Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Staples (NASDAQ:SPLS)

Q1 2012 Earnings Call

May 16, 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

Christine T. Komola - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Demos Parneros - President of US Retail Stores

Joseph G. Doody - President of North American Delivery

Analysts

Gary Balter - Crédit Suisse AG, Research Division

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

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

Christopher Horvers - JP Morgan Chase & Co, Research Division

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

Michael Lasser - UBS Investment Bank, Research Division

Kate McShane - Citigroup Inc, Research Division

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

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

David Gober - Morgan Stanley, Research Division

Alan M. Rifkin - Barclays Capital, Research Division

Jeremy Ridder Brunelli - Consumer Edge Research, LLC

Joseph I. Feldman - Telsey Advisory Group LLC

Gregory Hessler

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Staples Inc. Earnings Conference Call. My name is Anne, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to Mr. Chris Powers, Director of Investor Relations. Please proceed, sir.

Chris Powers

Thanks, Anne. Good morning, everyone, and thanks you for joining us for our first quarter 2012 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-Q filed this morning.

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

Ronald L. Sargent

Thanks, Chris, and good morning, everybody. Thanks for joining us today. Our first quarter results came in about how we expected, with stable top line performance in North America and international sales remaining weak. When you look at the headlines for the quarter, total company sales were $6.1 billion, that's flat in local currency, but a decrease of 1% in U.S. dollars versus last year. And earnings per share on a GAAP basis were down about 4% to $0.27.

During the quarter we incurred severance expenses, as well as payment of a legal settlement associated with the acquisition of Corporate Express in 2008. These items negatively impacted our first quarter earnings per share by about $0.03 combined. Excluding these items, earnings per share increased by about 7% versus last year's first quarter.

On our fourth quarter earnings call, we talked about our key objectives for 2012, and I'd like to give you some brief updates on some of the progress we've made during Q1. One of our top priorities this year is to continue building momentum and product categories adjacent to core office supplies. During the quarter, we drove strong growth in products and services like facilities and breakroom supplies, copy and print, mobile phones and accessories, and new technology products like tablets and eReaders. Together, these adjacent categories grew by over $100 million year-over-year during Q1. Another top priority is to improve profitability. In late February, we announced plans to reduce international headcount. And during the first quarter, we eliminated approximately 300 positions in Europe and Australia combined. While these actions are an important step to improve international profitability, these alone are not sufficient. And I want to make it clear that we're holding ourselves accountable for poor performance outside of North America. We're extremely focused on getting this business back on track, and we're working hard to better meet the needs of our customers.

During the first quarter, we also took a look at our North American cost structure, and despite our strong profitability North America, we also recognized the need to become even more nimble and efficient here. So to that end, we eliminated about 200 salary positions in the U.S. and Canada during Q1, which has allowed us to speed up decisions, simplify the way we do business and reduce overhead cost. Additionally, we continue to be extremely selective with incremental spending. This year, we expect to generate solid returns on the investments we've made over the past few years in several new products, services and growth initiatives. We also remain committed to returning cash to our shareholders. And during Q1, we spent about $93 million on share repurchases and we increased our quarterly dividend by 10% to $0.11 per share, which puts our current dividend yield in the 3% range.

Going forward, our outlook for 2012 has not changed. We continue to see modest improvement in the U.S. economy and ongoing weakness in Europe, we're maintaining our full year guidance of low-single digit sales growth and high-single digit EPS growth. Now let's take a look at our Q1 results for each of our business units in a little more detail, and I'm going to start with North American Delivery.

During the first quarter, we made good progress against our 2012 objectives. We continued to gain share. We drove solid sales growth in adjacent categories, and we accelerated our top line momentum in Staples.com. Sales for the first quarter were $2.6 billion and that's up 2%. The top line increased in each of our 3 delivery businesses with particular strength in Staples.com, which was up in the mid-single digits.

In Contracts, our customer acquisition and retention remained strong, and we continue to be very disciplined in managing account profitability. Late last year, we lost a couple of large legacy Corporate Express accounts that didn't achieve the right returns. While this will be a headwind to our top line throughout most of 2012, it has helped our operating metrics by improving average order size and reducing the number of small orders.

Taking a closer look at our core categories. Sales of ink and toner were up slightly during the first quarter, and sales of paper and core office supplies were down in the low-single digits compared to the prior year. Our expanded assortment and sharper pricing in facilities and breakroom supplies continue to resonate with our customers. Sales in this category increased by more than 20% in Q1 and came in ahead of our expectations. Facilities and breakroom supplies accounted for more than half of our growth in North American Delivery during the first quarter, and we're well on our way to growing this business by more than $100 million in 2012.

We're also seeing solid top line trends at some of our other adjacent categories. We achieved double-digit growth in our Contract, Copy & Print business, high-single digit growth in promotional products and mid-single digit growth in project furniture, which benefited from improved alignment of our sales force. We also launched a Managed Print Services solution late in Q1 to expand on our leadership in the Printing category, while helping customers create more efficient, customized and sustainable printing networks.

During the first quarter, we saw stronger growth in Staples.com as the investments we're making continue to pay off. We're seeing rapid growth in Copy & Print through our relationship with Vistaprint, and customers are taking advantage of our software download capabilities with strong performance during tax season. Our new proactive chat functionality is improving customer service. Our online circular is now the most visited in the United States, and we're building on our success in facilities and breakroom supplies with an expanded assortment of safety and industrial supplies. We remain on track to open an e-commerce innovation center in Cambridge during the second quarter, and we're sharing best practices in dot.com with our Contract and international businesses to further differentiate our offering in these channels as well.

Turning to customer metrics for the quarter. In Contract, we drove solid improvement in average order size and a significant decline in small orders with both mid-market and enterprise customers. In Staples.com and Quill.com, we achieved year-over-year growth in our customer file and order frequency, while average order size declined in each of these businesses.

During the quarter, North American Delivery operating margin increased 3 basis points versus last year to 7.9%. This improvement was driven by supply chain efficiencies, partially offset by an $8 million expense or about 30 basis points related to headcount reductions and the legal settlement, as well as a modest decline in product margin.

Moving on to North American Retail. The team continues to work very hard on our #1 priority, which is to improve store productivity. During Q1, we accelerated growth in adjacent categories and drove increased customer conversion. We're also off to a good start with our new line of Martha Stewart Home Office products, as well as our assortment of Apple products in Canada, including the new iPad.

North American Retail sales for the first quarter were $2.3 billion. That was flat in both U.S. dollars and local currency compared to Q1 of 2011. First quarter same-store sales were also flat with comps in the U.S. coming in a little stronger than comps in Canada. Looking at the components of our comp. Average order size and traffic were both unchanged year-over-year, and consumers continue to outpace small business customers.

