intothe fall, we've seen things really get to about where they are now.

I think that the same thing in terms of demand for capitalgoods items has occurred a little bit, but it's been later and it hasn't beenas precipitous.

Ron Sargent

It seems like this time it's more consumer-led, where lasttime was more jobs-led. We felt that pretty significantly in our deliverybusiness last time, this time I don't think we're feeling it as significantly.

Certainly we felt a little bit this quarter, but it seems tobe more like a consumer-led recession if that's the way we're heading -- and Idon't know if we are -- but I think thehard part is it affects retail business and retail comps.

Operator

Your final question comes from Brigitte Neigut - W.P.Stewart.

Brigitte Neigut - W.P. Stewart

On North American retail, is it fair to say margins on Dellproducts are in line with other electronics margins?

Your guidance in International ex-currency looks like itimplies a bit of an acceleration. Is that store growth or delivery? A bit morecolor there would be great.

Ron Sargent

I think Dell margins are comparable to other margins in thetechnology category.

John Mahoney

We tend to look at the currency forecasts that are consensusbased on the forward contracts as we plan for '08, so therefore we would expect that we're goingto see continuing strengthening of the euro. As we said, we are not finalizedon our budget yet and so I think you're talking about a little precision beyondwhere we are as of right now.

Brigitte Neigut - W.P. Stewart

I'm sorry. I meantex-currency – actually your guidance implies it looks like a bit of anacceleration, low double-digit growth in local currencies.

John Mahoney

You're talking about for '08? I think as I mentioned, we'veseen nice traction on accumulating business customers which we expect willcontinue to comp, and so I think that some of the comparisons are going to bemore reasonable as we go into next year where I think the '06 comparisons oftenincluded a little bit more promotional activity.

We're expecting to see solid comps in the retail business.We're not going to see an acceleration in the store growth there and we alsoexpect to see the catalog business to continue to perform steadily.

Operator

I'd like to turn the call back over to Ron Sargent forclosing remarks.

Ron Sargent

I'd just like to wrapup by thanking our associates for a solid quarter and for delivering results ina tough environment. We're certainly improving our offering in North American retail.We continue to gain market share in North American Delivery, and in international,we're making good progress. I think we're well-positioned to finish the yearstrong and set ourselves up for even more success in 2008. Thanks, everybody. Iappreciate your time this morning.

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