Staples, Inc. Q4 2005 Earnings Conference Call Transcript (SPLS)

Feb.28.06 | About: Staples, Inc. (SPLS)

February 28, 2006

8 a.m. EST

Executives

Laurel Lefebvre - VP, Investor Relations

Ron Sargent - Chairman, CEO

Mike Miles - President, COO

John Mahoney - Vice Chairman, CFO

Demos Parneros - President of U.S. Stores

Joe Doody - President of North American Delivery

Analysts

Bill Sims - Citigroup

Matthew Fassler - Goldman Sachs

Chris Horbers - Bear Stearns

Brian Engle - UBS

Gary Balter - Credit Suisse First Boston

Mark Rowen - Prudential

Colin McGranahan - Bernstein

Dana Telsey - Taggs

Dan Binder - Buckingham

Michael Baker - Deutsche Bank

Danielle Fox - Merrill Lynch

Operator

Good day, ladies and gentlemen and welcome to the Staples Inc. fourth quarter and fiscal year end 2005 earnings conference call. My name is Ann Marie and I will be your coordinator for today. (Operator instructions) I would now like to turn the call over to Ms. Laurel Lefebvre, Vice President of Investor Relations.

Laurel Lefebvre

Good morning, everyone and thanks for joining us for our fourth quarter and full year 2005 earnings announcement. During today's call, we will discuss some non-GAAP metrics such as return on assets, to provide investors with useful information about our financial performance. Please see the financial measures section of the investor information portion of Staples.com for an explanation and reconciliation of such measures, and other calculations of financial measures that we use to analyze our business.

I would also like to remind you that certain information contained in 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 under the heading risk factors and elsewhere in Staples latest10-K filed this morning.

Here to discuss Staples fourth quarter and fiscal year 2005 results and business outlook are Ron Sargent, Chairman and Chief Executive Officer; Mike Miles, President and Chief Operating Officer; and John Mahoney, Vice Chairman and Chief Financial Officer. Also joining us are Demos Parneros, President of US Stores and Joe Doody, President of North American Delivery. Ron.

Ron Sargent

Thanks, Laurel and good morning, everybody. I'd like to begin this morning by thanking the Staples team for a terrific performance in 2005. At the beginning of the year, we had some pretty aggressive goals, both in terms of our financial performance as well as investing in ideas for long-term growth. We over-delivered on the numbers, while investing in market share and new growth ideas and I'm very pleased to announce that we wrapped up a great year with a strong fourth quarter.

Just to cover the headlines for Q4, total sales were up 9% to $4.5 billion with a 3% retail comp and high teens growth in delivery showing continued momentum in North America. International sales also improved. We had a 3% comp, which was our best same-store sales performance in 10 quarters. That growth drove international top line 9% in local currency, although sales were flat in US dollars.

Net income for the Company was up 15% to $290 million, and earnings per share grew 18% to $0.39. Total company operating margin improved 50 basis points to 10.2%. That marks the first quarter in our Company's history with double-digit, total company operating margin.

I would also like to review the highlights of our full year 2005 results. Our team drove strong sales and earnings growth while making significant investments to gain market share and defending our position in key markets.

First the numbers. We grew sales 11% for the year to $16.1 billion, and earnings per share were up 20% for the full year, with all-time high operating margins of 8.2%. We drove inventory turns to 5.8X and generated $780 million in free cash flow.

Return on net assets, which is our primary measure of shareholder value creation, was up 120 basis points to 13.3% during the year, as we remain focused on driving profitable sales growth, improving operating margins, and better utilizing our assets.

When I look back on 2005, I'm also particular encouraged by the progress the team made in driving Staples brand. Sales of own-brand products grew to 18% of total sales. That was ahead of plan, and we made great strides with our quality, packaging, sourcing and innovation initiatives. We have brought hundreds of new Staples brand products to market, and we filed more than 50 patent applications last year alone. We have done this while driving steady margin improvement in our own-brand program.

Our Easy brand positioning is another highlight and continues to differentiate Staples as we make it easy for customers. Examples include our Easy Service model that has increased customer satisfaction, our redesigned web site, and our Easy Mobile tech program to help small businesses solve their technology problems. We also are seeing great response to our Easy Rebates program, that has processed more than 8 million rebates so far. We're being recognized as the easiest place to buy ink, because of initiatives like our Ink In-Stock Guarantee, a great assortment of Staples brand ink, and strong recycling programs.

Our marketing campaigns focusing on Easy drove traffic to our stores and delivery businesses. The Easy Button has really struck a chord with our customers; so much in fact that we have already sold a half-million of the Easy Buttons, including a few requested by the Pittsburgh Steelers prior to their Super Bowl victory.

We also made good progress on our key growth platforms during the year. Our delivery business is on a roll, with double-digit sales growth in each of our three North American businesses in 2005. Our contract business grew the fastest by far, benefiting from investments in sales force, service and a differentiated selling model. On the retail side, we had a strong new market entry in Chicago, where we went from zero stores to 25 stores in less than a year, and have become a powerful brand and value partner to Chicago communities.

We launched a new business channel selling office products in more than 850 grocery stores with more to come. Our Copy Center growth initiative has been a huge success, comping at a multiple of the chain and helping to drive customer service scores throughout the year. Our team also did a fine job defending our turf, and I think the across-the-board market share gains you see in our numbers prove that.

Turning to our international growth platforms, we made plenty of progress in Europe to position us for improvement next year, including a successful Office World integration and improving results in our delivery businesses. We also achieved impressive growth in China and South America, boding well for those businesses to become meaningful contributors to our results in the future.

Improving our supply chain was also a key, company-wide objective for 2005. We exceeded our goals for our Summit Supply Chain Program that focused primarily on retail over the past three years. We've seen big improvements in in-stock, vendor reliability, distribution expense and inventory turns.

Today, we're applying those learnings to our delivery business. We are on our way to building the delivery systems infrastructure we need to support our aggressive growth plans and to drive service improvement. We're testing some interesting new technologies to drive greater efficiency in our warehouses.

On the people side, we have recently announced the promotion of John Mahoney to Vice Chairman and CFO, and Mike Miles to President and Chief Operating Officer to recognize their contributions and expanding responsibilities. Basil Anderson, our Vice Chairman since 2001, he retires from that role this week, but Staples will continue to benefit from his leadership as he remains an active Staples board member. I would like to thank Basil for his enormous contributions to Staples over the past several years, and wish him all the best in his retirement.

At all levels of the organization, we have continued to invest our people and given them new opportunities, and we're very happy with the talent and tenure of our key management team.

Based on our strong 2005 performance and expectations for continued earnings growth, Staples has decided to increase our annual cash dividend to $0.22 per share to shareholders of record on March 31st. That is payable on April 20th. This is a 32% increase from the dividend we paid in 2005. Last year's dividend was up 25% from 2004, which was the first year the Company had ever paid a dividend.