Just to give you a little more color on category trends in North American Retail. Sales of core office supplies increased in the low-single digits while ink, toner and paper were down in the low-single digits. We're building momentum in adjacent categories as the investments we made over the past few years continue to pay off. During the first quarter, sales of mobile phones and accessories nearly doubled, and we achieved strong double-digit top line growth in new technology products like tablets and eReaders.

Sales of our expanded facilities and breakroom assortment were up almost 30% during the quarter. We also saw acceleration in Copy & Print with year-over-year top line growth in the mid-single digits. And sales of high-margin technology service continued to comp above the house. Beyond these adjacent categories, where we're starting to gain critical mass, we also have a solid pipeline of exciting growth ideas. Today, we're offering new concepts like wide format printing and shredding services in all of our stores. We've also rolled out computer rental workstations in over 500 stores. Each of these services has very attractive margins, and we're encouraged by early results.

We're also expanding our offering of technology products and services to better meet the evolving needs of small business customers. A few weeks ago, we announced the new and improved technology recycling program together with HP. Customers can now recycle all brands of business technology in a safe and responsible way at any of our retail locations at no cost. This service will help drive incremental traffic to our stores and reflects our ongoing commitment to being a leader in environmental sustainability.

Turning to profitability. North American Retail operating margin was 7.2% for the first quarter. That was a decrease of 43 basis points year-over-year. This was driven by a $4 million expense or about 20 basis points relating to headcount reduction in the legal settlement and investments to drive growth in categories beyond office supplies. That was partially offset by reduced marketing and depreciation expense.

During the quarter, we opened 4 stores. We closed 7 stores, ending Q1 with 1,914 stores in North America. That's 1,580 in the United States and 334 in Canada. We expect -- we continue to expect no net store growth in North America during 2012.

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

Michael A. Miles

Thanks, Ron. Good morning, everyone. During the first quarter, the international team made progress against our 2012 objectives, despite ongoing top line weakness. The tough economic environment in Europe continued to negatively impact our results, and sales trends in Australia also remained soft. Clearly, we're not happy with our performance in international, and we're taking action to manage against the tough top line. As Ron mentioned earlier, during the first quarter, we reduced headcount by about 300 in Europe and Australia.

Beyond streamlining our cost structure, we're also doing a better job leveraging the strategies and expertise behind our success in North America. During the first quarter, we continued to build momentum in our mid-market Contract offering in the U.K. and Germany. And we deployed experts from North America to launch a similar offering in Australia. Our U.S. real estate and pricing teams are providing an increased level of support to their European counterparts by sharing best practices and driving process improvement. During the first quarter, we also increased international own brand penetration by 40 basis points year-over-year, which had a favorable impact on gross margin.

Taking a look at the first quarter headlines. Staples International reported sales of $1.2 billion, a decline of 5% in local currency and 8% in U.S. dollars versus Q1 of last year. Sales for our European Office Products business were down about 4% in local currency for the first quarter. Sales in all of our channels declined versus the prior year, with our European Delivery business continuing to outperform European Retail.

Our Contract team in Europe did a nice job with customer acquisition and retention; however, this was more than offset by lower sales to existing customers. In our European online business, we increased electronic sales penetration, improved the efficiency of our marketing spend and leveraged our pan-European Web platform.

Trends in European Retail are still very challenging. Same-store sales were down 6% with continued weakness in technology categories like computers, which declined in the mid-teens. Our core key categories in European Retail performed better than the house during the first quarter with ink, toner and paper comps down in the mid-single digits and office supply comps down in the low-single digits. Our retail team remain focused on driving an increased mix of higher-margin services. And during the first quarter, we saw solid top line growth in European Copy & Print, which comped in the mid-single digits.

In Australia, the top line remained weak. Our visibility continues to improve, and Jay Mutschler has done a great job during his first 3 months building a plan to get this business back on track. We're aggressively reducing our cost structure, realigning our field sales organization. And a few weeks ago, we launched our Australian mid-market Contract offering. While we expect sales to remain soft throughout the first half of this year, service levels are up and we're confident we'll see gradual improvement during the back half of 2012.

Turning to profitability. International operating margin for the first quarter declined 225 basis points to a loss of 1.5% of sales. This decline was driven by a $16 million expense or about 130 basis points related to the headcount reductions in Europe and Australia, and the legal settlement that Ron mentioned. The decline also reflects deleverage of fixed expenses on lower sales in European retail and Australia, as well as lower product margins in Europe. We continue to exercise extremely tight expense management. And during the first quarter, we reduced supply chain and marketing expense in line with sales declines.

We also had a year-over-year benefit from strong gross margin improvement in China, Brazil and Argentina.

While the Q1 headcount reductions in Europe and Australia are an important step to our long-term margin goal, we still have significant opportunities to improve our international cost structure. Going forward, we expect trends in Europe to remain challenging. And we'll remain and continue to be consolidating business units, centralizing functions and reducing layers and complexity with an eye toward lower cost and better execution.

With that, I'd like to mark a Staples milestone and, for the first time, turn it over to Christine to review our financials.

Christine T. Komola

Thanks, Mike. Good morning, everyone. During the first quarter, total company sales of $6.1 billion were flat in local currency and down 1% in U.S. dollars versus the first quarter of last year, as the stronger U.S. dollar negatively impacted total company sales growth by about 90 basis points. Our first quarter earnings per share on a fully diluted basis decreased 4% to $0.27 versus the first quarter of 2011. These results include $28 million of pretax expenses related to headcount reductions in North America, Europe and Australia, and to the settlement of a contractual dispute associated with the acquisition of Corporate Express. In total, these 2 items hurt our first quarter EPS by about $0.03.

Gross profit margin for the first quarter decreased 14 basis points to 26.4% compared to the prior year. This reflects a decline in International Operations, partially offset by reduced supply-chain expense. SG&A increased 32 basis points versus last year's first quarter, primarily due to severance costs from headcount reductions and the legal settlement, offset in part by reduced marketing expense. Total company operating margin decreased 43 basis points during the first quarter to 5.2%. Excluding the negative impact of severance expense and the legal settlement of 46 basis points, operating margin increased slightly versus last year's first quarter.

Our effective tax rate for the quarter was 32.5%. This was 200 basis points lower than our effective tax rate of 34.5% during last year's first quarter. This reduction was driven by a shift in our geographic mix of taxable earnings. Our first quarter capital expenditure came in at $52 million, down from the $63 million we spent during the same period last year. With operating cash flows of about $147 million, we generated free cash flow of $95 million and we remain on track to generate more than $1 billion in free cash flow for the year.

