Strategic Initiatives, Restructuring and Related Charges

Staples 20/20 Plan

In May 2016 the Company announced a strategic plan under which it plans to:


•	focus on its North American operations, in particular on the mid-market sector by accelerating growth in services and products beyond office supplies


•	increase productivity and preserve profitability in its retail stores


•	pursue acquisitions of business-to-business service providers and companies specializing in categories beyond office supplies


•	execute a new multi-year cost savings plan which is expected to generate approximately $300 million of annualized pre-tax cost savings by the end of 2018, primarily by reducing product costs and increasing our mix of higher margin Staples Brand products, driving productivity in our supply chain, and evolving our pricing and promotional strategies.

Following the termination of its merger agreement with Office Depot and the announcement of the 20/20 Plan, the Company and Ron Sargent mutually agreed it was the right time to transition to new management, and therefore the Company announced in May 2016 that Mr. Sargent would step down from the position of Chief Executive Officer of the Company effective June 14, 2016. The Company and Mr. Sargent entered into a letter agreement providing for monthly payments of $166,740 for a period of 24 months commencing February 2017, as well as certain benefits with an estimated cost of $875,000. The Company recorded a liability for these severance benefits in the second quarter of 2016, the related cost for which is included in Restructuring charges in the condensed consolidated statement of income.

During the third quarter of 2016, the Company recorded restructuring charges of $5 million related to the 20/20 Plan, primarily related to severance benefits associated with strategic changes in the Company's International Operations segment. No material cash payments were made during the third quarter of 2016 related to these charges.

In connection with the $300 million cost savings plan, in the second quarter of 2016 the Company incurred charges of $6 million related to exiting certain product categories in its North American retail stores, of which $4 million is included in Cost of goods sold and occupancy costs and $2 million is included in Impairment of goodwill and long-lived assets in the condensed consolidated statement of comprehensive income (see Note D - Impairment of Goodwill and Long-Lived Assets). No similar costs were incurred in the third quarter of 2016.

In the third quarter and year-to-date 2016, the Company incurred $5 million and $10 million of costs in connection with exploring strategic alternatives for its European operations. These costs are included in Selling, general and administrative expense in the condensed consolidated statement of comprehensive income.

As the Company continues to execute its 20/20 Plan, additional charges may be incurred. The nature and timing of the charges will depend upon the actions that are taken, and cannot be estimated at this time.

2014 Restructuring Plan

In 2014 the Company announced a plan to close at least 225 retail stores in North America by the end of fiscal year 2015. Pursuant to this plan, the Company closed 242 stores in 2014 and 2015. This plan has been extended and the Company expects to close at least 50 additional stores in North America during 2016. In connection with these additional closures, in 2016 the Company currently expects to incur charges of approximately $15 million to $30 million for contractual lease obligations, less than $5 million for severance and up to $10 million in other associated costs. These charges relate to the Company's North American Stores & Online segment.

In 2014 the Company also initiated a cost savings plan to generate annualized pre-tax savings of approximately $500 million by the end of fiscal 2015. Actions related to the cost savings plan were largely complete as of the end of 2015.

During the third quarter and year-to-date 2016, the Company recorded restructuring charges of $2 million and $16 million related to the closure of retail stores, primarily related to lease obligations associated with the closed stores. These charges relate to the Company's North American Stores & Online segment.

During year-to-date 2016, the Company recorded adjustments to reduce the employee-related liabilities by $5 million, primarily as a result of certain changes to the scope of planned initiatives and actual forfeitures being higher than previous estimates. During year-to-date 2016, the Company also recorded adjustments to reduce contractual obligations by $4 million, reflecting lease terminations that were negotiated during this period.

The table below shows a reconciliation of the beginning and ending liability balances for each major type of cost associated with the 2014 Restructuring Plan (in millions):



	2014 Plan
	Employee-Related			Contractual Obligations			Other			Total
Accrued restructuring balance as of January 30, 2016	$	74		$	83		$	1		$	158
Charges	1			10			5			16
Adjustments	(5		)	(4		)	—			(9		)
Cash payments	(37		)	(41		)	(6		)	(84		)
Foreign currency translations	—			1			—			1
Accrued restructuring balance as of October 29, 2016	$	33		$	49		$	—		$	82

In addition to the contractual obligations shown in the table above, the Company also has a related liability of $11 million and $8 million recorded on the condensed consolidated balance sheet as of October 29, 2016 and January 30, 2016, which primarily represents amounts previously accrued to reflect rent expense on a straight-line basis for leased properties which the Company has now ceased using.

For the restructuring liabilities associated with the 2014 Restructuring Plan, $25 million of contractual obligations are included within Other long-term obligations and the remaining balances are included within Accrued expenses and other current liabilities in the Company's condensed consolidated balance sheet as of October 29, 2016. The Company expects that payments related to employee-related liabilities will be substantially completed by the end of the third quarter of fiscal 2017. The Company anticipates that payments related to facility lease obligations will be completed by the end of fiscal year 2025.

In the third quarter and year-to-date 2015, the Company recorded restructuring charges of $22 million and $87 million, respectively, related to the 2014 Restructuring Plan. These charges primarily related to the restructuring of the Company's North American delivery operations and general and administrative functions in Europe and at its corporate headquarters. The Company also recorded $8 million of charges for accelerated depreciation and impairment of long-lived assets in year-to-date 2015, primarily related to the closure of facilities supporting the Company's North American delivery operations.

The table below shows how the restructuring charges would have been allocated if the Company had recorded the expenses within the functional departments of the restructured activities (in millions):



	13 Weeks Ended				39 Weeks Ended
	October 29, 2016		October 31, 2015		October 29, 2016		October 31, 2015
Cost of goods sold and occupancy costs	$	2	$	12	$	15	$	51
Selling, general and administrative	—		10		1		36
Total	$	2	$	22	$	16	$	87