We are pretty excited as we enter the New Year, to keep going after the great opportunities our industry offers, to drive faster top line growth without sacrificing margin improvement or return capital. With a strong team that remains focused on executing well day in and day out, we are also devoting resources to new, profitable growth ideas. And with that, I will turn it over to Mike Miles to review our North American results in greater detail. Mike.

Mike Miles

Thanks Ron. Good morning. Our North American retail team delivered another quarter of solid financial results. Sales were $2.6 million up 7.6% versus Q4 last year. Same-store sales grew 3% on top of last year's 4%, reflecting positive customer traffic and higher average order size. The holiday season emphasized technology products, and we saw good growth in portable computers and peripherals, memory and drives, and digital camera accessories.

Printer cartridges remain a strong growth category for us and we are responding to customers' desire for lower prices with a broad assortment of our own brand cartridges and our enhanced recycling program that gives customers three dollars back for every cartridge they recycle. This program helps us expand our own brand offering while preserving our environment by diverting millions of ink and toner cartridges from landfills. Our re-manufactured cartridge, compatible with Dell printers, has quickly become our second bestselling own-brand cartridge since we launched it earlier this year. Double-digit sales growth in our Copy Centers also contributed to the 3% comp.

For the fourth quarter, North American retail SVU increased by 12% to $289 million. Operating margin increased by 40 basis points to 11.2% with improvements in gross margin and G&A expenses offsetting investments in labor and marketing for the Chicago entry and our Copy Center growth initiative.

During Q4, we opened 25 new stores in the U.S. and six stores in Canada for a total of 1,522 North American stores at the end of the quarter. For the full year, we opened a total of 99 stores in North America, with 75 in the U.S. and 24 in Canada. Of the 75 stores opened in the U.S., 25 were in the Chicago market, eight of which were opened during this past quarter. We are pleased with our first year's performance in Chicago, and look forward to continuing to build Staples presence in the market with 15 more stores in the wings for 2006.

We are also focused on keeping our store base fresh. We now operate 555 new or remodeled Dover format stores. Hundreds of other stores have incorporated Dover-like features through our mini-remodel program that captures the key elements favored by our customers.

Our Copy Center growth initiative continues to gain momentum. During the quarter, we capitalized on the national marketing program launched in the third quarter that drove initial trial and awareness, and rolled out web submission capability. Our efforts over the past two years to upgrade our people, technology and marketing programs are driving above planned sales increases and we expect to continue to see good growth in the Copy Centers again this year.

Turning to our full year performance, sales for 2005 were $9 billion up 8.6% over 2004. Same-store sales for the year were up 3%. Total year SVU income increased $135 million to $817 million, up 20%. Operating margin improved 90 basis points to 9% on improved gross margins and management of G&A expenses. These results were achieved while investing in a number of strategic initiatives, including the market entry into Chicago, ramping our Copy Center growth initiative, new retail channels, and solidifying our market leadership position in core markets.

Our Canadian stores had a very strong year on both the sales growth and profit improvement fronts, and continue to build a strong market position despite increased competition.

In summary, our North American retail team had a great year as they continued to drive high performance through their focus on customer service and consistent execution. We will continue to invest in growing our market share and differentiating our offering in 2006.

Moving on to North American delivery, Joe's team achieved terrific results again in Q4 and for the year, with strong top line growth, significant margin improvement, and solid customer scores. Delivery continues to contribute more than its fair share to the overall growth rate of the Company. In the fourth quarter, North American delivery sales grew to $1.3 billion, an 18% increase versus last year. SVU income of $146 million, or 11% on a rate basis, increased 26% versus last year's Q4.

For the full year, sales were $4.9 billion, up 18% versus 2004. SVU income increased 29% to $485 million or 9.8% of sales. We were particularly pleased to deliver 80 basis points of operating margin improvements for the year, despite headwinds like higher than budgeted fuel expense and extra investments in marketing and promotion to go after former Viking customers in the U.S.

Our contract business again delivered excellent sales growth, coupled with strong operating margin improvement. Our fastest growing business unit, contract has doubled sales since 2002, and robust new account acquisition continues with the addition of 7,400 new accounts in Q4 for a total of nearly 34,000 new accounts for the full year. We have opened new contract offices in 10 U.S. markets over the past two years, all of which are contributing to our rapid growth.

Retention rates in both medium and large account segments were strong, with large account segments showing signs of improving health. We saw continued strength in existing customer purchases in the fourth quarter.

Contract delivered its best performance in in-stock, on-time and perfect orders during Q4, its highest volume season. We continue to reap the benefits of reducing the number of small orders to mitigate higher fuel expense. Our customers appreciate that we have been able to avoid imposing fuel surcharges. While the vast majority of our growth and contract is organic, we are very happy as well with our recent contract stationer acquisition. Integration is going well with Prime Office Products, on schedule to be completed in 2006.

Staples business delivery continues to drive double-digit sales growth through new account acquisition and increasing share of wallet with existing customers. Customer satisfaction metrics remain strong with solid performance with our preferred customer programs. We saw good growth in furniture and technology, as well as strength in ink and toner and business machine attachment sales.

In Chicago, Staples business delivery is reaping the rewards of our multi-channel marketing efforts and nearly doubled sales in that market this year. We continue to see a nice payback on the investments we've made in our Canadian delivery business. With the right teams in place and our focus on acquiring the right customers, SPD Canada accelerated top line growth while driving dramatic improvement in operating margin and return on net assets in 2005.

Quill again achieve double-digit sales growth in Q4 with strong momentum as it enters its 50th year of business in 2006. Quill boosted SVU income margins for the full year, despite significant investments in market share to drive higher top line growth. We continue to raise the customer service bar with all-time high satisfaction scores. New account growth has accelerated, an indication that we are seeing a nice return on our investment from our efforts to convert Viking customers in the U.S. over to Staples.

Medical Arts Press will be an area of focus in 2006 as this business delivers the highest margins in our portfolio, but has not been growing as fast as we like.

To update you on our North American delivery infrastructure, we continue to expand our multi-channel delivery capabilities to improve efficiency and service. We plan to add three new fulfillment centers in the U.S. this year to replace five existing buildings, and will also add a new facility in Halifax. These investments will increase service and capacity to support rapid growth in North American delivery for the next several years.

In terms of electronic penetration, worldwide e-commerce sales exceeded $1 billion for the first time in our history during the fourth quarter and for the full year, it grew 27% to $3.8 billion. Overall, North American online sales volume grew to 74% for Q4 versus 67% a year ago, with contract the highest penetrated business at 88%.

To wrap up, NED had just a tremendous year and has made the right investments in people, service and infrastructure to drive top line momentum and sustainable margin improvement for years to come. With that, I will turn it back over to Ron to talk about our international results.

Ron Sargent

Thanks Mike. We are very encouraged by the improving trends that we saw in our international business this quarter. Q4 sales of $565 million were up 9% in local currency, although flat in U.S. dollars versus Q4 last year due to negative currency impact.