During the first quarter, we repurchased 5.9 million shares for $93 million. And our plan is to continue using excess cash to buy back stock throughout 2012. As you think about our other uses of cash during 2012, please keep in mind that we plan to repay about $325 million note, which matures in October. And on an annualized basis, we plan to pay about $300 million in cash dividends. At the end of Q1, Staples had approximately $2.3 billion in liquidity, including cash and cash equivalents of about $1.2 billion, and available lines of credit of about $1.1 billion.

As Ron mentioned at the beginning of the call, our guidance for 2012 is unchanged. In line with the trends we've seen during the first quarter, we continue to expect slow growth in the U.S. economy and for the demand environment in Europe to remain soft. We expect total company sales for the full year to increase in the low-single digits and diluted earnings per share for the full year to increase in the high-single digits, compared to adjusted diluted earnings per share of $1.37 in 2011.

Thank you for your time this morning. I'll now turn it back over to our conference call moderator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Gary Balter with Crédit Suisse.

Gary Balter - Crédit Suisse AG, Research Division

A couple of questions. One, first, just a technical clarification. On the charges in the quarter, how much was the Corporate Express thing versus the other one?

Ronald L. Sargent

Of the $28 million, I believe, around $6 million, give or take a few dollars was related to the Corporate Express legal settlement and about $21 million, $22 million on the overhead reduction expense.

Gary Balter - Crédit Suisse AG, Research Division

Okay. And the question is, in the Retail business, your margins dropped about 20-ish basis points after the charge. Could you discuss -- you mentioned some investments, could you discuss that? And is that a trend you expect to see throughout the year or is that just first quarter because of these investments and we should expect to see margin stability or margins start to rise again?

Ronald L. Sargent

I'll let Demos answer that one.

Demos Parneros

I would say it's primarily the first quarter it's essentially a result of a couple of things. One is flat sales and a little bit of expenses rising in various different lines. Clearly, the big one though is our continuation of our 500-store mobile phone initiatives. So we are now up and running in all 500. Some of the expense comes ahead of, obviously, the sales and the ramp-up. So that's primarily it, not much more to say on it.

Ronald L. Sargent

And the mix of business, not a lot of change year-over-year.

Joseph G. Doody

I would say not much happening in the way of change. Probably the same sort of trend for the second quarter as really any new product is not slated to happen until either very late in Q2 and certainly Q3 and beyond with some of the Windows 8 introductions.

Gary Balter - Crédit Suisse AG, Research Division

And then you're doing such a super job in the Contract business and in terms of, like you talked about facilities and how much you're adding. Have you thought -- is there a way to tie in your retail stores as essentially distribution networks for Contract or for customers in Contract? How do you -- have you thought about that?

Ronald L. Sargent

Yes. We have.

Joseph G. Doody

Well, as far as tying in the stores, Gary, we've got a great growth as well within our store operations for cleaning and breakroom products as well. But as far as delivery goes, we're not tying those in. We give next day delivery throughout our network and that really very much meets the needs of those customers. There's very little need for customer pickup. There's some exceptions to that where they might need something same day. But even in that case, we can do that out of our delivery network. So tying them in from a delivery standpoint, no, but certainly from a product assortment standpoint and driving that category within the stores, they're seeing a 20-plus percent growth there as well off a smaller base than we have in delivery.

Ronald L. Sargent

I think where you are seeing an opportunity is not the Contracts as much as it is in the dot.com space where -- Demos, you want to talk to the outline there?

Demos Parneros

Sure. I would love too, yes. There's obviously a very strong connection between our dot.com and retail.com business and our retail store business. One of the things that is available to customers today is to shop online and to ship to store. So we generate a trip to the store that way and really just trying to provide the customer with shopping experience their way. And whether it be offer a coordination or use the store as a pickup point, that is something that we've been doing that is actually growing today.

Operator

And our next question comes from the line of Brad Thomas with Keybanc Capital Markets.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

I wanted to just follow up on the international segment. And recognizing that there are some economic headwinds in Europe again, what are the expectations for margins in that segment this year? Do you believe you can start driving some improvement as we move through the year?

Ronald L. Sargent

Mike?

Michael A. Miles

Yes. Brad, I think our expectation is that the first half of the year is going to continue to be very difficult. But given the cost reductions that I described and other expense measures that, as I'm sure you can imagine we're taking in response to the sales environment, we expect that picture to get better as the year progresses. It's a little bit hard to make predictions about exactly what the leverage will look like given the uncertainty around the sales environment, but in terms of cost reductions and our cost performance, you should see that continue to improve throughout the year.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Great. And as we look at the company, it's -- and try and parcel out how well Staples is doing versus overall worldwide GDP performance. I was wondering if you all could just talk a little bit about how you think you're performing versus other segments of retail like mass versus some of the independent channels in Contract that seem to be doing well versus the Internet. How do you feel like you guys are performing from a market share standpoint?

Ronald L. Sargent

Yes. I'll take a stab at that and others can weigh in as well. I think you're right. I think the consumer side has performed a lot better than the business side. Unfortunately, when you look at our dot.com business, our Quill.com business, our Contract business, it's virtually all businesses of some size or another. And even on our retail side, half of our business is -- half of our sales go to small business. I think you asked about the economy, we're still seeing a very sluggish economic recovery with pretty weak jobs growth and really jobs, white collar jobs, are the big drivers of our top line. I think during the recession, I think we lost 8 million or 9 million jobs. 3 million have come back in the last 18 months, but many of those have come back in areas that are not high paper-consumption jobs, things like manufacturing and hospitality and utilities and transportation. Some of our best customers like financials and large companies really haven't added a lot of jobs in the recovery. When you look at our sales, I think our month-to-month sales trends have been pretty choppy. We have seen our North American Delivery sales up 9 consecutive quarters, so I think that's a bit of an indication that things are better. But in retail, sales have been flat. We have plus 1 comp, minus 1 comp, even comp as small businesses continue to be under pressure. I remain cautiously optimistic about improving economic trends as the year goes on. And I feel like our North American business is performing okay in a difficult environment. Now when you look at Europe, the bulk of the eurozone countries are in recession. I think probably Scandinavia and Germany are performing a little bit better. But it's feels in Europe a lot like it did in the United States in 2009. So we don't expect any improvements in the European economy during 2012. We do expect improvements in our business, in terms of Staples business, during the second half as Mike noted. So in terms of how we're performing versus others like us, there's not a lot of other companies out there that are like us. But I would just caution you to consider us as a B2B player more than a B2C player.

Operator

And our next question comes from the line of Dan Binder with Jefferies & Company.

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

Just kind of housekeeping item first. Ron, does your guidance include share buyback or not? And what are your thoughts on additional charges related to restructuring?

Ronald L. Sargent

Christine?