SVU income for international was $20 million. That 's versus $22 million last year with an operating margin of 3.6%. With a tough real estate market in the U.K. we haven't been able to dispose of all the stores we closed last year as quickly as we had expected. As a result, during the quarter we booked an accrual for lease liability in the amount of $3.5 million. Without that charge, profit would have been higher than last year's fourth quarter.

For the full year, international sales were $2.1 billion. That is up 9% from 2004 in U.S. dollars. We grew 10%, excluding currency impact, and sales were down 1%, excluding currency and acquisitions. Our international business was profitable for the year with SVU income of $12 million, that's versus $68 million in 2004. Operating margin came in at 0.6%, about 300 basis points lower than 2004.

Last year, we made significant investments in Europe to remodel Office World stores, drive our delivery business, integrate new infrastructure, and transition our Staples European catalog management team. We are now seeing those investments beginning to bear fruit. With the signs of a stronger economy throughout Europe, easy comparisons and investments paving the way for margin recovery, we expect solid improvement next year in Europe.

On the retail front, comps in Europe this quarter were 3% with positive comps in all countries except for the U.K., and with particular strength in Germany and the Netherlands. After eight quarters of flat or negative comps in Europe, we are very encouraged to see comps move back into positive territory, reflecting improvements in marketing, service and in-stock.

In terms of store growth, we opened one new store in Portugal during the fourth quarter, ended the 2005 year with a total of 258 stores in the five countries where we operate in Europe. For the full year, we opened eight stores and closed four, and in 2006, we plan to open approximately 10 new European stores.

German retail had another very good year in terms of both comps and profit improvement, bumping operating margin up more than 200 basis points. We are encouraged by how well the team there is controlling expenses, as well as increasing sales productivity.

Trends in the U.K. are also encouraging, with comps slightly negative but sequentially improving. The remodeled Office World stores -- only a handful of which are in the comp base -- are performing well, with the 46 converted stores growing double digits versus last year.

While we are pleased with all that we have accomplished with our Office World integration, I think we stretched management resources too thin last year and service and in-stock performance in the base business suffered. With a renewed focus on execution in all of our U.K. retail stores, we are starting to see improvements in store standards, and we are optimistic about our ability to grow sales and margins in the U.K. during the coming year.

Turning to the delivery side, we are seeing good progress in execution across all geographies and in the second half of the year, achieved solid improvement in marketing effectiveness. We are very pleased with the progress made by the new European catalog management team, whose leadership has set the stage for both stronger top line growth as well as margin expansion.

Our top priorities for '06 are to drive margin improvements through purchasing synergies and own-brand management, and improve our call center and delivery operations to increase our perfect order performance.

Outside of Europe, Staples China continues to experience explosive growth. They doubled their sales in '05. Our Beijing market entry last October is going well and we expect to expand to additional major markets in the near future. We have begun to rollout Staples brand products there, and launched the Chinese version of the Easy campaign and we are thrilled with our partners and prospects for continued rapid growth in the $25 billion Chinese office products market.

Office Net, which is our South American delivery business serving customers in Brazil and Argentina, is also growing rapidly and making significant investments in infrastructure and marketing in '05 to support that growth. We see tremendous potential in the South American market, and we are building a strong market position that could provide meaningful growth several years down the road.

So in sum, our international business had a tough year in 2005, but there were plenty of bright spots and reasons to be confident that we will report much better performance going forward. We have made significant investments to position Staples for margin recovery this year and more importantly, to set the stage for steady progress for 7% plus, medium-term margin goal.

Now I will turn it over to John Mahoney to give you a detailed look at the quarter's numbers.

John Mahoney

Thanks, Ron and good morning, everyone. I will cover our Q4 and full year results, and then provide some guidance on our expectations for the first quarter and for the full year 2006, as well remind you of our longer-term goals.

Beginning with the P&L, Q4 revenues of $4.46 billion were up 9.5% versus last year's fourth quarter. Acquisitions helped sales by 60 basis points and currency hurt sales by about 70 basis points. So organic, local currency growth was 9.6%. For the full-year, sales reached $16.1 billion, an 11.3% increase over the prior year's revenue. Sales from acquired businesses contributed 150 basis points to the top line. Adjusting for the positive impact of foreign exchange of 70 basis points and the benefit of acquisitions, organic growth for the year was 9.1%.

During the fourth quarter, gross profit margin declined by 10 basis points to 29.39% as stronger demand for lower margin technology products in our North American businesses, higher fuel costs, and continued gross margin pressure in our international operations offset margin improvements due to own-brand, Copy Center and supply chain initiatives.

For the full year, gross margins increased 11 basis points to 28.52%, primarily driven by strong gross margins in North American retail, partially offset by higher fuel costs and delivery and pressure in our international businesses.

For the fourth quarter, operating and selling expenses leveraged 13 basis points to 15.32% versus last year's fourth quarter. This reflects our continued focus on execution, expense management, and leveraging of operating expenses on higher sales.

Our retail business did a very good job of managing labor as we continued to benefit from our improved staffing model that better matches store labor to customer traffic. Marketing and advertising leveraged in our international businesses as we eliminated some less efficient marketing activities.

For the full year, operating and selling expense improved 5 basis points to 16.28%. This represents a great accomplishment in driving productivity, in view of the additional marketing investments that we made for Chicago and our Copy Center business, as well as the investments in our contract sales force and our Office World store remodel activity.

Turning to G&A expense, G&A for the fourth quarter leveraged 46 basis points to 3.8% of sales, as we continue to see strong expense controls and favorable comparisons as we cycled the heavy G&A investments made in the supply-chain last year. For the full year, G&A leveraged 24 basis points to 3.99%.

Moving on to the balance sheet, total inventory turns were up 17 basis points versus last year to 5.76X as we continue to benefit from the process changes implemented through our Summit Supply Chain Program and begin to apply those learnings to our delivery business. Return on net assets for the year improved to 13.3%, up 120 basis points compared to the end of the fourth quarter a year ago. We expect our strong performance on the bottom line, coupled with our focus on asset management, to drive our RONA to 13.7% next year, reaching our long-term goal of 200 basis points over long-term cost of capital. We expect to be able to sustain this high level of return.

To recap our liquidity and financial resources at the end of the fourth quarter, Staples had $2.4 billion in liquidity, including cash and short-term investments of $1.6 billion and available credit of about $800 million. CapEx for the year came in at $456 million, up from the $335 million we spent in 2004. This increase reflects investments in information systems, distribution and fulfillment centers, as well as more store openings and remodels. For the full year, we generated free cash flow of $780 million.

During the fourth quarter, we repurchased a total of $159 million of Staples stock, or about 6.9 million shares, and completed our $1 billion stock buyback program initiated in March of last year. In October, we announced our new $1.5 billion share buyback authorization, under which we repurchased $152 million, bringing our total 2005 repurchases to about $650 million, or about 30 million shares. Our share repurchase program has been effective in reducing our share count as weighted average shares outstanding declined by about 12 million shares, year-over-year. We expect to repurchase up to $650 million in 2006 under the new program.