Christine T. Komola

Sure. Dan, guidance does include our share buyback program. As we said, we expect it to continue throughout the rest of the year. And then to your second question, we don't expect any significant restructuring going on throughout the rest of the year. You'll probably see and hear about bits and pieces particularly in Europe, but nothing significant.

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

And then a separate question, on same customer sales and delivery, could you give us a little color on that and what's going on, on the pricing front? I know some of your competitors have reported up gross margins. You were down gross margin today. I think maybe it had more to do with international, but maybe a little color around that as well from a North America perspective.

Ronald L. Sargent

Joe?

Joseph G. Doody

Yes. The international was -- the margin that mentioned, Dan, is definitely affected by international. Ours were sort of flattish, down slightly and that was really driven more in the dot.com than it was in Contract. So from a competitive standpoint, Dan, it continues to be very competitive out there. We continue to take shares. Ron said 9 consecutive quarters of growth. There are instances where there is some competitive pricing in the lower-margin enterprise account area. We have -- very disciplined there. And as we said, we've walked away from 2 major customers of ours in the late third quarter of last year, so we have that headwind to go against until the latter half of this year. But pricing does remain stable in the higher-margin, mid-market business, which is the majority of our Contract business, so we're extremely happy with that. And again, we're going to continue to be very disciplined. And if you look at our profit growth in the quarter, it was driven by Contract because of the great discipline that we have continued to maintain in that business.

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

And anything on same customer sales?

Joseph G. Doody

Same customer sales, Dan, down slightly. But our growth is coming definitely from new business especially in the mid-market arena.

Operator

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

Christopher Horvers - JP Morgan Chase & Co, Research Division

Talking about in NAD, can you perhaps quantify the timing and the amount of the big contracts that you walked away late last year, just so we can think about how the business is growing x that and when we run over that comparison?

Ronald L. Sargent

Sure. Joe?

Joseph G. Doody

Yes. It happened late third quarter, so full -- first full quarter of it was, Chris, was fourth quarter of last year. And NAD-wide it's worth about 100 basis points.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Excellent. And then as you -- a bigger picture question, Ron, as you think about the 3 businesses and how they're positioned structurally today, how close are they to where you want them to be, whether it's from an asset, geography and mix perspective?

Ronald L. Sargent

Well, that's a big question, Chris. Maybe I should kind of start with North America. I mean, when you look at North American Retail, we're not quite filled out in terms of all the markets. There are still some markets that we don't operate any stores, places like St. Louis or New Orleans or Buffalo, New York. But I think we've about covered the geography in terms of retail locations. And I think the challenge there, I think, retail doesn't go away. I think retail will always be a key important part of our portfolio. But I think the challenge there is to get more productive with the units that we have in place. Do I think there are probably too many stores in the industry, I think there are. But I think that's being rationalized. I mean when you look at our competitors, our competitors, this year, will close about 2 stores a week. If you add the Depot closures, the Max closures and the 50 Best Buy closures. And so I think that store rationalization will continue. And as you notice from our numbers, we have not increased the total number. We've opened some, we've closed some, but we'll be flat. So I think we're pretty well positioned. Our stores are profitable and very high RONA and I think I'm okay with our North American Retail business. When you look at North American Delivery, I think that's probably where the bulk of the growth is going to come from, particularly in the dot.com area, because I feel like that is starting to accelerate. Many of the things we're doing and I think credit to Amazon because I think Amazon showed us what's possible in terms of growing a dot.com business, and I think we're trying to go to school on them and learn from them and grow our own business. But I feel like that's a great opportunity. And then on the Contract side, I probably don't have much more to add. I think we're doing a great job with the mid-market segment and we're not aggressively going after the enterprise segment because we think the big opportunity and the big potential there is in the mid-market, while maintaining our share of the large company segment. And we have a factoid we use around here, I think of the top 100 companies, despite my comment about the enterprise segment, I think we have about 66 of the top 100 companies in the United States. So I feel great about our North American positioning competitively, as well as future prospects. In terms of international, I'll ask Mike to respond and...

Michael A. Miles

Sure. I guess as we think about where we play, the coverage that we have around the world is important to our vendors and to some of our Contract customers. But we're not in every market. We're not in Japan or Mexico or Russia, so there really aren't, really, that many countries outside of North America that are sacred to us. We really feel like longer term, we're going to make money for our shareholders in a relative handful of markets that we can really concentrate on in places like Germany or the Nordics or Australia in the near term, and places like Brazil and China in the long term. And that's where we're really emphasizing the growth of the mid-market and the investment in the dot.com business. And in the rest of the countries we participate in, I think we're going to take a fairly hard line about making sure that we're getting a good return on our investment, and we've shown that we're not shy about exiting countries that don't meet our profitability thresholds. But I think our international strategy is focused on a handful of markets and we like our global footprint, but we're not wedded to any individual country.

Christopher Horvers - JP Morgan Chase & Co, Research Division

So as a follow-up to that, how close -- or do you think you're close at all to making those calls, perhaps retrenching from some geographies internationally?

Michael A. Miles

We've already made some of them, and I think we'll continue to make them as we need to. We don't have any countries that are such loss makers that it would make sense for us to take an extreme action to exit. But what we're really looking to do in some of the smaller countries that we've gotten the portfolio is consolidate those operations into the larger countries that they're adjacent to. So for instance, we are managing Belgium out of the Netherlands now in both Retail and Printing Systems. We're managing our Ireland Contract business out of the U.K. Taking those steps to maintain the customer service that we have in those markets without incurring all the expense.

Ronald L. Sargent

And Chris, when you look at channels, I mean, I think we feel pretty good about our Contract business in Europe as we kind of roll out the mid-market opportunity there. Our catalog business has been very profitable and stable. And really the problem that we're dealing with right now is on the retail side. So in terms of the 3 channels, that would probably be the least attractive to us right now. And certainly, we've got some things that we need to do but certainly, the economy is not helping us out much in Europe with the sovereign debt crisis.

Christopher Horvers - JP Morgan Chase & Co, Research Division

And then one last one, just to follow up on the retail side. Does it -- it sounds to me, domestically, it sounds like you think the rationalization can occur away from you and then you end up winning by that retrenchment?

Ronald L. Sargent

That certainly what we're planning. When you look at our portfolio of the 1,800 stores in North America, there's no reason to close any stores that are profitable and high-RONA stores.

Operator

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

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

I had a couple of follow-on questions. One on international. I think, Ron, you mentioned that the problem there is now the retail side. Mike, could you give us a little more detail on what you're actually doing and you think you could do in the next few quarters to try and arrest that or manage that decline? And I had a follow-up on U.S. margins.

Michael A. Miles

Sure. The retail comp decline in Europe has been driven a lot by the technology exposure and the technology -- the difficult technology market in Europe. The combination of some of the CE players really getting into a bloodbath, particularly in the U.K. And the fact that the economy is not lending itself right now to a lot of durables purchases, has that part of our business down significantly. Our supplies business, as I noted in the prepared remarks, is actually performing reasonably. It's not strong by any measure, but it's certainly not as bad as the overall comp would indicate. And we're continuing to focus on that part of our portfolio and of our assortment. I think, as you think about the opportunities we've got in Europe, we're profitable in all of the countries and most of our stores, so it doesn't make sense for us to -- making kind of a wholesale exit of that business. We're certainly looking opportunistically as leases come up and opportunities to either downsize or exit unprofitable stores come up. And there's a handful of those that we've concluded this quarter in the U.K., both closures and downsizing that we'll be implementing over the next year. But our focus is really on the improvement areas. Sharpening our marketing, we've got some nice pricing opportunities that we're uncovering with the help of the U.S. team, growing the Copy Center business, which is still very underdeveloped in Europe even compared to our U.S. business. Growing our own brand and also taking a page from the North American book on attachment selling. And that's really where the focus is going to be over the next year or so.

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

And then if I could, on the U.S. retail side, you mentioned product margins came under some pressure. Could you give a little more detail on which -- what drove that, which categories, what is it mix, was it rate within categories and how we should think of that going forward?

Ronald L. Sargent

Sure. Demos?

Demos Parneros

Yes. Essentially flat as we talked about. But some of the specific categories that are sort of a drag on the total, continue to see the downward trend, in box software, for example, computer media, the furniture category, broadly speaking, not chairs as we break those 2 apart. So I would say some of the predictable declines in some of the tech and tech-related.

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

And the growth of mobile is still a plus?

Demos Parneros

Sorry, one more time?

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

Growth in mobile?

Demos Parneros

Yes. Growth in mobile, as we mentioned earlier, we have now completed our rollout and build out of the 500 stores, and it's been actually very encouraging. It's just in ramp rate right now.

Ronald L. Sargent

And we got to play in mobile. When you think about it, things like GPS, you can do that on your phone now. When you think about digital photography, you can do that on your phone now. So I think you got to play there in order to be relevant.

Operator

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

Michael Lasser - UBS Investment Bank, Research Division

On the cost reductions in North America, is that process over or do you still have opportunity to rationalize the cost structure? And then where do you reach a point where you may start to pinch morale a little bit?

Ronald L. Sargent

Yes. I think the headcount reduction, I think, we think that's virtually over. It was really -- we felt like there was a need to delay our corporate office team in Framingham and also in Toronto. We thought we needed faster decision-making. We felt like we need to be a little more nimble. So what we did is we reduced the layers, we increased the reporting spans and we combined functions that were being done in multiple locations to become more efficient. And then obviously, a second goal was to reduce overhead expense. If you're not growing, you have to take cost out. And we wanted to continue to leverage our SG&A expense. In terms of going forward, I think there's a lot of cost initiatives going forward. And I'm going to ask Christine to talk about some of those since that's really kind of her role.

Christine T. Komola

Sure. So we do actually have, as Ron said, several areas that we're looking at in terms of cost. One of them is more aggressive indirect procurement purchasing. That continues to be a big opportunity for us in North America, as well as in the European structure. Another area of opportunity is BPO practices, so we don't do a significant amount here in North America on BPO, so that's an area that we're looking at as well. And then I think you've heard us talk in the past a little bit about our Lean Six Sigma program that we call Process Excellence, which continues to be a big source of taking cost out both in North America, as well as in Europe. So those are kind of pretty significant activities that we are ramping up this year.

Michael Lasser - UBS Investment Bank, Research Division

Yes. Switching gears on -- you alluded to reducing marketing spend in a couple of areas. Is there a risk that as you do that it's going to be more difficult to grow the adjacencies, some of the newer categories since awareness among your customers is probably low of some of those newer offerings?

Ronald L. Sargent

Yes. I'll let Demos respond, but a lot of the reason marketing expenses are lower is not because we reduced the number of impressions out there, but we basically transferred some of those impressions into lower-cost vehicles. For example, we used to spend a ton of money on television, and although that was effective, you didn't know exactly how effective. Today, a lot of that is being done electronically with e-mail marketing. So I think it's a little efficiency more than it is a reduced number of impressions. Demos?

Demos Parneros

Yes. That's right. And as we continue to just do a huge shift within the marketing mix, there's just a lot more activity within digital, there's a lot more search that we're doing in conjunction with our dot.com team, there's a lot more emphasis and activity on social. So it's just really a big shift. But I just wanted to address the awareness issue on some of the categories. So for instance, one of the key priorities for us is Copy & Print, which is something we've been doing since -- for over 25 years. But actually, the business is now accelerating as we have done several things over the past couple of years. One is the rollout of our sales force, which is now over 300 strong, and people are now in position for over a year and we're starting to see good benefits from that. In addition, we talked about the Vistaprint partnership, which is really paying off nicely as well. As we've introduced new product to the lineup, such as business cards, post cards, banners, et cetera. So that's an existing business that's got a nice charge in it right now and we're seeing nice acceleration there. The other key service business is our tax services business, which has been changing a lot, but I would say, continuing to grow double digits. And more importantly, I think, showing very good customer satisfaction data of that and Copy as well. So awareness on Copy is probably better, but both are good and growing.

Michael A. Miles

And Michael, in Europe, the vast majority of our marketing spend is on mailing paper catalogs to customers, which is probably not the marketing vehicle for the 21st century. And we're getting a lot more efficient in how we do that, and we're also shifting, as Ron said, from that media to more effective online mediums that are probably more consistent with where the business will be in 5 and 10 years.

Michael Lasser - UBS Investment Bank, Research Division

That makes total sense. But one last question, if I could. On Canada, it sounds like the comp was slightly down for the quarter, despite having Apple products and the launch of the new iPad. Can you talk about the performance there and how you're thinking about that? Because I think there is some optimism that, at some point, if you can prove success in that market by working with that vendor then perhaps there's an opportunity to bring it over to the U.S., which would clearly improve your competitive positioning?

Ronald L. Sargent

Sure. We hope you're right. Demos, you want to talk about Canada?

Demos Parneros

Yes. Sure. Our teams work side-by-side, and while the Apple introduction has been very well received by customers, I would say that it's not in every one of our stores just yet, although growing. And product availability has been a slight concern and, again, hope to improve that as we show very good results. So the partnership has been good on both sides. Both parties are quite pleased with it and we're happy and hopeful that, that will lead to expansion into the U.S. So I think on the Apple, that's pretty much all there is to say at the moment. I mean the highlight has been the iPad product and that's really where the challenges have been on inventory. Everything else seems to be in good shape.