Before I discuss our outlook for the first quarter and full year, I would like to remind you that our outlook includes the impact of a 53rd week in 2006 and expensing stock options under the FASB statement 123R effective beginning in Q1. To give you a clear picture of the impact of equity compensation on our financial performance, we will restate our quarterly and full year results for 2005 to include the impact of options. Stock option expense impacts gross profit, operating and selling, and primarily G&A expense in the P&L.

Pro forma restated numbers are available in the financial measures section of our investor relations website on Staples.com. You should use these pro forma restated numbers as a base when incorporating the earnings growth rates I will give you in a moment.

Restating our 2005 results will of course impact the cash flow statement and we expect a reduction of free cash flow we reported for 2005 of about $37 million as a result of the lower cash from operations and some impact on taxes. The financing activities section of the cash flow statement will be positively impacted by the same amount, so there is no net impact on overall cash flow generation.

In terms of our expectations for full year 2006, we expect to achieve 15% to 20% earnings per share growth, as we continue to achieve solid growth while investing in our business. We expect low double-digit growth for the total company on the top line, including new store growth in our North American retail store base and a positive low single digit comp.

For North American delivery, we expect to grow revenues in the mid-teens, and in international, revenue growth could be flattish in U.S. dollars, but mid to high single digits in multiple currency.

We expect to invest approximately $500 million in capital in 2006, and we expect free cash flow generation in the range of $700 million in 2006, and more than $2.5 billion over the next three years. Again, this reflects the impact of expensing stock options. We plan to continue returning cash to shareholders this year for our dividend and share repurchase plans.

In terms of specific Q1 guidance, we expect high single digit growth on the top line. We expect low single digit comp and high single-digit sales growth in our North American retail business; mid-teens growth in North American delivery; and flat sales in U.S. dollars in international.

We anticipate that gross profit will leverage versus last year's first quarter. Both operating and selling expense in G&A are expected to leverage slightly. We expect that our tax rate will decline 50 basis points to 36%. Average shares outstanding are expected to be about $742 million. Q1 earnings per share are expected to grow 15% to 20%, consistent with the current range of analyst estimates.

As a reminder, we updated our long-term operating margin goals at our investor conference last October. Since we launched our profit improvement plan in 2002, we have delivered well over 300 basis points of operating margin improvement. We believe that we can drive another couple of hundred basis points over the next few years, bringing us to our new long-term operating margin goal of beyond 10%.

We see opportunity in our North American retail business for long-term margins to be in the 9.5% to 10% range. In our delivery business, we expect to reach 11% to 11.5%. In Europe, we envision 7% to 7.5%, about 700 basis points beyond our 2005 performance as an achievable, medium-term goal. With that, back to you, Ron.

Ron Sargent

Thanks, John. Before we take your questions, I would like to close by again, thanking our 69,000 associates for a superb performance in 2005. In a year that offered plenty of challenges, the team really stepped up to exceed many of our financial goals and made great progress on the key initiatives that continue to drive our business.

Our Company just celebrated its 20th anniversary at our global sales meeting a couple of weeks ago. While I am tremendously proud of what the team has accomplished over the last two decades, I'm even more impressed with our people's enthusiasm, energy and commitment to keep driving our business going forward.

As we look to 2006 and beyond, the team is focused on several things:

  • building our brand through products and services that make it easy for our customers;
  • achieving our goals for key retail growth platforms like Copy Center and new market entries;
  • improving our supply chain;
  • gaining market share in our delivery business;
  • leading a significant turnaround in Europe; and
  • laying the groundwork for rapid growth in China and South America.

Staples' building blocks for success -- great execution, differentiation and market leadership -- those things haven't changed, but we are not standing still, and as always, we will continue to explore new arenas for growth that we look forward to sharing with you over the course of 2006.

Thanks for your time this morning. I will turn it back over to our conference call moderator to line up any Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question will come from Bill Sims with Citigroup. Please proceed.

Bill Sims - Citigroup

Thank you and good morning.

Ron Sargent

Good morning, Bill.

Bill Sims - Citigroup

Congratulations on another solid quarter.

Ron Sargent

Great, thank you.

Bill Sims - Citigroup

I have two questions. My first question is on gross margins. You've reported down gross margin for the fourth quarter two years in a row. I presume that is more of a seasonal function in terms of a mix-up of technology sales. But as we look out to 2006, how much of a drag will the mix shift into technology sales continue to have, and should we expect another weak fourth quarter in '06? Or, will something change to drive accelerated improvement there?

Ron Sargent

Let me ask John to walk you through the gross margin impact of technology.

John Mahoney

Sure. I think we've seen a tremendous amount of demand for technology products, particularly throughout our North American retail business in the fourth quarter, and that has been typical as we see a lot of consumers in our stores during the month of December. Technology is really what brings them into the store, whether it is digital cameras or PCs. So I think you will continue to see some sort of seasonal demand as long as the holiday period is a period where consumers are interested in technology.

I also mentioned, though, that some of the issue is related to weakness in margin in our international businesses and we don't expect that to continue, so I think you will see a moderating effect there. We also would expect that some of the other supply chain initiatives and our own brand program would help the mix and therefore be able to offset some of those. I think over the course of the year, we are expecting to see gross margin continue to leverage.

Ron Sargent

And just one thing to add there is, when you look at the mix of our business, our delivery business is growing significantly faster than our retail business or our international business, and the margin mix is better for the delivery business than it is in any other part of our business. Bill, you had a second question?

Bill Sims - Citigroup

Yes, the second question is regarding the Dell remanufactured cartridges. I believe they were rolled out fairly quickly in 2005. Potential for you to sell them under the Simply brand. Are there any plans in 2006 to switch the cartridges to Staples branded, and how does that impact sell through when you switch brands from Simply to Staples on other products?

Ron Sargent

Mike Miles will answer that one for you.

Mike Miles

Bill, we are planning on switching those cartridges into the Staples brand later this year. We have a very rigorous set of standards for products before we put things under the Staples brand, and just from a timing standpoint we haven't been able to run all of the gates we needed on the Dell cartridges in 2005. We will have those under the Staples brand next year and from our experience, that can only mean upside to the sales of the cartridges. Once we have done it, we will have a better sense for exactly how much the Staples brand contributes versus just having it under the more generic Simply label.

Bill Sims - Citigroup

Thank you. And one follow-up modeling question. Where does the 53rd week fall in 2006?

John Mahoney

We always think of it as the week that is in the middle of the year, so about a 2% week -- no more, no less.

Bill Sims - Citigroup

Thank you very much.

Ron Sargent

Thanks, Bill.

Operator

Thank you, sir. Your next question will come from Matt Fassler with Goldman Sachs.

Matt Fassler - Goldman Sachs

Thanks a lot and good morning.

Ron Sargent

Good morning, Matt.

Matt Fassler - Goldman Sachs

I would like to start off by focusing on Europe. If you could just give us a little more color on profit trends by region, with the U.K. the only market that was down from a profit perspective. If you could follow that up by just reminding us of the timing of some of the investments that you made in the first half of 2005, just to assess how quickly those roll off the P&L.

Ron Sargent

Sure. Let me take a stab at that. I don't want to get into profitability by country, by region or anything like that but basically, we saw some nice improving trends in all of our businesses, including the U.K. Certainly the comps were positive, which was a nice change from our recent history. Even in the U.K. we didn't quite get to breakeven comps, but we were a lot closer than we have been in a long time.

So I think we are seeing improving trends in every one of our businesses in Europe during the fourth quarter, and we expect many of those trends to continue. When you look at last year, we had a lot of one-time expenses. I am not sure I can quantify it specifically, but about two-thirds of our miss year over year. Last year we made 12, the year before we made 68. About two-thirds of that delta, if you will, is the result of one-time events. You can go down the list. Office World remodel is probably the biggest one-time event; we had a U.K. warehouse integration as a one-time event; we had transitioning the European catalog management team, which involved some relocation and some severance. We had the expansion of the Quill brand out to Eastern Europe to launch Office Supplies in Eastern Europe. We had a fire in France, we had a flood in South America -- it seems like it was a tough year all the way around.

I think about two-thirds of the delta was one-time in nature, and the rest was frankly us just shooting ourselves in the foot around execution. So I am very encouraged that 2006 is going to be a nice turnaround year for our European business.

Matt Fassler - Goldman Sachs

Got you. And the timing of those, were those more first quarter, second quarter focused as you think about those one-shot items?

Ron Sargent

They were virtually -- I mean the Office World remodels were in the first eight months of the year, so certainly there were a lot of Office World remodels going on in the second half. The others were probably spread evenly throughout the year. I'll be disappointed if we don't see significant improvement in our business each quarter in 2006.

Matt Fassler - Goldman Sachs

Second question, on the G&A front, John can you give us a sense as to how much of the reversal, if any, reflect the changes in incentive compensation, and what those accruals might have looked like in the fourth quarter versus the rest of the year?

John Mahoney

Sure. Obviously, we had a great year in '04 so bonuses were pretty good. Our visibility to our results for the whole year in '05 was very good, so we saw no reversals in bonus accruals or anything of that nature. As a matter of fact, as the year goes on we tend to build the accruals, so the impact year-over-year is a relatively small couple million dollars, and there was certainly no reversals of accruals that improved G&A at any quarter during the year.

Matt Fassler - Goldman Sachs

And then finally in retail, if you could just touch on supply comps. I know that is a number that you look at closely, given your comments on technology during 4Q.

Ron Sargent

We had strong comps in the Copy Center, and in ink cartridges, which you tend to think about as supplies as well. The supplies business has been solid in Q4 and as we start up 2006 as well.

Matt Fassler - Goldman Sachs

Good. Thank you very much.

Ron Sargent

I think the only other point to add is we were happy to see positive customer count comps, as well as the average order comps in the fourth quarter. I think that is a good trend as well.

Matt Fassler - Goldman Sachs

Thank you.

Operator

Thank you, sir. Your next question will come from Chris Horbers - Bear Stearns. Please proceed.

Chris Horbers - Bear Stearns

Good morning. Another solid Staples quarter.

Ron Sargent

Good morning. Thank you.

Chris Horbers - Bear Stearns

So NA Delivery continues to be a star, both on a top line and from a profit expansion perspective. It also seems your competitors are doing reasonably well in this area. Can you provide some insight on what is driving the business? Is it market share gains? Is it just stronger business spending? On the market share side, where do you think it is coming from? Is it the contract stationers, local competitors?

Ron Sargent

Let me ask the guy who runs our delivery business, Joe Doody, to answer that one.

Joe Doody

First, Chris, clearly we are gaining some share in the market. So that is a factor for us. But as far as the overall market and the growth that we are seeing among our competitors relative to ourselves, clearly it is category expansion. Many of us are selling categories much stronger than we were over the last several years i.e. [jan fan] type products, mail and ship products, furniture - deeper penetration, printing, custom printing. So expansion of categories is clearly one area that we are growing in that is allowing for a greater growth.

I would say that all of us are probably -- it is a large market out there, and we are all taking a little bit of share from the many small, independent contract stationers that are out there as well.

Ron Sargent

I guess the other thing you can't discount is the fact that the economy is growing and jobs are being created, which to the extent that the service or white collar jobs, which is one of the things we track, that is good for the delivery business as well.

Joe Doody

We've seen throughout the year a solid performance from our small to medium-size customers, and increasing strength from our large customers.

Chris Horbers - Bear Stearns

So on the category expansion, is there a planned SKU expansion or assortment expansion in any areas in 2006?

Joe Doody

We are continuing to do that; started in '05, continue in '06 and we see that as an opportunity not only for top line growth, but many of those category expansions are at margin rates that are higher than our house, if you will. That is another reason, or a reason behind as well our optimism towards margin expansion within the business overall.

Chris Horbers - Bear Stearns

And as a follow-up on the G&A question, I think the past second half of the year we saw markedly improved G&A and that has helped on driving the EPS upside. Can you talk about, in looking at 2006, what factors we should think of as structural versus items that were maybe more one-time in nature?

John Mahoney

I think first of all, we do tend to see more leverage on G&A in the second half of the year as the seasonally bigger quarters in the third and fourth quarter absorb more of the fixed expenses. But overall, I really give a lot of credit to all of our G&A areas for controlling expenses aggressively. We have seen a lot of activity in process improvement, as well as thinking carefully about what we can stop doing, that has really resulted in more efficiencies in just about every area. It is a strong focus for us as a Company. We have continued to emphasis that. I don't think there is any one single thing that is going to change it, and it is not one-time in nature; it has become a part of our culture. We take pride in getting more productive every year. I expect us to see continued G&A leverage.

Chris Horbers - Bear Stearns

Thank you very much.

Ron Sargent

Thank you, Chris.

Operator

Sir, your next question will come from Brian Engle with UBS. Please proceed.

Brian Engle - UBS

Good morning.

Ron Sargent

Good morning, Brian.

Brian Engle - UBS

Congratulations on another very good quarter.

Ron Sargent

Thank you.

Brian Engle - UBS

A couple of questions. First off, with respect to the extra week, could you just help us quantify the impact of that? I assume then that falls within your guidance of 15% to 20% EPS growth for 2006?

John Mahoney

That's right, Brian. We've said that it is a little hard to know exactly what its worth, but we think it is probably worth about a proportionate amount. It does fall, it is an extra week in the fourth quarter but it is in our 15% to 20% guidance.

Brian Engle - UBS

Okay. The second question, a competitor of yours recently announced plans to close a number of stores. Some of these compete directly with Staples. Have you guys seen anything in those markets to suggest the operating environment many be changing, near term?

Ron Sargent

I am going to ask Demos Parneros, the guy who runs our retail business, to answer that one.