Ronald L. Sargent

In terms of comps, I think the Canadian economy is very similar to the U.S. economy, comps I think for the quarter were like minus 1 and U.S. was positive. So that's how we got to the flat.

Michael Lasser - UBS Investment Bank, Research Division

Demos, it seems like your commentary on the relationship with Apple is a little more encouraging today than maybe it has been in the past. Is that safe to read?

Demos Parneros

I can't really give you a good read because we don't have the product in U.S. stores. I mean, we'd like to. We do business with Apple in several countries around the world. We do a good job with it. They know that, we know that. I think it's a matter of really just moving the discussions forward. I can tell you that we're having good discussions, but we're not there yet.

Operator

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

Kate McShane - Citigroup Inc, Research Division

I just want to follow up on a couple of other questions that have been asked in regards to margin and costs. And Mike, I think in your comments, you noted that you could see an improvement internationally on the top line in the back half of the year, and I wondered what was driving that.

Michael A. Miles

Well, I think improvement in the international business in general will be as much driven by -- on the top line, will be as much driven by overlap as anything from a macro standpoint. As Ron said, I don't think we expect things to get a lot better in Europe, but it was in the third quarter last year that they really fell off significantly. We had a 700 basis points drop in the European business in the third quarter of last year and have been kind of at a steady state level since then. And we would expect, as we come through the second quarter and into the third quarter, that the overlap helps us out a little bit. Same thing in Australia, which is the other big business that we've got, where the problems that we had in Australia were really exacerbated by the distraction of the SAP launch last year in the third quarter. And again, as we come through that in the third quarter of this year, we would expect to see some recovery. And then from a cost standpoint, a lot of the actions that we've taken in the first quarter, both the severance that we announced and some of the other things that we're doing, will really begin to take hold in the second and third quarters. And that's why we think that the second half of the year will look better than the first.

Kate McShane - Citigroup Inc, Research Division

Okay. Great. And then if I could follow up on that. I think you highlighted on the last call that there was probably 150 basis points of opportunity for margin expansion in Europe. And I just wondered if you could update us on how you're thinking about this number in light of the environment in Europe and some of the actions you took during Q1. And can you talk about the timing you put around that opportunity?

Michael A. Miles

Yes, I think the long-term margin opportunity in Europe is bigger than that. I think the 150 basis points is really our objective in the near term around G&A reduction. And I think we're sort of in the middle of a 3-year program to get that. Unfortunately, we've given up. I'm not quite sure of the exact number, but we've given up significant G&A leverage because of the sales declines over the last year. And so that we're -- although we're probably halfway through the cost actions that we envision, we have some sales recovery that we're going to need to get to achieve that 450 basis points. And given our visibility to European economy, it's hard to be real clear about when that will come.

Operator

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

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

First on the 500 global headcount reduction, can you quantify the dollar impact of that on an annualized basis for us?

Michael A. Miles

No. I'm not sure I can. I have to do the math on the average rate plus the benefits.

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

Would it be fair to say $50,000 to $75,000 fully loaded, which would be $35 million to $45 million or about $0.04 a share?

Michael A. Miles

Yes. I mean, well -- again, you've done the math, I haven't. But do I think a head would be in the $50,000 to $75,000, sure.

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

Okay. And you would expect to start to see the benefits of that in 2Q and then annualized out over the course of the next year?

Michael A. Miles

We will expect to see the benefit of that starting in Q2 and that will continue.

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

Okay. And then, Ron, while I've got you, just you said the #1 priority in retail is to improve the productivity of the retail stores. Given that growth in retail is basically flat and because of the structural and secular long-term issues, that may be the outlook for a long time, seems like a big lever at improving the productivity would be to reduce the size of the stores. You've got a couple of hundred leases coming due each year, are you still resigning 25,000 square-foot store leases for the next 10 years? And how are you thinking about a smaller store format going forward?

Ronald L. Sargent

Yes. I'm not sure I buy the hypothesis that our retail sales are going to be flat. We obviously think our retail sales are going to get growing again, as we do a better job, as the economy improves and as our competitors close stores. But I think your point's a really good one. The best way to improve store productivity is to have less square footage. And let me ask Demos to talk about some of the stuff he's doing there.

Demos Parneros

Yes. So first, I think, our pipeline of sales initiatives to combat some of the decliners is good and actually improving, as the second half of the year should have new product that we're excited about. But I want to address the specific real estate issues. The first thing I should say is that it's close -- over the next 3 years close to 200 stores per year, where we actually have great choices in front of us to make. So our choices are, we can close a store that's not needed in the network. We can renew at a lower rent. We can downsize. Our average store size is smaller than our competitors. And I should also mention that when we converted to our 15k format several years ago, we have actually been opening stores at the smaller square footage for several years now. This is not a new thing for us. We've, as far back as 5 years ago, introduced a set of store formats, including our urban 10,000 square-foot store, our downtown Express stores, which are below 10,000 square feet. And today, we have several hundred stores below 14,000 square feet. So we've actually been working on this for some time. All that being said, we've got to continue to -- if we open any new stores or relo stores, which we're doing over 20 this year, they are all significantly smaller than the 15,000. We have no 25,000 square-foot stores for the record. There was a 24k format back about 12 years ago and we haven't opened one of those in a long time. So we're continuing down this path of repositioning our portfolio by looking at each and every one. As Ron mentioned before, these are very high-RONA stores, so we want to protect profitability but at the same time, think for the future and make smart choices store-by-store. And that's what we're doing, in fact, we're doing that later today.

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

Okay. And final question, if I could sneak one in here. Just listening to Mike's comments about being kind of halfway through the cost-reduction opportunity in Europe and yet, obviously, facing a pretty big headwind from sales, so deleveraging against that reduction. It feels a lot like it's running really hard and at best staying in place right now because of the cyclical environment and maybe drifting backwards. So Europe is now a loss-making operation as of 1Q; hopefully, that gets better. But what is the lever, what is the catalyst to think more broadly or more significantly about Europe in general given the outlook there?

Michael A. Miles

Colin, I think we're still pretty bullish on our overall business in Europe. I think the first quarter is a tough quarter seasonally and I think that we're still quite profitable on an annual basis in Europe. We see a lot of opportunity on the delivery side of the business and whether that's the mid-market or the dot.com space, we expect that will be a nice growth driver for us, particularly as the economy comes back. The Retail business has been a problem area. And as I said, we're exploring all of our alternatives there but there's not really a business case today for a more aggressive action than the improvement alternatives or the improvement opportunities I described. And for taking the same kind of actions around real estate that Demos just described for the North American business.

Operator

And 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 follow-up questions. You haven't discussed the traditional computing business all that much today. Some of your competitors seem to be stepping back from that business. I know there is some new releases, obviously, out later in the year. Can you talk about what your expectations are for that segment as the year progresses, please?

Ronald L. Sargent

Sure. Demos?

Demos Parneros

Yes. Sure. Matt, I think there's been little talk because there's little activity, frankly. Right now, the sort of the latest thing that's in the marketplace is ultrabooks and we're participating nicely in ultrabooks. These are smaller, more powerful kind of road warrior products from our top vendor partners and it's an excellent product. I would say it's selling well. But clearly, there's been pressure on the category, I think, it was slightly negative. So holding on, I think, pretty nicely during a great job at really connecting with customers and selling the total solution including service. I think the key there is clearly what's happening in the second half of the year with the big Windows release, Windows 8 release. And I expect there'll probably be a little bit more pressure on us, as people anticipate the product and probably concerned at waiting for that product to come out.

Ronald L. Sargent

We're obviously offering to upgrade people who would buy a computer before the Windows 8 launch. But the Windows 8 launch really starts end of October, 1st of November. We think it is a big significant launch for the Microsoft Windows 8 platform. But we are, I think, in the first half of the year expecting computer sales to be softer. The other thing that's happening is our laptops or our tablet sales have been larger. But we think computers are here to stay and will play a big important role, along with the tablet, along with the cell phone. Those are the 3 devices that we think customers will need and want, and we want to play.

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

Got it. Second question, if I could. You talked about a couple of major contracts that rolled off from legacy Corporate Express side of the house. Is that, in your view, an isolated instance just related to the schedule of Corporate Express accounts, expiring or contracts expiring? Or do you feel like there's perhaps a change in the competitive environment, where rationality has diminished to some degree and it might be a bit more of a dogfight for some of those big accounts?

Ronald L. Sargent

No. Well, it's fair to say, Matt, it's been competitive and it stayed competitive. So there's a bit of a dogfight most everyday out there, our people would say. But that being said, I think it's more of the rare exception that we would walk away from one that's that big. But we are disciplined and we will do it if we think it's going to be unprofitable, and that has happened. And I only expect it to be on an exception basis. There were certainly no service issues or nothing related to the transition from CE customer to a Staples family. It was just a competitive situation that was rare and that continues to be rare.

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

Got it. And then just finally, Christine, Colin asked a question about the savings from the severance and taking out some cost. Were those savings contemplated in your original guidance or are they baked into the new guidance, if you will, as an offset to other things? How should we think about those savings on the context of the expectations you laid out this morning?

Christine T. Komola

Sure, Matt. The savings are included in the guidance. I think you'll remember in our last call, we did mention that we were going to be taking action in Europe and in the U.S. And then just to remind you on the Europe front, severance takes a long time to really get the benefit because you have almost a full year salary as part of that. So that will take some time to bake in, and it's included in the guidance. And the North America piece is also included in the guidance. That part we'll start to get some benefits of, starting, as Ron said, probably next quarter. And we should be including that.

Operator

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

David Gober - Morgan Stanley, Research Division

Just had a couple of questions on cash flow and uses of cash flow, if I could. Just one question on working cap. In the quarter it was about a $200 million burn last year, in 1Q it was about $177 million, and a lot of that got recovered throughout the year. But I was just curious if you were expecting working capital to be a bigger burn this year than it was last year, and particularly with some of the categories like accounts payable going against you if there's anything going on there that's ongoing?

Christine T. Komola

Dave, it should be pretty consistent with last year. I think in this quarter, there's timing of tax payments. So in 2010, we were in a prepaid position. In 2011, it became at source. And now we're basically normalized. So I don't expect any significant kind of ups or downs on working capital.

David Gober - Morgan Stanley, Research Division

Okay. So if I take your guidance for $1 billion-plus of free cash flow and just assuming for the moment that you hit the very low end of that guidance, so you've got a $1 billion of free cash, $300 million dividends, you've got $320 million of debt maturities. It looks like you're now annualizing at about $375 million of buybacks. Is that kind of the right way to think about it in terms of effectively keeping cash on hand totally flat and just using cash flow for all those uses?

Christine T. Komola

Those are the major drivers. I think you're kind of in the ballpark on all of them. I don't expect any major shift in any of the capital structure lines that you've spoken about. So it sounds reasonable.

David Gober - Morgan Stanley, Research Division

Okay. And so just one for Ron in terms of the M&A environment. I know you've talked a bit in the past about investing in acquisitions to spur growth in some of the adjacent categories, and we haven't seen much of that to date. And I was just curious, if it's that you're just not finding the right opportunities or if you're finding that you can grow these businesses organically? Or do you just not think that the environment is right for M&A given everything else that's going on right now?

Ronald L. Sargent

M&A isn't the top of the list of things to invest in at this point. Having said that, if I were looking at M&A, probably facilities and breakroom would be the area I'd be most interested in. I think we felt like we needed to probably have a base to build from much like we did with our Contract business back in the mid- to late-90s. And I think, still that's a possibility. But having said that, I mean, every business, Quill, Staples.com, Contract, Retail, every business grew, facilities and breakroom, about over 20%. I think anywhere between 20% and 29%. And it's already close to a $1 billion business for us. So if there's a great strategic partner that feels like we could learn some things or get us into some parts of the market that we're not in, we'd certainly look at that. But aside from that, I don't see any impending kind of M&A on the close horizon. But we're always looking, but we're going to be pretty disciplined about what we're going to be willing to pay as well.

Operator

And our next question comes from the line of Alan Rifkin with Barclays.

Alan M. Rifkin - Barclays Capital, Research Division

Most of mine have been answered as well, but still have one for you, Ron. So if we look at the numbers, since 2006, your square footage has increased by almost 20%, your EBIT margins are down 150 basis points and your sales per square foot are down more than 20%. If you agree that the industry needs to be rationalized, I'm just curious as to why do you think, in a little bit more detail, and I understand your stores have a high RONA, but admittedly they're not as high as where they were 3 and 5 years ago, why do you think the rationalization does not pertain to you? That you don't need to participate in that?

Ronald L. Sargent

Well, again, if you've got a business that's 8% operating profit that is flat. And we think once the economy turns, we'll start to be positive again, I don't know why you'd want to participate. Why close down good businesses?

Alan M. Rifkin - Barclays Capital, Research Division

Yes, I mean, but the NFIB index has actually been rising for 3 years straight, we're now back to pre-recession levels yet -- look, I'm not pointing the finger at you, but industry-wide, it's pretty clear that we just haven't seen a rebound in the sales. I mean, so is it possible that there is a secular trend going on that may suggest that the environment that we knew 10 years ago, we never get back to those levels?