Demos Parneros

Good morning. I think it is just a little bit too soon to see a change yet. They announced the closing, there have actually been a few closings and in those cases, we have seen a nice little lift in our competing stores. But it is really too soon to see what the overall impact of that will be.

Brian Engle - UBS

Okay. The final question, you highlight in the press release this morning as well as in the comments the 18% penetration of your private label items. Could you just update us on how far we are into this initiative?

Ron Sargent

Mike.

Mike Miles

We are real excited with that, and as you know it has been growing very steadily over the last several years. Honestly, we are not sure how high it is up. We are committed to preserving the choice and the brand presence of the other OEM labels in our stores and making sure customers don't feel like they are being pushed into the Staples brand, but there is a lot of pull from our customers for Staples brand products as we've made the investments in quality and packaging to really drive that penetration.

We see that own-brand penetration going well into 20s, and for some of our other private labels like Quill, the penetration is significantly higher than the mid to low 20s numbers that we are thinking about today. So we think there are several years of continued growth in the own-brand penetration, 2% to 3% year improvement that we've seen over the last several years.

Joe Doody

Just to add to that, I think the other big attraction of the expansion of own brand is the capability that we are developing on the sourcing side in terms of better buying of this product. Direct sourcing is still a fairly small percentage of our total sales today, but I think the own-brand growth has allowed us to learn a lot more about direct sourcing, and I think that is probably a significant and meaningful expansion to our margin down the road.

Mike Miles

And the final thing on it is, it is not just a matter of taking existing products and putting them into Staples packaging. We are doing a tremendous amount of innovation on own-brand products, whether it is something like [Word Block] or some of the products that have come out of Invention Quest. We continue to sell lots of the Desk Apprentices that came out of our partnership with the Donald Trump show last Spring, and we expect to continue to be a force for innovation in the office supply side of the store under the Staples brand, as well as providing more value for folks through our own brand products.

Brian Engle - UBS

Great, thank you and good luck for 2006.

Ron Sargent

Thanks, Brian.

Operator

Thank you. Your next question will come from Gary Balter with CSFB. Please proceed.

Gary Balter - Credit Suisse First Boston

Thank you.

Ron Sargent

Good morning, Gary.

Gary Balter - Credit Suisse First Boston

Good morning. First of all, have you found any Chinese Easy Buttons yet? I have French and English.

Mike Miles

I have been looking diligently for that for you Gary, and they say Easy on them and they say that was Easy in Chinese. We will have one for you soon.

Gary Balter - Credit Suisse First Boston

Good, so we will work on that.

Ron Sargent

I am also looking for a Canadian Easy Button for you as well.

Gary Balter - Credit Suisse First Boston

I've got that. I got the one when I was in Quebec, so that is taken care of. On delivery, you had a great year, you were up 80 basis points. Some of that I believe must be a reflection of the fact that you added so many people the previous year and leveraged that. Should we be looking for that type of market expansion in '06, or is there another investment now? Should we be thinking 80 a year, or is that too much?

Ron Sargent

Joe.

Joe Doody

I think, Gary you started off by saying we had a great year, and I would just like to give the team credit for having a great year this year within the delivery business. I think to be able to repeat an 80 basis point, year-over-year improvement in '06 is maybe even beyond Ron's expectations for our business. But I do expect to have good improvement in margin performance and we are driving towards that goal of 11% to 11.5% and we see that as very achievable in the median term.

Gary Balter - Credit Suisse First Boston

So as we're looking overall at '06, Europe, margin-wise, will be the biggest incremental improvement?

Ron Sargent

Absolutely.

Gary Balter - Credit Suisse First Boston

Followed by North American retail, followed by delivery? Is that the way we should be thinking?

Ron Sargent

I don’t want to get into North American delivery versus retail, but certainly Europe is poised for a big improvement.

Joe Doody

In terms of rate, Gary, you are right. Obviously the North American businesses are so much bigger that the contribution that they make on a smaller rate increase is very important, and really what drives our total growth rate.

Gary Balter - Credit Suisse First Boston

Thank you very much.

Ron Sargent

Thanks, Gary,

Operator

Your next question will come from Mark Rowen with Prudential. You may proceed, please.

Mark Rowen - Prudential

Thanks, good morning.

Ron Sargent

Good morning, Mark.

Mark Rowen - Prudential

A couple of questions. One, can you give us an update on the office furniture reset that you've done at retail? I know you brought in some brands that are exclusive. Can you give us a sense of how that's going? Are you getting any traction there, and do you think that that could be a big opportunity in '06?

Mike Miles

Mark, it's Mike Miles. We are still testing and still in the fairly early stages of what we're calling a furniture innovation test in our stores. We've been pleased with the resets and the looks of the new furniture pad, and we are also testing labor in a number of stores. We haven't yet settled on exactly the combination that we are planning on rolling out across the chain, and actually we have some additional tests planned for this year, particularly in the area of storage and organization. So more to come on that, but we expect furniture to be a key contributor over the long-term for Staples.

Mark Rowen - Prudential

So for '06, probably more of a testing year?

Mike Miles

Yes, we are still trying to get exactly the right combination of investments in labor and the resets, and also the correct merchandise to be something that we could really roll out everywhere across the chain.

Mark Rowen - Prudential

Okay, and then Ron, you mentioned that the Office World stores were comping double digits from a year ago, even though they are not in the comp base. It seems like you ought to be driving pretty much leverage off of double-digit comps there. Is that what gives you the confidence that you are going to see tremendous margin improvement this year in Europe?

Ron Sargent

I think that is certainly part of the equation. We start comping the stores a year after we have done the complete Staples remodel. So a lot of those will be coming into the comp base during the first half of the year. I think that is just part of the equation. I think we are seeing great improvements in our customer service scores, which are very important, I think, to shoppers coming back. We are seeing a great improvement in our operating margins. I think the look of the store, I think the better experience in the store, and we are doing a great job in collecting names for the Business Rewards program over in the U.K. which is something we have been very successful with here in the U.S. I am very confident that the U.K. is going to have a much better year.

John Mahoney

And just from a math perspective, we had big investments in the whole remodel team. We also held onto some of the G&A expenses. We were running two systems for replenishment in the U.K. last year, so you are right. The increasing revenue does give us a good basis for leveraging our expenses, but in addition to that there were a lot of expenses that we incurred last year that we won't have to incur this year.

So the margin expansion in the U.K. should be very solid, which is why we feel confident that Europe should have a good year.

Mark Rowen - Prudential

Okay, and then last question. In Chicago, now that you have 25 stores open, the grand openings are done and it is grinding out business on a daily basis, have you seen any change in response from your competitors, now that there is a third player in the market? How is the market shaping up there from a competitive standpoint?

Ron Sargent

Demos.

Demos Parneros

Hi, Mark. First of all, I would say that we are not completely settling in Chicago because we have a very aggressive growth plan. For 2006 we will be adding close to 15 more stores in that market. We are continuing to forge forward. There was a little bit of activity with our initial grand opening events from both competitors, and I would say that has settled down quite a bit. It is a little bit more business as usual in that respect, but as you would expect they are probably quite interested in defending their turf as we continue to grow and open more stores. So it is going to remain competitive there for the balance of the year.

Mark Rowen - Prudential

And does that mean competitive in the form of pricing, or certain promotions on certain products? How does it take shape?

Demos Parneros

Right. We haven't seen any sort of irrational pricing type activity. We've seen more in the way of promotions, ones that particularly respond to the actual grand opening.

Ron Sargent

I guess the only other point I would add is it is not just the office superstore competitors, but we've gotten a lot of other competitors in the Chicago area that, as we continue to fill out the market, a lot of the smaller players are also feeling the pressure.

Mark Rowen - Prudential

Okay, thanks.

Ron Sargent

Thanks, Mark.

Operator

Your next question will come from Colin McGranahan - Bernstein. Please proceed.

Colin McGranahan - Bernstein

Thank you. Good morning.

Ron Sargent

Good morning, Colin.

Colin McGranahan - Bernstein

First question, Ron, is for you.

Ron Sargent

Sure.

Colin McGranahan - Bernstein

You have $1.6 billion in cash, you generated $780 million in free cash flow in '05 -- it sounds like you are lowballing the '06 free cash flow numbers a bit -- but you only plan to do maybe up to $650 million in repurchases. Why not more? Is there some other use of that cash, or do you just plan on accumulating it on the balance sheet?

Ron Sargent

Colin, it's a high quality problem that we have, that we have been able to generate a lot of cash. We've stepped up the capital investment a bit this year. We've certainly announced our buyback program for the year, and that will be up to our board to decide if we want to increase that buyback or add to that buyback program down the road. We just bumped up our dividend by 32% this morning. So there are a lot of uses for that cash, but obviously we are going to look at ways to continue to grow our business, whether it is on the delivery side, the retail side or the international side.

John Mahoney

Let me just remind you that the way we calculate free cash flow is we take operating cash flow less capital investments. The new 123-R takes the proceeds that we get from our stock option activity and it reclassifies it from operating down to financing activities. So when you are accusing us of lowballing a little bit, there is at least some element that comes from the new accounting standard. So be aware of that as you think about calculating what our free cash flow will be for '06.

Colin McGranahan - Bernstein

Fair enough, John, but we will see if it is $700 million at the end of the year or not. Second question, turning back to Europe, can you talk about what the organic revenue growth in the fourth quarter was for the delivery business? If comps were positive it had to be less than negative 1 then. How does that compare to the third quarter, and just generally talk about the success of turning around the marketing efforts there.

Ron Sargent

I think organic growth is improving in the fourth quarter compared to where it had been. I mean, we tried a lot of stuff in our delivery business in the first half of the year in terms of different marketing approaches that would stimulate the top line. I think when you look, as the year progressed, we got more and more effective on the marketing side. Not only did we grow because of seasonal patterns which would cause the second half to be better, but also I believe that marketing effectiveness also improved the top line as well. John, do you have the number?

John Mahoney

Yes. We had a mid single-digit growth rate in the delivery business overall in the fourth quarter in Europe. I think that the key thing to remember there is that our growth rate is somewhat scattered in that we've got the southern European markets in Spain and Italy that are growing really rapidly; we continue to see flattish growth in the JPG business, which is a big component of the total delivery business.

I think as we've said, some of the efforts that we are going through to reconfigure our marketing approach in France are going to be key to get the aggregate top line catalog growing in Europe. The currency effect is going to have a dampening effect on growth in Europe, according to what we're thinking about now, based on forward rates.

Ron Sargent

We expect our total European business to be in the high single digits in local currency, and probably flattish again in the first quarter, given the currency impact.

Colin McGranahan - Bernstein

But I guess I am just more interested in the organic growth. Maybe I am missing something in the math, but the total business in Europe, international, was down 1% organic, right?

John Mahoney

Right.

Colin McGranahan - Bernstein

And comps were positive in retail and you didn't close very many stores. So wasn't the delivery business organically then down more than 1%?

Ron Sargent

No.

John Mahoney

No. In U.S. dollars it was.

Ron Sargent

But not in local currency.

John Mahoney

Not in local currency, right.

Colin McGranahan - Bernstein

Okay, I will follow back up.

John Mahoney

Yes, we can help you with the math, but suffice to say that what we just described is what happened.

Colin McGranahan - Bernstein

Thanks.

Ron Sargent

Thanks, Colin.

Operator

And your next question will come from Dana Telsey with Taggs. Please proceed.

Dana Telsey - Taggs

Hi, good morning, everyone.

Ron Sargent

Good morning, Dana.

Dana Telsey - Taggs

Can you talk a little bit about Medical Arts Press? You mentioned that is a focus for 2006. What are you doing there, and how do you see the improvement coming about? Lastly, fuel increases were a focus last quarter. How are those expenses doing this quarter? Thank you.

Ron Sargent

I will give Joe the Medical Arts Press one, but on fuel I think it cost us about over and above what we budgeted for the year. I am not sure I know the fourth quarter, but over and above what we budgeted, about $10 million year-over-year. It has cost us about $0.01 a share for the entire year, and I would think that would probably be mitigating a little bit in the fourth quarter compared to how it was earlier in the year. In terms of the Medical Arts Press, Joe.

Joe Doody

Dana, what was your question on Medical Arts Press, please?

Dana Telsey - Taggs

You mentioned that as a focus for 2006 in terms of improvement. How are you going to get there? What drives that business to do better? Thank you.

Joe Doody

Thank you. First of all we are experiencing what I call low growth there. We are very satisfied with the profitability of the business. We just need to get it up to our, if you will, normal delivery growth, double-digit growth. What we will focus on there, clearly they have a great brand. Their customer satisfaction levels, in fact, are the highest of all of our delivery businesses, including Quill's customer satisfaction levels.

It is really just a matter of presenting to their existing customers the proper offers, and also doing a better job of really going out and marketing to new customers. We are not satisfied at either our sales through in growth amongst our existing customers, as well as really new business opportunities there. So going after both of those.

Ron Sargent

It seems like Medical Arts Press has really benefited from the Quill connection in terms of the Quill direct marketing expertise, that has really helped.

Joe Doody

We will be bringing that to bear, and all of the expertise that we have is some of the best in the business from a direct marketing standpoint from Quill. We have high confidence that as we sit here a year from now, that our improvement will be as significant on a year-over-year basis as we had in the turnaround in our SVD Canadian business this past year. Which as well, a year ago, was comping in the flattish range and is now very strongly into the teens.

Dana Telsey - Taggs

Thank you.

Ron Sargent

Thank you, Dana.

Operator

(Operator instructions) Your next question will come from Dan Binder with Buckingham Research. You may proceed, please.

Dan Binder - Buckingham Research

Good morning.

Ron Sargent

Good morning, Dan.

Dan Binder - Buckingham Research

A couple questions. First just with the sequential improvement you are seeing in Europe. How much of that would you tie to just management changes and store conversions behind you, versus really a macro recovery or early signs of a recovery?

Ron Sargent

I think it is a lot about execution, and like I said, a lot of the one-time charges hopefully won't be repeating themselves in 2006, but I think a lot of the executional stuff is a big part of our optimism for the future.

Having said that, I think there are some macro economic trends in Europe that imply that things are getting a little bit better. Services growth seems to be picking up, business formation is on the upswing; employment is up and consumer confidence is at a three-and-a-half year high. So we are seeing some early signs that the European economy is starting to improve compared to where it had been in the last few years.

Dan Binder - Buckingham Research

Okay. And then I think in response to an earlier question on gross margin, John I think you mentioned that you were seeing international pricing pressure, but you didn't expect that to continue, if I heard you correctly. I was just curious, why you wouldn't expect that to continue?

John Mahoney

Well it wasn't so much international pricing pressure as it is relatively poor gross margin performance as a result of some execution issues, whether it is supply chain or whether it is some overstock and markdown sort of activity. So it is not pricing pressure so much that is driving it. In our main businesses, both retail and the catalog business, we have see a pretty good pricing environment over there.

Dan Binder - Buckingham Research

And just a second question on delivery. A lot of talk today about the cash flow, there seems to be plenty of cash generation, and also some talk about the pressure on the independent dealers. I was curious, with just modest activity on the acquisition front in delivery in '05, would you expect that to pick up in '06?

Joe Doody

I think our acquisition strategy has been clear. We are going to do things that are close and core to the business that earn good returns quickly and that we can do out of our existing cash, as a core strategy. As a result, the deals that we have done have tended to be more opportunistic; deals like Prime where the team there was ready to throw their lot in with us, that came about through a relationship that we've had with them for a long period of time. I would expect that would continue into the future. We aren't undertaking any coordinated roll off strategy or anything like that.

Ron Sargent

When you look at Joe's top line, it grew 18% in the quarter; organically it was 17%. It was only about a 1% add to his total growth in the fourth quarter.

Dan Binder - Buckingham Research

Right. I wasn't being critical, I am just thinking you have been pounding away on these independent dealers for a while. On the offset, we've had a great labor environment. I am wondering what it takes for further consolidation in that area. Do we have to go through a slowdown where these independent dealers don't want big multiples for their businesses? Is that the primary issue?

Ron Sargent

It is hard for me to speculate on the independent dealers perspective on that one, to tell you the truth.

Dan Binder - Buckingham Research

Okay. And then on the pricing front, there seems to be mixed response coming out of the big four about what is going on on the pricing front; two complaining that it has been more intense, I guess Office Depot is saying it is intense, but not more intense. I am curious what your take is on it.

Ron Sargent

Joe.

Joe Doody

I think we certainly don't attempt to compete on price and price only, so we see it as it always has been, Dan, a competitive market out there. We are really offering something that is differentiated to our customers, and we compete and look at total delivered cost and that is how we compete effectively in the marketplace. We believe, based on looking back and now looking forward that we will be able to continue to compete effectively on that same basis out into '06 and beyond.

Ron Sargent

I guess the best indicator is not only you grew in the top line 18%, but your margins are improving.

Dan Binder - Buckingham Research

Great. Thanks.

Ron Sargent

Thanks, Dan.

Operator

And your next question will come from Michael Baker with Deutsche Bank.

Michael Baker - Deutsche Bank

Thanks. I have to try one more question in Europe. So if the math is right, then Europe was down $55 million last year, or thereabouts, and if you add back two-thirds of that on top of the $12 million that you did this year, that gets you right back close above $50 million, plus some macro improvement. Is that too aggressive for Europe next year? Within your guidance, are you expecting that kind of improvement?

Ron Sargent

Well I don't want to provide specific guidance, because last year when I was asked a very similar question about our future profitability in Europe, I wasn't very good at my prediction. So at this point, let me just go back to what I said earlier. We feel that we are very well-positioned for a significant turnaround in Europe in '06. We have the one-time events behind us, I think we have the right team. I think the investments that we made last year should begin to bear fruit. I think it is a better economy and we have easier comparisons. So I think we will see significant improvement, but I don't want to go out on a limb in terms of talking about how many millions of dollars of operating improvement we will see.

Michael Baker - Deutsche Bank

Fair enough. Let me try this one, then. I think when you first established the Summit Supply Chain Initiative for retail, going back a number of years, if memory serves you did quantify -- I think it was a $200 million opportunity, or something along those lines?

Ron Sargent

Yes.

Michael Baker - Deutsche Bank

Is there a similar opportunity in delivery? Is it more, is it less? Is it hard to quantify?

John Mahoney

I think what we said at our analysts' day that it is proportionate to the size of the business. I think there is good opportunity in supply chain and delivery. The team there is really looking at the same kind of process change. As our team says there, we want to look left and look right. So as we undertake some of those process changes, like we did in Summit in retail, you will see a lot of the process change come first and the benefits tend to come after that. I expect to see the same thing in NAD.

Ron Sargent

And I think we haven't even scratched the surface in Europe, where I think there are great opportunities to improve our supply chain practices as well. I think that is coming as well.

Michael Baker - Deutsche Bank

Good, okay. Thanks.

Ron Sargent

Thanks, Michael.

Operator

Thank you. Your next question will come from Danielle Fox with Merrill Lynch. You may proceed, please.

Danielle Fox - Merrill Lynch

Good morning. I have two quick questions. First, can you talk about the impact that the Copy Center growth had on your store traffic? You mentioned that you were pleased to see the customer count up, and I am wondering if the Copy Center was the main contributor to it, or if there were other factors.

Ron Sargent

There were other factors, Danielle but the Copy Center -- and as you know, the Copy Center is only about 5% of our sales, so even though it has grown at a multiple of the house, it is hard for it to really pull the whole chain up. But there is no question that the growth that we experienced in the fourth quarter coming out of our marketing initiatives in the third quarter and some of the investments that we have made in technology there with web submission and email submission and wide format, both color and black and white machines, has contributed not only to the sales growth and the margin growth, but also to traffic growth. Those are good footprints for us in the store and we are excited about that going forward.

Danielle, what was your last question.

Danielle Fox - Merrill Lynch

The final question was just, John when you say medium-term, do you mean two years? I am trying to get a sense for some of the long-range objectives that you've laid out, and some of what you said are medium-term opportunities? Like 7% operating margin in Europe, things like that. How to think about the long-term forecast.

John Mahoney

When I say medium term, I think in terms of three to five years.

Danielle Fox - Merrill Lynch

Okay, great. Thanks a lot.

Ron Sargent

Great, thank you Danielle. That concludes our question-and-answer session. Thanks everybody for your time this morning, and thanks for your continued interest in Staples.

Operator

Once again, ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.

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