Ronald L. Sargent

Well, sure. I mean, there's always -- I mean, I've been at this for 23 years and I've seen the business cycle down, up and sideways. And there has been a secular trend. I mean when you look at paper consumption 20 years ago versus today. But there's also growth categories as well. I mean, I think we've been pretty disciplined, particularly in North America about how we've invested our money. I mean, in 2008, we didn't buy a Retail business. We bought a delivery business because we think that's going to be a key part of our future. But I guess I'm feeling pretty good about our Retail business. And I don't know why I would want to reposition. I mean, when you look at kind of the strategy for us, I mean, we want to be a multichannel resource for business. And that's office products, that's services, that's solutions. We recognize that the bulk of our future growth is probably going to come more from delivery and as well as products and services outside of core office supplies. But we also recognize that international has got to improve as a meaningful part of our future as well. So I think the retail network is very important to kind of the big picture strategy for the company and we plan on sticking with it.

Operator

And our next question comes from the line of Jeremy Brunelli with Consumer Edge Research.

Jeremy Ridder Brunelli - Consumer Edge Research, LLC

Many of my questions are already asked, just one quick question. Ron, in the past you've said that retail typically leads you out of the recession. And if you look at trends not just for your business but across the sector, as Alan referred to, retail has been decelerating both in the U.S. and in Europe. So what makes you cautiously optimistic that we won't see deceleration in the delivery business and potentially broader trends overall?

Ronald L. Sargent

Yes. I think this recession has been pretty unique. I mean, typically, recession you're going to kind of bottom to top in 15 months. This one has been like a bit of a bad cold that just kind of hangs on. I feel like we've had slow growth economy for the last 3 years-plus. And the good news is our delivery business has grown, and it's grown over the last 2 years. And I would say our Retail business has been flat during that time. I mean, we saw the big cyclical decline back in 2009, and really since 2010, '11, I mean it's been pretty flat in North America.

Operator

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

Joseph I. Feldman - Telsey Advisory Group LLC

Yes. A lot of my questions, obviously, have been answered as well, but I wanted to go back to a question back on the dot.com business for a second. And ask about how you guys are competing -- if you could dive into this a little more maybe -- with free shipping, with Amazon, with the pricing? Are you finding it a different landscape to compete and are you having to adjust? And is the margin structure going to be capped at some point because of all these promotions or shipping fees that will have to be free?

Ronald L. Sargent

Well, I mean, most of our shipping is free today, first of all. But I think when you look at the history, I mean, there's always been kind of disruptors. And whether that was -- Costco several years ago with their B2B drive, whether that was the growth of Best Buy or whether that was kind of Walmart going to take over the world. And today, certainly online, certainly Amazon has been a very successful company. They're one of our suppliers, as well as one of our customers. And we compete with them primarily with consumers and small business. I know they've recently kind of repackaged a business they've been in, in quite a while, which is the Amazonsupply effort. But I think that effort is really more geared toward kind of MRO supplies, rather than office supplies. When you look at 2/3 of our NAD sales are to Contract customers, and 80% of our NAD sales are to business customers, which is more of a sales force driven model, I think that insulates us a bit. These customers require things like customized pricing and high service levels and invoicing and next day delivery. But having said that, we compete very aggressively with Amazon and retail and dot.com with small business customers. And I think pricing is one that you kind of measure pricing versus service all day long. I'm not sure that Amazon can provide the levels of service that we provide our customers. And I think pricing -- there are some items that they're very aggressively priced on, but I don't think that we're losing customers because of the pricing, particularly when you factor in the rewards program and that Amazon, hopefully, in the future will be kind of moving more towards sales tax. So I don't know, Joe, you might say anything about...

Joseph G. Doody

Yes. I think the only thing I could comment on further is, as Ron said, Joe, today, essentially 98%-plus of our customers get free shipping. And I'm talking no membership fees, nothing, it's because we give free shipping on any order greater than $45, and the vast majority of our orders are all greater than $45. And every one of our Contract customers' free delivery is a part of it. As Ron said, we're very much in the B2B and when you look at the pricing, you've got to be careful you don't take a simple price comparison between what Amazon carries on their site versus what dot.com does because the vast majority of our customers are getting either rewards or specialized pricing that is more competitive. So those are the only comments I'd add. It is -- there's great respect for them. When you look at -- the only other comment I'd add on is on amazonsupply.com, as Ron indicated, heavily focused on industrial supplies. Less than 5% of their SKUs are office and Jan/San products. So it's very much industrial products and the pricing that they have on those products for office and Jan/San are, quite honestly, are not very sharp.

Joseph I. Feldman - Telsey Advisory Group LLC

Got it. That's very helpful, guys. And one more quick follow-up. I think, Ron, it was you who mentioned you envision sales growing and, obviously, in the future. And I guess, the question I have is how much beyond GDP do you think sales will grow? I mean, presumably, it should grow GDP plus, but I guess how do you guys think about that?

Ronald L. Sargent

Yes. At this point, I'd be happy if we were growing in our Retail business at GDP. I mean, historically, when you look at 20 years, I mean, typically, this business has grown a couple of percentage points above GDP. But at this point, given the last 3.5 years, it's going to be hard to say whether that trend is going to continue or accelerate or decelerate.

Joseph I. Feldman - Telsey Advisory Group LLC

Got it. And then just one housekeeping issue. Did I hear you guys say right that the EPS guidance of high-single digits for the year includes all the charges or excludes the charges from today?

Christine T. Komola

It includes.

Joseph I. Feldman - Telsey Advisory Group LLC

Includes?

Christine T. Komola

Yes.

Operator

And our final question today comes from the line of Greg Hessler with Bank of America.

Gregory Hessler

My question is actually on the balance sheet. With the repayment of the October 2012 maturity with cash on hand, your leverage is going to be at the lowest since prior to the Corporate Express acquisition. So do you have a targeted leverage metric or ratings target?

Christine T. Komola

We are targeting mid-2s is generally our target, back to kind of where we were pre-acquisition time. So we should be getting -- continue to be getting closer to that.

Gregory Hessler

Okay. And just one follow-up, and it may be early for this, but have you started to look at the January 2014 maturity? Is that something that you think you might be in the market to refinance?

Christine T. Komola

We do actually look at that. We are continuing to kind of think about how to address it. Right now, we are planning to pay it down and we'll continue to watch the markets as we go forward. So we've still got some time particularly into early next year. So we'll be back to you on it.

Ronald L. Sargent

But in all cases, we're going to lower our interest rates, which I'm very happy about.

Christine T. Komola

Yes, we are. Yes.

Operator

Ladies and gentlemen, with no further questions, this concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Ron Sargent for closing remarks.

Ronald L. Sargent

Thanks for joining us on the call this morning. I realize we ran over a little bit, but we look forward to speaking to all of you again very soon.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Staples Management Discusses Q1 2012 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts