10-K 1 spls10-k01282017.htm SPLS 10-K 01282017 Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________________________________________________________________
FORM 10-K
____________________________________________________________________________

(Mark one)
 
 
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to  ____________________                
For the fiscal year ended:
January 28, 2017
 
Commission File Number:
0-17586
 
STAPLES, INC.
(Exact name of registrant as specified in its charter)
 
stapleslogoa14.jpg
Delaware
(State or other jurisdiction of
incorporation or organization)
Five Hundred Staples Drive,
Framingham, MA 01702
(Address of principal executive office and zip code)
04-2896127
(I.R.S. Employer
Identification No.)

508-253-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.0006 per share
 
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
___________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
The aggregate market value of common stock held by non-affiliates of the registrant, based on the last sale price of Staples' common stock on July 30, 2016, as reported by NASDAQ, was approximately $6.0 billion. In determining the market value of non-affiliate voting stock, shares of Staples' common stock beneficially owned by each executive officer and director have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The registrant had 652,529,821 shares of common stock, par value $0.0006, outstanding as of March 7, 2017.
Documents Incorporated By Reference
Listed below is the document incorporated by reference and the part of the Form 10-K into which the document is incorporated:
 
 
 
 
 
Portions of the Proxy Statement for the 2017 Annual Meeting of Stockholders
Part III
 
 
 




PART I

Item 1.    Business    
Staples, Inc. and its subsidiaries (''we'', ''Staples'' or the ''Company'') is a world-class provider of products and services that primarily serve the needs of business customers of all sizes. We are committed to providing superior value to our customers through a broad selection of products, easy to use websites and mobile platforms, an integrated retail and online shopping experience and a wide range of print and marketing and technology services. We pioneered the office products superstore concept by opening the first office products superstore in Brighton, Massachusetts in 1986 to serve the needs of small businesses, and we currently serve businesses of all sizes and consumers in North America, Australia, South America and Asia. Our delivery businesses account for a majority of our sales and many of our delivery customers place their orders online, making Staples one of the largest internet resellers in the world.

We operate two business segments - North American Delivery and North American Retail - with our remaining foreign operations included in an Other category. Additional information regarding our operating segments is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Annual Report on Form 10-K, and financial information regarding these segments, and regarding geographic areas, is provided in Note O - Segment Reporting in the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K. As noted in Note DDiscontinued Operations in the Notes to the Consolidated Financial Statements, we completed the sale of a controlling interest in our European operations in February 2017.

Strategy
Our vision is we help businesses succeed.  This reflects a multi-year effort to evolve our company to become the product and service destination for businesses in a rapidly evolving and competitive marketplace. In May 2016 we introduced our Staples 20/20 strategic plan with four key priorities to transform Staples. Our priorities include accelerating mid-market growth in North America, preserving profitability and rationalizing excess capacity in North American Retail stores, aggressively driving profit improvement and cost reduction across the Company, and narrowing our geographic focus to North America. In conjunction with our 20/20 strategy, in November 2016 we completed the sale of our retail business in the United Kingdom, and in February 2017 we completed the sale of a controlling interest in our remaining European operations. Our combined European operations are reported as discontinued operations in our consolidated financial statements.

We view the industry in which we sell our products and services as large, fragmented, and diversified. We reach our customers through contract, online, and retail sales channels. Our contract businesses serve mid-market customers with 10 to 200 office workers, as well as larger regional customers and Fortune 1000 companies. Our public websites and mobile platforms primarily target small businesses and organizations with up to 20 office workers. Our retail stores primarily target small businesses, home offices and consumers. Our ability to address our customers' needs expands our market opportunities and increases awareness of the Staples brand. Serving customers of all sizes, and across product and service categories, allows us to benefit from a number of important economies of scale, such as enhanced efficiencies in purchasing, distribution, advertising, and general and administrative expenses.

Our top priority is to continue to improve the service and value we offer customers in a highly competitive industry. We will focus on building scale and credibility in categories beyond office supplies, including facilities supplies and breakroom supplies, furniture, promotional products, technology products and services; increasing mid-market penetration; improving conversion in stores and online; and improving the productivity and efficiency of our store network. Additionally, we are engaged in an ongoing effort to change the way we work and aggressively reduce costs in areas like supply chain, merchandising, store operations, marketing, business process and IT outsourcing, and customer service.

North American Delivery

Our North American Delivery segment consists of the U.S. and Canadian businesses, including Staples Business Advantage, staples.com, staples.ca, and quill.com, that sell and deliver products and services primarily to businesses.  Our strategies for North American Delivery focus on driving increased customer acquisition, retention and share of wallet through customized contract offerings, membership programs and expanding categories beyond office supplies, with a particular focus on the mid-market customer segment. We have merged our Staples Business Advantage and staples.com resources to allow us to better serve mid-market customers regardless of their ordering platform, supported by world-class selling, digital and omni-channel capabilities. We are also focused on serving our customers by evolving our team-based contract selling model to be more unified and

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collaborative. We are driving growth in categories beyond core office supplies by adding specialists who have expertise in selling products like facilities supplies, breakroom supplies, furniture, promotional products and technology products.

Staples Business Advantage, our North American contract business, focuses on serving the needs of mid-market businesses and organizations as well as larger regional businesses and Fortune 1000 companies. We offer full service account management, free delivery, customized pricing and payment terms, usage reporting, the stocking of certain proprietary items and a wide assortment of environmentally friendly products and services.

Staples.com and staples.ca are designed to reach a variety of customers, including small businesses, home offices and consumers, offering next business day delivery for most orders in the majority of our markets. We have recently made significant investments in talent, technology, and pricing, while expanding our assortment to enhance the customer experience online. We have successfully launched new desktop and mobile platforms, improved site speed, enhanced usability, and increased customer conversion.

Quill.com uses a targeted approach to serve the needs of small and mid-sized businesses in the United States. Quill.com has rapidly expanded its assortment in categories beyond office supplies to serve the evolving needs of its customers. To attract and retain its customers, quill.com seeks to offer outstanding customer service, and builds loyalty through its Quill brand products and special services. Quill.com also offers a specialized assortment of office supplies and products for health care professionals.

North American Retail

Our North American Retail segment includes our retail stores in the U.S. and Canada.  Our strategy for North American Retail focuses on offering easy-to-shop stores with products that are readily available and easy to find, and courteous, helpful and knowledgeable sales associates while preserving profitability through increased customer conversion, cost reductions and growing our services businesses. Our goals are to continue to be a destination for core office supply categories like ink, toner and paper as well as products and services beyond office supplies, such as print and marketing services, facilities supplies, breakroom supplies and technology products and services. Our associates are trained to deliver excellent service by engaging with customers, focusing on solution selling, and encouraging customers to shop across channels.

We operate a portfolio of retail store formats, tailored to the unique characteristics of each location. Our North American Retail segment consisted of 1,255 stores in the United States and 304 stores in Canada at the end of fiscal 2016. In an effort to improve store productivity and effectively manage our cost structure, we closed 242 stores in 2014 and 2015 combined and 48 stores in 2016, and we expect to close approximately 70 additional stores in 2017.

Other
In addition to our two operating segments, we have other businesses in Australia, South America and Asia. The markets for office products and services in these countries are highly fragmented. Staples Australia serves primarily contract and government customers in Australia and New Zealand. We also have operations in China, Argentina, Taiwan and Brazil.

Merchandising and Marketing

Our objective is to be the preferred provider of virtually all those essential products and services that businesses of all sizes need to succeed. As a result, we sell a wide variety of office supplies, business technology products, facilities supplies, breakroom supplies, computers and mobility products, print and marketing services and office furniture. The Staples merchandising team constantly reviews and updates our product assortment and services offering to respond to changing customer needs and to maximize the performance of key categories. One of our top priorities is to continue to expand our product and services offering beyond office supplies. Over the past few years, we have had considerable success driving growth in relevant categories such as facilities supplies and breakroom supplies.

The merchandising team uses integrated systems to perform the vast majority of our merchandise planning and product purchasing. Some of our business units, particularly quill.com and our Canadian operations, leverage our global buying and merchandising staff along with local staff to meet their specific buying and merchandising needs. We purchase products from thousands of vendors around the world and we believe that competitive sources of supply are available to us for substantially all of the products we carry.

Our own brand offering includes Staples, Quill and other proprietary branded products which in aggregate represented approximately 29% of our sales in 2016. We offer more than 10,000 own brand products and services, including an assortment

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of products with various environmentally friendly attributes, which we sell under the “Sustainable Earth” brand label. Staples own brand products deliver genuine value to our customers with prices that are at least 10% lower than the national brand yet are of a comparable quality. We realize higher gross margins for our own brand products than for national brands. Our own brand strategy is based on offering a portfolio of products that meet customers’ needs across a broad variety of product categories and price points. The largest portion of our own brand portfolio focuses on offering national brand quality at lower prices. We have also developed a selection of opening price point products for more price conscious customers, and a number of unique and innovative own brand products to help further differentiate Staples in the marketplace. Our sourcing office in Shenzhen, China supports our own brand strategy by driving higher quality and lower costs, and by enabling Staples to bring new products to market more quickly. In addition to our proprietary branded products, we also differentiate our core product offering through exclusive third-party relationships. 

In addition to products, we also offer a broad array of services, which represented 9% of our sales in 2016. This includes print and marketing services that we provide to our retail and delivery customers, as well as technology services that we provide in North American Stores and on our public websites and mobile platforms. As with the markets for our products, the market for these services is highly fragmented, and we believe we have a significant opportunity to offer these services to existing customers and acquire new customers.
    
See Note O - Segment Reporting in the Notes to the Consolidated Financial Statements for a summary of our sales by each major category.

Our "Make More Happen" brand campaign utilizes the full spectrum of digital and traditional marketing vehicles to drive brand awareness, establish relevancy and increase consideration, contributing significantly to our sales among current customers and to our new customer acquisition efforts. These vehicles include digital display, paid search, email, television, radio, newspaper circulars, direct mail, public relations and social media. In addition, we market to larger customers through a combination of inside and outside sales force supported with selling aids and digitally-driven marketing qualified leads. We change the level of marketing spend, as well as the mix of media employed, depending upon market, customer value, seasonal focus, and other cost factors. This flexible approach helps us to optimize the effectiveness and efficiency of our marketing expenditures. We continue to improve our systems and capabilities to track our customers' multi-channel purchasing behaviors, execute more effective personalized and dynamic offers, and promote enhanced direct marketing and customer loyalty programs to drive higher sales across all our channels.
Supply Chain
We operate two networks to fulfill the majority of our customer delivery and store replenishment needs in North America. Our network of 50 delivery fulfillment centers supports our North American Delivery operations. We currently fulfill the majority of customers’ orders through this distribution network, which provides for next day delivery coverage to more than 95% of the North American population. We rely on our vendor partners to fulfill orders and deliver products to our customers from our expanded assortment that is not stocked in our delivery fulfillment centers.

We operate a separate network of four large distribution centers to support the majority of replenishment demand from our U.S. retail store operations. Our retail distribution centers provide us with significant labor and merchandise cost savings by centralizing receiving and handling functions, and by enabling us to purchase in full truckloads and other economically efficient quantities from suppliers. Our centralized purchasing and distribution systems enable our store associates to spend more time on customer service and presentation. Since our distribution centers maintain backup inventory, our in-store inventory requirements are reduced, allowing us to more efficiently operate our retail stores.
Competition
As we focus on accelerating growth in Staples Business Advantage, we are competing against a growing and diverse set of competitors, including other office supplies distributors, wholesalers, networks of regional suppliers, managed print service companies, contract stationers, electronic commerce distributors, regional and local dealers, direct manufacturers of the products we distribute, and companies focused on adjacent categories such as maintenance, repair and operation providers. We also compete with online retailers such as Amazon.com, mass merchants such as Walmart and Target, warehouse clubs such as Costco, computer and electronics retail stores such as Best Buy, specialty technology stores such as Apple, print and marketing businesses such as FedEx Office, and a wide range of other retailers, including grocery stores, drug stores, discount retailers, and traditional office supply retail stores. Many of our competitors have increased their presence in our core product areas in recent years, and we expect this trend to continue going forward.

We believe we are able to compete favorably against our competitors because of the following factors: our focus on business customers; our management team's ability to respond to the dynamic markets in which we operate and the changing needs of our customers; courteous, helpful and knowledgeable associates focused on making shopping easy for customers; a wide

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assortment of products and services, on our websites and in our stores; easy to use websites and mobile platforms; reliability and speed of order shipment; convenient store locations; hassle-free returns and competitive prices.

Trademarks, Patents, Copyrights and Domain Names

We own or have applied to register numerous trademarks and service marks in the United States and throughout the world in connection with our businesses. Some of our principal global and regional marks include Staples, the Staples red brick logo, "Make More Happen", Staples the Office Superstore, the Easy Button logo, ''that was easy," Quill.com, Corporate Express and many other marks incorporating ''Staples" or another primary mark, which in the aggregate we consider to be of material importance to our business. While the duration of trademark registrations varies from country to country, trademarks are generally valid and may be renewed indefinitely so long as they are in use and their registrations are properly maintained.

In connection with the sale of a controlling interest in our European operations, we granted the divested business (excluding our former retail business in the United Kingdom) an exclusive, perpetual, royalty-free license to use certain intellectual property, including the Staples trade name, in the relevant territory.

We own and maintain a number of products, systems, business processes and designs, many of which have been patented. We also own copyrights for works such as packaging, training materials, promotional materials, computer software, in-store graphics, website and multi-media content. In addition, we have registered and maintain numerous internet domain names, including many that incorporate "Staples."
Available Information
We maintain a web site with the address www.staples.com. We are not including the information contained on our web site as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our web site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission ("SEC").

We were organized in 1985 and are incorporated in Delaware. As of January 28, 2017, Staples employed 45,565 full-time and 31,875 part-time associates (includes both continuing and discontinued operations).

EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, their respective ages and positions as of March 9, 2017 and a description of their business experience are set forth below. There are no family relationships among any of our executive officers and directors.
Mark Conte, age 51
Mr. Conte has served as Staples’ Senior Vice President and Corporate Controller since June 2015.  Prior to joining Staples, Mr. Conte served as Chief Financial Officer of Hanson Building Products Limited, a multinational manufacturer of concrete pipe, pressure pipe and light building products, since June 2014, and also served as its Principal Accounting Officer. Mr. Conte served as Corporate Controller and Chief Accounting Officer of Lehigh Hanson North America - HeidelbergCement Group which had acquired Hanson. Mr. Conte joined Hanson North America - Hanson PLC in July 2000 as the Corporate Controller, and in 2007 he assumed responsibility of the Operations Controller for the Materials business.
Joseph G. Doody, age 64
Mr. Doody has served as Vice Chairman since February 2014. Prior to that he served as President—North American Commercial from January 2013 to January 2014. Previously, Mr. Doody served as President—Staples North American Delivery since March 2002. Prior to that, he served as President—Staples Contract & Commercial from November 1998, when he first joined Staples.
Shira Goodman, age 56
Ms. Goodman has served as President and Chief Executive Officer since September 2016, as President and interim Chief Executive Officer from June 2016 to September 2016, and as President, North American Operations from January 2016 to June 2016. Previously, she served as President, North American Commercial since February 2014, Executive Vice President of Global Growth since February 2012, Executive Vice President of Human Resources since March 2009, and Executive Vice President of Marketing since May 2001.  Prior to that, she served in various capacities since joining Staples in 1992, including Senior Vice President of Staples Direct, Senior Vice President of Brand Marketing, and Vice President of Contract & Commercial.

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Jeffrey Hall, age 50
Mr. Hall has served as Vice Chairman and Chief Administrative Officer since January 2017. Prior to joining Staples, he served as Executive Vice President Finance & Administration and Chief Financial Officer of SunEdison Semiconductor Limited, a global leader in the manufacture and sale of silicon wafers to the semiconductor industry, since December 2013. Previously, Mr. Hall served as the Executive Vice President and Chief Financial Officer for Express Scripts Holding Company, an integrated pharmacy benefit management services provider, from 2008 to 2013. Prior to joining Express Scripts, Mr. Hall was with KLA-Tencor Corporation, a provider of process control and yield management solutions, since 2000 in various leadership positions with increasing roles and responsibilities, including serving as Senior Vice President and Chief Financial Officer from 2006 to 2008.
Christine T. Komola, age 49
Ms. Komola has served as Executive Vice President and Chief Financial Officer since March 2013. Prior to that she served as Senior Vice President and Chief Financial Officer from February 2012 to March 2013, and Senior Vice President and Corporate Controller from July 2004 to January 2012. She also served as the Senior Vice President, General Merchandise Manager for furniture from January 2002 to July 2004. She has also held other roles within Staples since joining in April 1997, including Assistant Controller, Vice President of Planning, Margin and Control and Chief Financial Officer of Staples.com.
Steven Matyas, age 63
Mr. Matyas has served as President, North American Retail since June 2016, and as President of Staples Canada from July 2000 to May 2016. He also served as Senior Vice President, Sales and Operations of Staples Canada from August 1994 to July 2000, and Vice President, Sales, Operations and Human Resources of The Business Depot, Ltd. from March 1991 until its acquisition by Staples in 1994.
Neil Ringel, age 52
Mr. Ringel has served as President, North American Delivery since January 2017, as Executive Vice President, Staples Business Advantage from October 2012 to January 2017, and as Senior Vice President, Staples Business Advantage from June 2006 to October 2012. He has also held other roles within Staples since joining in January 1995, including Vice President of Sales - East, Regional Vice President - Sales, and Vice President - SBA Operations.
Michael Williams, age 63
    Mr. Williams has served as Chief Legal Officer and Secretary since January 2017, Executive Vice President, General Counsel and Secretary from December 2014 to January 2017, and previously as Senior Vice President, General Counsel and Secretary from November 2012 to December 2014. Prior to joining Staples, Mr. Williams served as Executive Vice President, General Counsel and Secretary of Sony Electronics, Inc., a consumer electronics company, from March 2004 to October 2012 with responsibility for legal operations of several professional and consumer electronics companies in the U.S., Central America and South America.

FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and, in particular, the description of our Business set forth in Item 1 and our Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Appendix B ("MD&A") contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 ("the Exchange Act").
Any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements. You can identify these forward-looking statements by use of the words like "believes," "expects," "anticipates," "plans," "may," "will," "would," "intends," "estimates" and other similar expressions, whether in the negative or affirmative. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management's beliefs and assumptions and should be read in conjunction with our MD&A, our consolidated financial statements and notes to consolidated financial statements included in Appendix C. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in the forward-looking statements made. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, without limitation, those set forth below under the heading "Risk Factors" as well as risks that emerge from time to time that are not possible for us to predict. Forward-looking statements, like all statements in this report, speak only as of the date of this report (unless another earlier date is indicated).

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We disclaim any obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.
Item 1A.    Risk Factors

Risks Related to the Business    

If we fail to meet the changing needs of our customers our business and financial performance could be adversely affected.

We are currently engaged in a multi-year effort to evolve our business to meet the changing needs of business customers. One of our top priorities is to expand our product and service offerings beyond traditional core office supplies, a category that is declining. Over the past few years we have had success driving growth in adjacent product categories, such as facilities supplies, breakroom supplies, and print and marketing services. Our success is dependent on providing our customers the selection of products, as well as services, at competitive prices that meet customers' changing needs and purchasing habits. If we misjudge either the demand for products and services we sell or our customers' purchasing habits and tastes, we may be faced with excess inventories of some products or missed opportunities for products and services we do not offer. Failure to provide the products and services preferred by our customers could have a material adverse effect on our revenue, results of operations and ability to attract and retain customers.
    
We face uncertainties transforming our business, and our inability to successfully implement our strategies could adversely affect our business and financial performance.

As part of our continuing efforts to transform our business, in 2016 we announced our 20/20 business strategy with four priorities: (i) accelerating growth in the mid-market in North America, including through acquisitions; (ii) preserving profitability in North American stores; (iii) taking aggressive action to drive profit improvement and reduce costs across the organization, including a plan to generate approximately $300 million of annualized pre-tax cost savings by the end of 2018, primarily through reducing product costs, optimizing promotions, increasing the mix of own-brand products and reducing operating expenses; and (iv) narrowing our geographic focus to North America, including through the divestiture of our European operations. We plan to close approximately 70 North American retail stores in 2017 in connection with our 20/20 strategy. Charges will be required as a result of implementing our plans, and additional charges may be required if we adopt new strategies for the future. The success of our plans is subject to both the risks affecting our business generally and the inherent difficulty associated with implementing our new strategies, and is also dependent on the skills, experience, and efforts of our management and other associates and our success with third parties. To the extent we pursue acquisitions or other operational and strategic opportunities, our success will depend on selecting the appropriate targets or partners, completing integration efforts quickly and effectively and realizing any expected synergies and cost savings. To the extent we make investments in our business, such as investments to accelerate growth in our mid-market contract business, these investments may not generate incremental revenue or increase profitability in proportion to their cost, or at all. There is no assurance that we will be able to successfully implement our strategic initiatives or that the implementation of changes will result in the benefits or costs savings at the levels that we anticipate or at all, which may result in an adverse impact on our business and financial statements.

We operate in a highly competitive market and we may not be able to continue to compete successfully.
 
As we expand our assortment of products and services we compete against a growing and diverse set of competitors, including other office supplies distributors, wholesalers, networks of regional suppliers, managed print service companies, contract stationers, electronic commerce distributors, regional and local dealers, direct manufacturers of the products we distribute, and companies focused on adjacent categories such as maintenance, repair and operation providers. We also compete with online retailers such as Amazon.com, mass merchants such as Walmart and Target, warehouse clubs such as Costco, computer and electronics retail stores such as Best Buy, specialty technology stores such as Apple, print and marketing businesses such as FedEx Office, and a wide range of other retailers, including grocery stores, drug stores, discount retailers, and traditional office supply retail stores. Many of our competitors have increased their presence in our historic core product areas in recent years, for example by expanding their assortment of office products and services, opening new stores near our existing stores, and offering direct delivery of office products, and we expect this trend to continue going forward. Intense competitive pressures from one or more of our competitors could affect prices or demand for our products and services. If we are unable to appropriately respond to these competitive pressures, or offer the appropriate mix of products and services at competitive prices, our financial performance and market share could be adversely affected. Some of our current and potential competitors are larger than we are, may have more experience in selling certain products or delivering services or may have substantially greater financial resources.

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Macroeconomic conditions could adversely affect our business and financial performance.

As a world-class provider of products and services that operates globally to serve the needs of business customers and consumers, our operating results and performance depend significantly on North American and worldwide economic conditions and their impact on business and consumer spending. Increases in the levels of unemployment, particularly white collar unemployment, energy and commodity costs, health care costs, higher interest rates and taxes, tighter credit markets, reduced consumer credit availability, fluctuation in the financial markets, lower consumer confidence, lack of small business formation and other factors could result in a decline in business and consumer spending. Our business and financial performance may continue to be adversely affected, and our ability to generate cash flow may be negatively impacted, by current and future economic conditions if there is a renewed decline in business and consumer spending or if such spending remains stagnant.

Compromises of our information systems or unauthorized access to confidential information or personal information may materially harm our business or damage our reputation.

Through our sales and marketing activities and our business operations, we collect and store confidential information and certain personal information from our customers, end users of our services, vendors, business partners and associates. For example, we handle, collect and store personal information in connection with our customers purchasing products or services, enrolling in our promotional or rewards programs, registering on our web site or otherwise communicating or interacting with us. We also accept payments using a variety of methods, including debit and credit cards, gift cards, electronic transfer of funds, and others. We rely on third parties to provide payment processing services or make certain payments on our behalf. In addition, in the normal course of business, we gather and retain personal information about our associates and generate and have access to confidential business information. We may share confidential and personal information with vendors or other third parties in connection with processing of transactions, operating certain aspects of our business or for marketing purposes. Although we have taken steps designed to safeguard such information, there can be no assurance that such information will be protected against loss or unauthorized access, acquisition, use or disclosure. For example, computer hackers may penetrate our or our vendors' network security and, if successful, misappropriate such information or interfere with our ability to access such information. A Staples associate, contractor or other third-party with whom we do business may misuse confidential or personal information to which they have access; attempt to circumvent our security measures; or inadvertently cause a breach involving such information. Additionally, methods to obtain unauthorized access to confidential information change frequently, are increasingly sophisticated and may be difficult to detect or remediate, which can impact our ability to respond appropriately. We could be subject to liability for failure to comply with privacy and information security laws, for failing to protect personal information, for failing to respond appropriately, or for misusing personal information, such as use of such information for an unauthorized marketing purpose. Loss, interference with our ability to access, unauthorized access to, or misuse of confidential or personal information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on our business, financial condition and results of operations.

We have investigated, with the assistance of outside experts, a data security incident involving unauthorized access into the computer systems of PNI Digital Media Ltd ("PNI"), a subsidiary we acquired in July 2014. PNI, which is based in Vancouver, British Columbia, provides a software platform that enables retailers to sell personalized products such as photo prints, photo books, calendars, business cards, stationery and other similar products. PNI’s customers include a number of major third party retailers, as well as our affiliates. The investigation determined that an unauthorized party entered PNI’s systems and was able to deploy on some of PNI’s servers supporting its customers, malware designed to capture data that end users input on the photosites. Some of PNI's affected customers have notified certain of their users of a potential compromise of the users' payment card information and/or other personal information. PNI took prompt steps to contain the incident, including disabling the retailer photosites, or online payment transactions, for a period while the incident was being investigated, and to further enhance the security of its retailer customers' data. To date the Company has incurred incremental expenses of $18 million related to the incident. Additional losses and expenses relating to the incident are probable; however, at this stage, we do not have sufficient information to reasonably estimate such losses and expenses. The types of losses and expenses that may result from the incident include, without limitation: claims by PNI’s retailer customers, including indemnification claims for losses and damages incurred by them; claims by end-users of PNI’s services, including class action lawsuits that have been filed, and further class action lawsuits that may be filed, in Canada and the United States; investigations and claims by various regulatory authorities in Canada and the United States; the costs of completing our investigation of the incident; remediation costs; and legal fees. We will continue to evaluate information as it becomes known and will record an estimate for losses or expenses at the time or times when it is both probable that any loss has been incurred and the amount of such loss is reasonably estimable. Such losses may be material to our results of operations and financial condition. We maintain network-security insurance coverage, which we expect would help mitigate the financial

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impact of the incident. The incident has resulted in a loss of business for PNI and may result in further reputational and other harm to us going forward.

Problems in our information systems and technologies may disrupt our operations.
 
We rely heavily on various information systems and technology to sell and deliver our products and services and operate our business, including systems to track inventory, to process and record transactions, to generate financial reports and to communicate with our associates, vendors and customers. As we continue to accelerate our growth online, our ability to attract and retain customers, compete and operate effectively is dependent on a consistent, secure and easy to use technology infrastructure with uninterrupted availability and reliable back-up systems. Any disruption to the internet or our technology infrastructure, including a disruption or incident affecting our web sites and information systems, including without limitation a denial of service or ransomware attack, may cause a decline in our customer satisfaction, jeopardize accurate financial reporting, impact our sales volumes or result in increased costs. Hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly disrupt our operations or compromise our information security. Although we continue to invest in our technology, if we are unable to continually add software and hardware, effectively manage or upgrade our systems and network infrastructure, and develop effective system availability, disaster recovery plans and protection solutions, our business could be disrupted thus subjecting us to liability and potentially harming our reputation.

In addition, we periodically make modifications and upgrades to our information systems and technology. Some of our information systems are outsourced to third parties. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. Although we make a diligent effort to ensure that all providers of outsourced services observe proper internal control practices and procedures, we cannot assure that failures will not occur. We are aware of inherent risks associated with replacing our systems, including accurately capturing data, system disruptions and outsourcing to third parties. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.

We may be unable to attract, train, engage and retain qualified associates.
 
Our customers across all channels value courteous and knowledgeable associates. Accordingly, our performance depends on attracting, training, engaging and retaining a large number of qualified associates, as well as business leaders and other key technology, sales, supply chain, marketing and support personnel. We face intense competition for qualified associates and other key employees, particularly in tight labor markets or in specialized areas of technical expertise. Many of our associates, particularly in retail stores, are in entry-level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling our labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the workforce, unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs, the attractiveness of our incentive compensation plans, and the cost of compliance with labor and wage laws and regulations. We have experienced reductions in force in connection with our restructuring activity, which may lead to lower associate engagement, gaps in experience and knowledge, and a higher likelihood that remaining associates terminate their employment. If we are unable to attract, train, engage and retain a sufficient number of qualified associates and key employees, our business and financial performance may be adversely affected.

Our quarterly operating results are subject to significant fluctuation.
 
Our operating results have fluctuated from quarter to quarter in the past, and we expect that they will continue to do so in the future. Historically, sales and profitability are generally stronger in the second half of our fiscal year than the first half of our fiscal year due in part to back-to-school and back-to-business seasons.  Factors that could also cause these quarterly fluctuations include: the mix of products sold; pricing actions of competitors; the level of advertising and promotional expenses; the expense and outcome of legal proceedings; severe weather; consumer confidence; and the other risk factors described in this section. Most of our operating expenses, such as occupancy costs and associate salaries, do not vary directly with the amount of sales and are difficult to adjust in the short term. As a result, if sales in a particular quarter are below expectations, we may not proportionately reduce operating expenses for that quarter, and therefore such a sales shortfall may have a disproportionate effect on our net income for the quarter.

The divestiture of our European operations could harm our business, financial condition and results of operations.

On February 27, 2017, we completed the sale of our European operations to a third party buyer as part of our 20/20 business strategy. Following the divestiture of our European operations, we will be a smaller, less diversified company with a narrower business focus and restricted from operating in Europe, and we may be more vulnerable to changing market conditions, which could materially adversely affect our business, results of operations and financial condition. We have licensed certain Staples

8



trademarks and other intellectual property to the divested business, and the actions of the divested business, including misuse of the intellectual property, could harm our brand and reputation. We may also incur losses as a result of indemnification obligations, challenges in separating business operations and in servicing or retaining joint global customers, the provision of transition services, and our continuing minority ownership; in each case related to the divested operations.

Our international operations expose us to risks inherent in foreign operations.
 
Although we have divested our European operations, we continue to operate in countries outside the United States. In certain international market segments, we may not benefit from any first-to-market advantages or otherwise succeed. Cultural differences abroad and local practices of conducting business may conflict with our own business practices and ethics standards. Ensuring compliance with foreign and U.S. laws and our own policies may require that we implement new operational systems and financial controls, conduct audits or internal investigations, train our associates and third parties on our existing compliance methods, and take other actions, all of which may be expensive, divert management's time and impact our operations. There are also different employee/employer relationships that may delay or impact the implementation of some of these operational systems. In addition, differences in business practices in our international markets may cause customers to be less receptive to our business model than we expect.
 
Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences and greater difficulty in enforcing intellectual property rights. Other factors that may also have an adverse impact on our international operations include limitations on the repatriation and investment of funds, foreign currency exchange restrictions, complex import and export schemes, increased local competition, our lack of familiarity with local customer preferences, unfavorable foreign trade policies, unstable political or economic conditions, and geopolitical events, including war and terrorism.

Our effective tax rate may fluctuate.

We are a multi-national, multi-channel provider of products and services. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. Our effective tax rate may be lower or higher than our tax rates have been in the past due to numerous factors, including the sources of our income, any agreements we may have with taxing authorities in various jurisdictions, changes in the laws and the tax filing positions we take in various jurisdictions. In addition, our effective tax rate may fluctuate quarterly, and the resulting tax rate may be negative or unusually high as a result of significant charges in a quarter that are not tax deductible, such as goodwill and long-lived asset impairment. We base our estimate of our effective tax rate at any given point in time upon a calculated mix of the tax rates applicable to our company and to estimates of the amount of business likely to be done in any given jurisdiction. The loss of one or more agreements with taxing jurisdictions, a change in the mix of our business from year to year and from country to country, changes in rules related to accounting for income taxes, adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, or changes in domestic tax policy or tax laws in any of the multiple jurisdictions in which we operate could result in an unfavorable change in our effective tax rate which could have an adverse effect on our business and results of operations.

Fluctuations in foreign exchange rates could lead to lower earnings.
 
Sales from our delivery operations and stores outside the U.S. are denominated in the currency of the country in which these operations or stores are located and changes in foreign exchange rates affect the translation of the sales and earnings of these businesses into U.S. dollars for financial reporting purposes. Additionally, merchandising agreements may also be denominated in the currency of the country where the vendor resides. Although we attempt to mitigate such risks by sometimes entering into foreign exchange hedges or utilizing risk management strategies, such hedges and strategies themselves present some risk and thus may not be entirely successful in mitigating the risk.

Our indebtedness could adversely affect us by reducing our flexibility to respond to changing business and economic conditions.
As of January 28, 2017, our consolidated outstanding debt was $1.0 billion and we also had $1.1 billion of additional borrowing capacity under our commercial paper program, revolving credit facility and other lines of credit. We are not restricted from incurring substantial additional indebtedness in the future. Incurring substantial indebtedness in the future could reduce our ability to obtain additional financing for working capital, capital expenditures, acquisitions, and other general corporate purposes and could make us more vulnerable to economic downturns and economic pressures. Our level of indebtedness may also place us at a competitive disadvantage against less leveraged competitors. If we default or breach our obligations, we could be required to pay a higher rate of interest or lenders could require us to accelerate our repayment obligations. If we were to experience a credit rating downgrade in future periods, we may incur higher interest costs on future financings and it may limit our ability to participate in the commercial paper market.

9




Our expanded offering of proprietary branded products and services may not improve our financial performance and may expose us to intellectual property liability, product liability, import/export liability, government investigations and claims, and other risks associated with global sourcing.
 
Our product offering includes Staples, Quill and other proprietary branded products and services, which represented approximately 29% of our sales in fiscal 2016 and which typically generate higher margins than national brand products and services. Our proprietary branded products compete with other manufacturers' branded items that we offer. An increase in our proprietary branded products and services also exposes us to added risks that could increase the cost of doing business, such as third party intellectual property infringement, false advertising, and product liability claims against us with respect to such products and services; increased tariffs on goods we import, particularly in light of current uncertainty with respect to U.S. trade policy; and import and export compliance issues. Furthermore, although we have implemented policies and procedures designed to facilitate compliance with laws and regulations relating to importing and exporting merchandise, there can be no assurance that contractors, agents, vendors, manufacturers or other third parties with whom we do business will not violate such laws and regulations or our policies, which could subject us to liability and could adversely affect our operations or operating results. We also have greater exposure and responsibility to the consumer for replacements as a result of product defects. If any of our customers are harmed by our proprietary branded products or services, they may bring product liability and other claims against us or we may have to issue voluntary or mandatory recalls.
The more proprietary branded products and services we offer, the more these risks increase. A loss of consumer acceptance of these products could also adversely affect our sales and gross margin rates. Any of these circumstances could damage our reputation and have an adverse effect on our business and financial performance.
Our business may be adversely affected by the actions of and risks associated with third-parties.
 
The products we sell are sourced from a wide variety of third-party vendors and as we expand our assortment we rely on third parties to fulfill our customer orders and deliver products directly to our customers. In general, we do not have long-term contracts with our vendors or third parties committing them to provide products to us on acceptable terms. For example, we derive benefits from vendor allowances and promotional incentives which may not be offered in the future. We also cannot control the supply, design, function or cost of many of the products that we offer for sale. Some of the products we offer are supplied to us on an exclusive basis and may be difficult to replace in a timely manner. Additionally, third parties may not live up to the delivery promises they have made to our customers. Disruptions in the availability of products or services purchased through third parties, or quality issues that cause us to initiate voluntary or mandatory recalls for products we sell on an exclusive basis, may result in customer dissatisfaction, damage our reputation and adversely affect our sales.

Global sourcing of many of the products we sell is an important factor in our financial performance. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced outside the United States. Political instability, the financial instability of suppliers, trade restrictions, tariffs, foreign currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control. We also rely upon many independent service providers for services that are important to many aspects of our business. If our service providers fail or are unable to perform as expected and we are unable to replace them quickly, our business could be harmed at least temporarily until we are able to do so and potentially, in some cases, permanently. These and other issues could adversely affect our reputation, business and financial performance.

Various legal proceedings may adversely affect our business and financial performance.
 
We are involved in various private legal proceedings, which include consumer, employment, intellectual property, commercial, tort and other litigation. We are subject to potentially increasing challenges by private litigants regarding compliance with local, state and national labor regulations, whether meritorious or not.  In addition, companies have increasingly been subject to employment related class action litigation, and we have experienced “wage and hour” class action lawsuits.  We expect that these trends will continue to affect us. We are also subject to claims that the technology we use or the products we sell infringe intellectual property rights of third parties. Such claims, whether meritorious or not, involve significant managerial resources and can become costly. Generally, we have indemnification protections in our agreements which our vendors or licensors often have honored; however, there are no assurances that such vendors or licensors will continue to do so in the future. We estimate exposure and establish reserves for our estimated significant liabilities, however, litigation is inherently unpredictable and the outcome of legal proceedings and other contingencies could be unexpected. Some verdicts or decisions may not be reasonable or based on law or prior precedent, in which case we will vigorously contest and appeal such decisions. Other outcomes may require us to pay substantial amounts of money or take actions that adversely affect our operations. In addition, defending against these claims may involve significant time and expense. Given the large size of our operations and workforce, the visibility of our brand and our

10



position as an industry leader, we may regularly be involved in legal proceedings that could adversely affect our business and financial performance.

Failure to comply with laws, rules and regulations could negatively affect our business operations and financial performance.

Our business is subject to federal, state, local and international laws, rules and regulations, such as state and local wage and hour laws, the U.S. Foreign Corrupt Practices Act, the False Claims Act, the Employee Retirement Income Security Act (“ERISA”), securities laws, import and export laws (including customs regulations), privacy and information security regulations, product safety, warranty or recall regulations, unclaimed property laws, and many others. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to legal and regulatory requirements, increased enforcement and our ongoing expansion into new markets and new channels. In addition, as a result of operating in multiple countries, we must comply with multiple foreign laws and regulations that may differ substantially from country to country and may conflict with corresponding U.S. laws and regulations. We may also be subject to investigations or audits by governmental authorities and regulatory agencies, which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an industry, country or practice. If we fail to comply with laws, rules and regulations or the manner in which they are interpreted or applied, we may be subject to government enforcement action, class action litigation or other litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of regulatory compliance, any of which could adversely affect our results of operations and financial performance.

Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of January 28, 2017, for our continuing operations we operated a total of 1,583 retail stores in 46 states and the District of Columbia in the United States, 10 provinces and 2 territories in Canada, and in Argentina, Australia and Brazil. As of that same date, we also operated 78 distribution and fulfillment centers in 25 states in the United States, 7 provinces in Canada, and in China, Argentina, Brazil, Taiwan and Australia.

11



The following table sets forth the locations of our facilities related to our continuing operations as of January 28, 2017:
RETAIL STORES
Country/State/Province/Region/Territory
 
Number of
Stores
 
Country/State/Province/Region/Territory
 
Number of
Stores
 
Country/State/Province/Region/Territory
 
Number of
Stores
United States
 
 
 
New Jersey
 
71

 
Canada
 
 
Alabama
 
10

 
New Mexico
 
9

 
Alberta
 
39

Arizona
 
24

 
New York
 
112

 
British Columbia
 
41

Arkansas
 
7

 
North Carolina
 
44

 
Manitoba
 
10

California
 
175

 
North Dakota
 
2

 
New Brunswick
 
8

Colorado
 
17

 
Ohio
 
50

 
Newfoundland
 
4

Connecticut
 
33

 
Oklahoma
 
16

 
Nova Scotia
 
12

Delaware
 
7

 
Oregon
 
17

 
Northwest Territories
 
1

District of Columbia
 
1

 
Pennsylvania
 
87

 
Ontario
 
112

Florida
 
74

 
Rhode Island
 
8

 
Prince Edward Island
 
2

Georgia
 
28

 
South Carolina
 
20

 
Quebec
 
64

Idaho
 
8

 
South Dakota
 
1

 
Saskatchewan
 
10

Illinois
 
32

 
Tennessee
 
17

 
Yukon
 
1

Indiana
 
20

 
Texas
 
47

 
Total Canada
 
304

Iowa
 
12

 
Utah
 
10

 
 
 
 
Kansas
 
5

 
Vermont
 
6

 
 
 
 
Kentucky
 
14

 
Virginia
 
38

 
Argentina
 
14

Maine
 
10

 
Washington
 
23

 
Australia
 
9

Maryland
 
38

 
West Virginia
 
4

 
Brazil
 
1

Massachusetts
 
62

 
Wisconsin
 
7

 
 
 
1,583

Michigan
 
34

 
Wyoming
 
3

 
 
 
 
Minnesota
 
5

 
Total United States
 
1,255

 
 
 
 
Missouri
 
10

 
 
 
 
 
 
 
 
Montana
 
7

 
 
 
 
 
 
 
 
Nebraska
 
4

 
 
 
 
 
 
 
 
Nevada
 
6

 
 
 
 
 
 
 
 
New Hampshire
 
20

 
 
 
 
 
 
 
 

12



DISTRIBUTION AND FULFILLMENT CENTERS
Country/State/Province/Region/Territory
 
Number of
Centers
 
Country/State/Province/Region/Territory
 
Number of
Centers
United States
 
 
 
Canada
 
 
Arizona
 
1

 
Alberta
 
3

Alaska
 
1

 
British Columbia
 
2

California
 
4

 
Manitoba
 
1

Colorado
 
1

 
New Foundland
 
1

Connecticut
 
2

 
Nova Scotia
 
2

Florida
 
1

 
Ontario
 
3

Georgia
 
2

 
Quebec
 
2

Idaho
 
1

 
Total Canada
 
14

Illinois
 
1

 
 
 
 
Indiana
 
1

 
China
 
8

Iowa
 
2

 
Argentina
 
1

Kansas
 
1

 
Brazil
 
1

Maryland
 
2

 
Taiwan
 
1

Massachusetts
 
2

 
Australia
 
13

Minnesota
 
2

 
 
 
78

New Jersey
 
1

 
 
 
 
New York
 
2

 
 
 
 
North Carolina
 
2

 
 
 
 
Ohio
 
1

 
 
 
 
Oregon
 
3

 
 
 
 
Pennsylvania
 
1

 
 
 
 
Tennessee
 
1

 
 
 
 
Texas
 
3

 
 
 
 
Washington
 
1

 
 
 
 
Wisconsin
 
1

 
 
 
 
 
 
 
 
 
 
 
Total United States
 
40

 
 
 
 
 
 


 
 
 
 
Most of the existing facilities are leased by us with lease terms expiring between 2017 and 2026. In many instances, we have renewal options at increased rents. Leases for 126 of the existing stores provide for contingent rent based upon sales.
We own our Framingham, Massachusetts corporate office, which consists of approximately 650,000 square feet.
Item 3. Legal Proceedings
We are subject to ordinary routine litigation incidental to our business. We do not believe the results of such litigation will have a material adverse effect on our business. See Note I - Commitments and Contingencies of the Notes to our Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
Not applicable.

13



PART II
Item 5.    Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
NASDAQ
Our common stock is traded on the NASDAQ Global Select Market under the symbol "SPLS". The following table sets forth for the periods indicated the high and low sales prices per share of our common stock on the NASDAQ Global Select Market, as reported by NASDAQ.
 
 
High
 
Low
52 Weeks Ended January 28, 2017
 
 
 
 
First Quarter
 
$
11.37

 
$
8.04

Second Quarter
 
10.83

 
8.00

Third Quarter
 
9.38

 
7.24

Fourth Quarter
 
10.11

 
7.24

52 Weeks Ended January 30, 2016
 
 
 
 
First Quarter
 
$
19.40

 
$
15.72

Second Quarter
 
16.84

 
13.74

Third Quarter
 
14.71

 
11.61

Fourth Quarter
 
13.50

 
8.29

Cash Dividend
Since 2004, we have returned cash to our stockholders through cash dividends. We paid quarterly dividends for fiscal year 2016 of $0.12 per share on April 14, 2016, July 14, 2016, October 13, 2016 and January 12, 2017 resulting in a total dividend payment of $311 million or $0.48 per share. We paid quarterly dividends for fiscal year 2015 of $0.12 per share on April 16, 2015, July 16, 2015, October 15, 2015 and January 14, 2016, resulting in a total dividend payment of $308 million or $0.48 per share. We paid quarterly dividends for fiscal year 2014 of $0.12 per share on April 17, 2014, July 17, 2014, October 16, 2014 and January 15, 2015 resulting in a total dividend payment of $307 million or $0.48 per share.
While it is our intention to continue to pay quarterly cash dividends in 2017 and beyond, any decision to pay future cash dividends will be made by our Board of Directors and will depend upon our earnings, financial condition and other factors. Our payment of dividends is permitted under our existing public notes and other financing agreements, although our revolving credit agreement restricts the payment of dividends in the event we are in default under such agreement or such payout would cause a default under such agreement.
On March 7, 2017, our Board of Directors approved the payment of a cash dividend of $0.12 per share to be paid on April 13, 2017 to stockholders of record on March 24, 2017.     

14



Stock Performance Graph
The following graph compares the cumulative total stockholder return on Staples' common stock, the Standard & Poor's 500 Index and the Standard & Poor's Retail Index during our 2012 through 2016 fiscal years, assuming the investment of $100.00 on January 28, 2012 with dividends being reinvested.
trgraph2016a02.jpg

TOTAL RETURN TO STOCKHOLDERS
 
 
28-Jan-12
 
2-Feb-13
 
1-Feb-14
 
31-Jan-15
 
30-Jan-16
 
28-Jan-17
Staples, Inc. 
 
$
100.00

 
$
87.30

 
$
87.82

 
$
118.14

 
$
64.14

 
$
69.36

S&P 500 Index
 
$
100.00

 
$
116.78

 
$
141.91

 
$
162.09

 
$
161.01

 
$
193.28

S&P Retail Index
 
$
100.00

 
$
129.41

 
$
163.38

 
$
196.45

 
$
230.90

 
$
273.54

Issuer Purchases of Equity Securities
We did not repurchase any of our common stock under our share repurchase program during 2016. The remaining authorization under our existing share repurchase program is $373 million. We plan to balance our allocations of capital for open-market share repurchases with allocations for merger and acquisition opportunities.
Other Information
For information regarding securities authorized for issuance under our equity compensation plans, please see Note K - Equity Based Employee Benefit Plans in the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K.
At March 7, 2017, we had 4,257 holders of record of our common stock.
Item 6.    Selected Financial Data
The information required by this Item is attached as Appendix A.

15



Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by this Item is attached as part of Appendix B.
Item 7A.    Quantitative and Qualitative Disclosures about Market Risk
The information required by this Item is attached as part of Appendix B under the caption "Quantitative and Qualitative Disclosures about Market Risks."
Item 8.    Financial Statements and Supplementary Data
The information required by this Item is attached as Appendix C.
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.    Controls and Procedures
1.     Disclosure Controls and Procedures
The Company's management, with the participation of the Company's chief executive officer and chief financial officer, evaluated, as of January 28, 2017, the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term "disclosure controls and procedures", as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means a company’s controls and other procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in reports filed or submitted under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and that judgment must be applied in the evaluation of the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures as of January 28, 2017, management, the chief executive officer and the chief financial officer concluded that the Company's disclosure controls and procedures were ineffective at the reasonable assurance level at that date, due to the material weaknesses identified as described below. The material weaknesses did not result in any identified misstatements in the current period consolidated financial statements, nor in any restatements of consolidated financial statements previously reported by the Company, and there were no changes in previously released financial results.
2.     Internal Control over Financial Reporting
(a)   Management's Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company's principal executive and principal financial officers and effected by the company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, access to, use or disposition of the company's assets that could have a material effect on the financial statements.
Staples' internal control system is designed to provide reasonable assurance to the Company's management and Board regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to

16



be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Staples' internal controls over financial reporting as of January 28, 2017. In making this assessment, it used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) ("COSO") . Based on our assessment, we concluded that, as of January 28, 2017, the Company has not maintained effective internal control over financial reporting based on those criteria as a result of the material weaknesses in internal control over financial reporting described below.
Management has identified deficiencies in its internal control over financial reporting, which are related to the operation of information technology (“IT”) general controls in the areas of access security, program change management and computer operations (“IT General Controls”) in certain business units in North America and a business unit in the United Kingdom. The deficiencies in IT General Controls also resulted in a conclusion that manual controls that rely on data produced by and maintained within these affected IT system applications and automated controls within these affected IT system applications were ineffective. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Management has determined that the aggregate impact of these deficiencies resulted in material weaknesses as follows:
North America IT General Controls - deficiencies in certain applications used by business units in North America that resulted in the failure of other automated controls and other controls that rely on data from these applications.
United Kingdom IT General Controls - deficiencies in certain applications used by a component of discontinued operations in the United Kingdom that resulted in the failure of other automated controls and other controls that rely on data from these applications.

The material weaknesses did not result in any identified misstatements in the current period consolidated financial statements, nor in any restatements of consolidated financial statements previously reported by the Company, and there were no changes in previously released financial results. We have begun to develop remediation plans for these material weaknesses which are described below under “Remediation Activities”.
The independent registered public accounting firm, Ernst & Young LLP, has issued an adverse audit report on the effectiveness of the Company’s internal control over financial reporting as of January 28, 2017, which is included herein.
(b)   Attestation Report of the Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Staples, Inc.

We have audited Staples, Inc.’s internal control over financial reporting as of January 28, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Staples, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the

17



company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:
IT general controls deficiencies in North America
IT general controls deficiencies in the United Kingdom

In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Staples, Inc. and subsidiaries has not maintained effective internal control over financial reporting as of January 28, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Staples, Inc. and subsidiaries as of January 28, 2017 and January 30, 2016, and the related consolidated statements of income, comprehensive income shareholders’ equity and cash flows for each of the three years in the period ended January 28, 2017 of Staples, Inc. and subsidiaries and our report dated March 9, 2017 expressed an unqualified opinion thereon. 
/s/ Ernst & Young LLP
 
 
Boston, Massachusetts
 
 
March 9, 2017
 
 

18



(c)   Changes in Internal Control over Financial Reporting
Except for the control deficiencies discussed above in this Item 9A that have been assessed as material weaknesses as of January 28, 2017, there were no other changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended January 28, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
During the three months ended January 28, 2017, management identified deficiencies in internal control over financial reporting related to IT General Controls in the areas of access security, program change management and computer operations in certain business units in North America. These deficiencies also resulted in the failure of other automated controls and other controls that rely on data from these applications. Management determined that the aggregate impact of these deficiencies resulted in a material weakness affecting certain applications and business units in North America.
After identifying the material weaknesses noted above in certain business units in North America, management remediated the IT General Controls where possible, and began to develop remediation plans for the remaining affected applications. At year-end, access, change management and computer operations controls in certain systems  were not operating effectively. These deficiencies resulted in the failure of other automated controls and other controls that rely on data from these applications. As such, as of January 28, 2017, management concluded that the material weakness in internal controls over financial reporting related to IT General Controls in the areas of user access, change management and computer operations affecting certain applications and business units in North America was unremediated.

Management identified deficiencies in internal control over financial reporting related to IT General Controls in the areas of access security, program change management and computer operations as well as deficiencies in business process controls related to a certain component of the business in the United Kingdom. These deficiencies resulted in the failure of other automated controls and other controls that rely on data from these applications. Management determined that the aggregate impact of these deficiencies resulted in a material weakness associated with a component of discontinued operations and assets held for sale in the United Kingdom.
(d)   Remediation activities
Management is actively engaged in the implementation of a remediation plan to address the ineffective IT General Controls contributing to the material weaknesses. The remediation actions include the following:
Improving the operation and monitoring of control activities and procedures associated with logical security including user and administrator access to the affected IT systems, including both preventive and detective control activities.
Improving the operation of program change management control activities to track authorizations to changes, emergency change management procedures and across the affected IT systems, including both preventive and detective controls activities.
Improving the operation and monitoring of computer operations control activities to track appropriate processing and authorization of job and backup processes of the affected IT systems.
Implementing additional training for resources in the functional areas that support and monitor our IT systems and information generated therefrom.
Implementing additional business process controls or improving existing business process controls, as needed, to address the risks related to the financial reports and data generated from the affected IT systems.

Management believes that these efforts will effectively remediate the material weaknesses. However, the material weaknesses in our internal control over financial reporting will not be considered remediated until (a) the new controls are fully implemented and existing controls are reinforced, (b) the controls are in operation for a sufficient period of time and (c) these controls are tested and concluded by management to be designed and operating effectively. We cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. In addition, as we continue to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above. Management will test and evaluate the implementation of these new and revised processes and internal controls to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material error in our financial statements.

Item 9B.    Other Information

19



On March 6, 2017, Carol Meyrowitz informed the Board of Directors of Staples, Inc. (the “Board”) that she would not stand for re-election to the Board at our 2017 Annual Meeting of Shareholders (the “2017 Annual Meeting”).  Ms. Meyrowitz will remain on the Board until the conclusion of the 2017 Annual Meeting.  Our Board voted to reduce its size from 11 members to 10 members, effective upon Ms. Meyrowitz’s departure.


20



PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K and incorporated herein by reference to the definitive proxy statement with respect to our 2017 Annual Meeting of Stockholders (the "Proxy Statement"), which we will file with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Report.
Item 10.    Directors, Executive Officers and Corporate Governance
Certain information required by this Item is contained under the heading "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K. Other information required by this Item will appear under the headings "Election of Directors (Item 2 on the Proxy Card)" and "Corporate Governance" in our Proxy Statement, which sections are incorporated herein by reference.
The information required by this Item pursuant to Item 405 of Regulation S-K will appear under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement, which section is incorporated herein by reference.
We have adopted a written code of ethics, the Staples Code of Conduct, that applies to our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our Code of Conduct, which also applies to our directors and all of our officers and associates, can be found on our web site, which is located at www.staples.com, and is also an exhibit to this report. We intend to make all required disclosures concerning any amendments to or waivers from our code of ethics by filing a Form 8-K disclosing such waiver, or to the extent permitted by applicable NASDAQ regulations, by posting such information in the Investor Information section of our web site.
Item 11.    Executive Compensation
The information required by this Item will appear under the headings "Corporate Governance", "Director Compensation", and "Executive Compensation and Compensation Discussion and Analysis" including "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report" in our Proxy Statement, which sections are incorporated herein by reference.
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will appear under the headings "Beneficial Ownership of Common Stock" and "Equity Compensation Plan Information at 2016 Fiscal Year End" in our Proxy Statement, which sections are incorporated herein by reference.
Item 13.    Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will appear under the headings "Certain Relationships and Related Party Transactions" and "Director Independence" in our Proxy Statement, which sections are incorporated herein by reference.
Item 14.    Principal Accountant Fees and Services
The information required by this Item will appear under the heading "Independent Registered Public Accounting Firm's Fees" in our Proxy Statement, which section is incorporated herein by reference.

21



Item 15.    Exhibits and Financial Statement Schedules

(a)
Index to Consolidated Financial Statements: The following financial statements and schedules of Staples, Inc. are included as Appendix C of this Report:
1.    Financial Statements.    

Consolidated Balance Sheets - January 28, 2017 and January 30, 2016;
Consolidated Statements of Income - Fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015;
Consolidated Statements of Comprehensive Income - Fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015;
Consolidated Statements of Stockholders' Equity - Fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015;
Consolidated Statements of Cash Flows - Fiscal years ended January 28, 2017, January 30, 2016 and January 31, 2015; and
Notes to Consolidated Financial Statements.
2.    Financial Statement Schedules.

Schedule II—Valuation and Qualifying Accounts.
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission other than the one listed above are not required under the related instructions or are not applicable and, therefore, have been omitted.
3.    Exhibits.    The exhibits which are filed or furnished with this report or which are incorporated herein by reference are set forth in the Exhibit Index beginning on page D-1, which is incorporated herein by reference.

Item 16. Form 10-K Summary
Not applicable.


22



Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 9, 2017.
 
 
 
 
STAPLES, INC.
 
By:
/s/ SHIRA D. GOODMAN
 
 
Shira D. Goodman,
 
 
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
 
Capacity
 
Date
/s/ SHIRA D. GOODMAN
 
Director and President and Chief Executive Officer (Principal Executive Officer)
 
March 9, 2017
Shira D. Goodman
 
 
 
 
 
 
 
 
 
/s/ DREW G. FAUST
 
Director
 
March 9, 2017
Drew G. Faust
 
 
 
 
 
 
 
 
 
/s/ CURTIS FEENY
 
Director
 
March 9, 2017
Curtis Feeny
 
 
 
 
 
 
 
 
 
/s/ PAUL-HENRI FERRAND
 
Director
 
March 9, 2017
Paul-Henri Ferrand
 
 
 
 
 
 
 
 
 
/s/ DEBORAH HENRETTA
 
Director
 
March 9, 2017
Deborah Henretta
 
 
 
 
 
 
 
 
 
/s/ KUNAL S. KAMLANI
 
Director
 
March 9, 2017
Kunal S. Kamlani
 
 
 
 
 
 
 
 
 
/s/ JOHN F. LUNDGREN
 
Director
 
March 9, 2017
John F. Lundgren
 
 
 
 
 
 
 
 
 
/s/ CAROL MEYROWITZ
 
Director
 
March 9, 2017
Carol Meyrowitz
 
 
 
 
 
 
 
 
 
/s/ ROBERT E. SULENTIC
 
Director and Chairman of the Board
 
March 9, 2017
Robert E. Sulentic
 
 
 
 
 
 
 
 
 
/s/ VIJAY VISHWANATH
 
Director
 
March 9, 2017
Vijay Vishwanath
 
 
 
 
 
 
 
 
 
/s/ PAUL F. WALSH
 
Director
 
March 9, 2017
Paul F. Walsh
 
 
 
 
 
 
 
 
 
/s/ CHRISTINE T. KOMOLA
 
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
 
March 9, 2017
Christine T. Komola
 
 
 
 
 
 
 
 
 
/s/ MARK CONTE
 
Senior Vice President and Corporate Controller (Principal Accounting Officer)
 
March 9, 2017
Mark Conte
 
 
 
 


23



APPENDIX A
STAPLES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollar Amounts in Millions, Except Store and Per Share Data)
 
 
Fiscal Year Ended
 
 
January 28, 2017 (1) 
(52 Weeks)
 
January 30, 2016 (1) 
(52 Weeks)
 
January 31, 2015 (1) 
(52 Weeks)
 
February 1, 2014 (2)
(52 Weeks)
 
February 2, 2013 (3)
(53 Weeks)
Statement of Income Data:
 
 
 
 
 
 
 
 
 
 
Sales
 
$
18,247

 
$
18,764

 
$
19,684

 
$
20,180

 
$
21,133

Gross profit
 
4,758

 
4,907

 
5,038

 
5,265

 
5,661

 
 
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations
 
$
(459
)
 
$
462

 
$
125

 
$
736

 
$
793

(Loss) income from discontinued operations
 
(1,038
)
 
(83
)
 
10

 
(116
)
 
(1,004
)
Net (loss) income
 
$
(1,497
)
 
$
379

 
$
135

 
$
620

 
$
(211
)
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.71
)
 
$
0.71

 
$
0.19

 
$
1.13

 
$
1.19

Discontinued operations
 
(1.60
)
 
(0.12
)
 
0.02

 
(0.18
)
 
(1.50
)
Consolidated operations
 
$
(2.31
)
 
$
0.59

 
$
0.21

 
$
0.95

 
$
(0.31
)
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.71
)
 
$
0.71

 
$
0.19

 
$
1.12

 
$
1.19

Discontinued operations
 
(1.60
)
 
(0.12
)
 
0.02

 
(0.18
)
 
(1.50
)
Consolidated operations
 
$
(2.31
)
 
$
0.59

 
$
0.21

 
$
0.94

 
$
(0.31
)
 
 
 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.48

 
$
0.48

 
$
0.48

 
$
0.48

 
$
0.44

 
 
 
 
 
 
 
 
 
 
 
Statistical Data:
 
 
 
 
 
 

 
 

 
 

Stores open at end of period
 
1,583

 
1,629

 
1,699

 
1,887

 
1,932

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Working capital (4)
 
$
1,934

 
$
1,587

 
$
1,410

 
$
1,460

 
$
2,300

Total assets
 
8,271

 
10,172

 
10,308

 
11,175

 
12,280

Long-term debt, net of current maturities (4)
 
529

 
1,016

 
1,018

 
1,000

 
1,000

Noncontrolling interests
 
8

 
8

 
8

 
9

 
8

Total stockholders’ equity
 
$
3,696

 
$
5,384

 
$
5,313

 
$
6,141

 
$
6,136


(1) See the reconciliation of GAAP to non-GAAP income from continuing operations in Management's Discussion and Analysis of Financial Condition and Results of Operations for the impact of certain items of income or loss reflected in this period.

(2) Income from continuing operations for this period reflects pre-tax charges of $20 million for restructuring activities related to streamlining the Company's operations and general and administration functions.

(3) Income from continuing operations for this period reflects pre-tax charges of $6 million for impairment of long-lived assets, $38 million for restructuring activities, $57 million for a loss on early extinguishment of debt, $26 million related to the termination of the Company's joint venture agreement in India, and $20 million for accelerated intangible asset amortization.

(4) Balances exclude discontinued operations.

A-1

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations

General
Our fiscal year is the 52 or 53 weeks ending on the Saturday closest to January 31. Fiscal year 2016 ("2016") consisted of the 52 weeks ended January 28, 2017, fiscal year 2015 ("2015") consisted of the 52 weeks ended January 30, 2016 and fiscal year 2014 ("2014") consisted of the 52 weeks ended January 31, 2015.
New Business Segments

As part of Staples’ 20/20 strategic plan, during the fourth quarter of 2016 we realigned our business segments to support growth and better address the changing needs of our customers. Under the new structure, the North American Delivery segment includes Staples Business Advantage, our contract operations in the U.S. and Canada, as well as our Quill.com business and our Staples.com and Staples.ca businesses in the U.S. and Canada. The North American Retail segment includes our retail stores in the U.S. and Canada.

Also during the fourth quarter of 2016, we completed the sale of our retail stores business in the United Kingdom ("UK Retail"), and classified our remaining European operations ("European Operations") as held for sale. As a result, UK Retail and the European Operations are presented in discontinued operations, and our remaining international businesses will no longer be included in a reportable segment. The sale of our European Operations was completed on February 27, 2017. See Note D - Discontinued Operations in the Notes to the Consolidated Financial Statements for more information.
Results of Operations
Major contributors to our 2016 results of continuing operations, as compared to the results for 2015, are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:
We generated $18.2 billion in sales, a decrease of 2.8%;

North American Delivery sales decreased 0.9% and business unit income rate increased to 6.3% from 5.8%;

North American Retail sales decreased 7.1% and business unit income rate decreased to 4.8% from 5.3%;

(Loss) income from continuing operations for 2016 was a loss of $(459) million compared with income of $462 million in 2015;

Loss from continuing operations for 2016 reflects pre-tax charges of $1.2 billion for impairment of goodwill and long-lived assets, merger-related costs, restructuring-related charges, legal fees, and a net loss on the sale of businesses and assets;

Non-GAAP income from continuing operations was $586 million in 2016 compared with $598 million in 2015; and

Earnings per diluted share from continuing operations was $(0.71) in 2016 compared to $0.71 in 2015. Non-GAAP earnings per diluted share from continuing operations was $0.90 in 2016 compared with $0.93 in 2015.


See the non-GAAP reconciliations in the "Non-GAAP Measures" section further below.

Outlook

For the first quarter of 2017, we expect to achieve fully diluted non-GAAP earnings per share for continuing operations in the range of $0.15 to $0.18.  Our earnings guidance excludes potential charges related to our strategic plans, including restructuring and related initiatives and charges related to the sale of our European operations.  For the full year 2017, we expect to generate at least $500 million of free cash flow.  We provide earnings and cash flow guidance on a non-GAAP basis only as we cannot predict certain elements which are included in reported GAAP results, as discussed below under "Non-GAAP Measures."

Our guidance reflects the following material trends, events, uncertainties and strategic actions:

We plan to accelerate growth in Staples Business Advantage, our North American contract business, where we have momentum and best in class offerings to build on. We plan to accelerate growth by focusing on providing services and products beyond office supplies and by targeting mid-market business customers.

B-1

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

At the same time we are focused on maximizing profitability and reducing risk in our underperforming North American retail and international businesses. Our guidance assumes that we will close approximately 70 retail stores in North America in 2017. We will evaluate our remaining store portfolio on an ongoing basis as performance and market conditions change.
We plan to reduce end-to-end product costs, continue to evolve our promotional strategies, increase our mix of Staples Brand products, drive savings in our supply chain, eliminate fixed costs in our retail stores, and generate additional efficiency savings across the entire organization, which we expect will approximately $300 million of annualized pre-tax cost savings by the end of 2018.

Termination of Proposed Merger with Office Depot

On February 4, 2015, Staples announced that it had signed a definitive agreement to acquire Office Depot, a global supplier of office products, services and solutions for the workplace. On December 7, 2015, the U.S. Federal Trade Commission and Canadian Commissioner of Competition each filed lawsuits against the Company and Office Depot, seeking to block the proposed merger and prevent the acquisition from closing. On May 10, 2016, the U.S. District Court for the District of Columbia granted the Federal Trade Commission’s request for a preliminary injunction against the proposed acquisition, and as a result Staples and Office Depot terminated the merger agreement on May 16, 2016. See Note Q - Termination of Merger Agreement with Office Depot in the Notes to the Consolidated Financial Statements for information related to costs associated with terminating the merger agreement and interest and fees associated with the related financing agreements.

Non-GAAP Measures
In our analysis of the results of operations and in our outlook, we have referred to certain non-GAAP financial measures for sales, net income, earnings per share, effective tax rate, and free cash flow (which we define as net cash provided by operating activities less capital expenditures). The presentation of these results should be considered in addition to, and should not be considered superior to, or as a substitute for, the presentation of results determined in accordance with GAAP. We believe that these non-GAAP financial measures assist management and investors to analyze our performance by providing meaningful information that facilitates the comparability of underlying business results from period to period. We use these non-GAAP financial measures to evaluate the operating results of our business against prior year results and our operating plan, and to forecast and analyze future periods. We recognize there are limitations associated with the use of non-GAAP financial measures as they may reduce comparability with other companies that use different methods to calculate similar non-GAAP measures. We generally compensate for these limitations by considering GAAP as well as non-GAAP results. In addition, management provides a reconciliation to the most comparable GAAP financial measure, other than financial guidance which is only provided on a non-GAAP basis given that potential charges to be incurred related to the company’s strategic plans, including restructuring and related initiatives, and the potential related impact on cash flow, cannot be reasonably estimated.



B-2

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

For the non-GAAP measures related to results of operations, reconciliations to the most directly comparable GAAP measures are shown below (amounts in millions, except per share data):    
 
 
52 Weeks Ended
 
 
January 28, 2017
 
 
GAAP
 
Impairment of goodwill and long-lived assets
 
Merger-related costs
 
Loss on sale of businesses and assets, net
 
Litigation
 
Costs related to restructuring and strategic plans
 
Non-GAAP
Gross profit
 
$
4,758

 
$

 
$

 
$

 
$

 
$
4

 
$
4,762

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating (loss) income
 
(264
)
 
783

 
272

 
55

 
14

 
45

 
905

Interest and other expense, net
 
62

 
 
 
(37
)
 
 
 
 
 
 
 
25

Loss on early extinguishment of debt
 
26

 
 
 
(26
)
 
 
 
 
 
 
 

(Loss) income from continuing operations before income taxes
 
(352
)
 
 
 
 
 
 
 
 
 
 
 
880

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
107

 
 
 
 
 
 
 
 
 
 
 
107

Adjustments
 

 
 
 
 
 
 
 
 
 
 
 
187

Adjusted income tax expense
 
107

 
 
 
 
 
 
 

 
 
 
294

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations
 
$
(459
)
 
 
 
 
 
 
 
 
 
 
 
$
586

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate
 
(30.5
)%
 
 
 
 
 
 
 
 
 
 
 
33.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share
 
$
(0.71
)
 
 
 
 
 
 
 
 
 
 
 
$
0.90

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
649

 
 
 
 
 
 
 
 
 
 
 
649

Effect of dilutive securities
 

 
 
 
 
 
 
 
 
 
 
 
4

Weighted average common shares outstanding assuming dilution
 
649

 
 
 
 
 
 
 
 
 
 
 
653

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



B-3

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

 
 
52 Weeks Ended
 
 
January 30, 2016
 
 
GAAP
 
Restructuring charges
 
Impairment of long-lived assets and accelerated depreciation
 
Loss on sale of assets, net
 
Merger-related costs
 
PNI data security incident costs
 
Non-GAAP
Operating income
 
$
713

 
$
105

 
$
39

 
$
5

 
$
53

 
$
18

 
$
933

  Interest and other expense, net
 
149

 

 

 

 
94

 

 
55

Income from continuing operations before income taxes
 
564

 
 
 
 
 
 
 
 
 
 
 
878

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes
 
102

 
 
 
 
 
 
 
 
 
 
 
102

   Adjustments
 

 
 
 
 
 
 
 
 
 
 
 
178

Adjusted income taxes
 
102

 
 
 
 
 
 
 
 
 
 
 
280

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Income from continuing operations
 
$
462

 
 
 
 
 
 
 
 
 
 
 
$
598

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate
 
18.1
%
 
 
 
 
 
 
 
 
 
 
 
31.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share
 
$
0.71

 
 
 
 
 
 
 
 
 
 
 
$
0.93


B-4

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

    
 
 
52 Weeks Ended
 
 
January 31, 2015
 
 
GAAP
 
Inventory write-downs
 
Restructuring charges
 
Accelerated depreciation
 
Impairment of goodwill and long-lived assets
 
Gain on sale of businesses, net
 
Non-GAAP
Gross profit
 
$
5,038

 
$
26

 
$

 
$

 
$

 
$

 
$
5,064

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
296

 
26

 
158

 
8

 
469

 
(29
)
 
928

  Interest and other expense, net
 
43

 
 
 
 
 
 
 
 
 
 
 
43

Income from continuing operations before income taxes
 
253

 
 
 
 
 
 
 
 
 

 
885

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
128

 
 
 
 
 
 
 
 
 
 
 
128

Adjustments
 

 
 
 
 
 
 
 
 
 
 
 
160

Adjusted income taxes
 
128

 
 
 
 
 
 
 
 
 
 
 
288

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
125

 
 
 
 
 
 
 
 
 

 
$
597

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate
 
50.9
%
 
 
 
 
 
 
 
 
 
 
 
32.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share from continuing operations
 
$
0.19

 
 
 
 
 
 
 
 
 
 
 
$
0.92


Reconciliation of GAAP to Non-GAAP Sales Growth
 
 
 
 
 
North American Delivery Comparable Sales Growth
 
 
Fourth quarter of Fiscal 2016
Fiscal Year 2016
 
GAAP sales growth
(1.2
)%
(0.9
)%
 
Impact of foreign exchange
0.2
 %
(0.1
)%
 
Impact of divestitures
(3.5
)%
(2.0
)%
 
Impact of acquisitions
0.9
 %
0.3
 %
 
Comparable sales growth
1.2
 %
0.9
 %
 
 
 
 
 
Note that certain percentage figures shown in the tables above may not recalculate due to rounding.

B-5

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

Consolidated Performance
2016 Compared with 2015
Sales: Sales for 2016 were $18.2 billion, a decrease of 2.8% from 2015. The sales decline was primarily driven by a 5% decline in comparable store sales in North American Retail, the unfavorable impact from the divestiture of our Staples Print Solutions business ("SPS") in the second quarter of 2016, and approximately a 1% negative impact associated with store closures, partly offset by comparable sales growth in North American Delivery. Declines in ink and toner, business machines and technology accessories, tablets and supplies were partly offset by growth in facilities supplies, food and breakroom supplies, computers and print and marketing services.
Gross Profit: Gross profit as a percentage of sales was 26.1% for 2016 compared to 26.2% for 2015. The slight decrease was primarily due to growth in low margin offerings in China and an unfavorable impact of lower sales on fixed expenses in U.S. Retail, mostly offset by improved product margin rates in both North American Retail and North American Delivery.
Selling, General and Administrative Expenses: Selling, general and administrative expenses in 2016 decreased by $148 million or 3.7% from 2015. The decrease was driven by a reduction in compensation due to headcount reductions, lower legal and integration planning costs as a result of the terminated merger with Office Depot, and reduced marketing expense. These reductions were partially offset by increased professional service fees and higher incentive compensation.
Selling, general and administrative expenses in 2016 includes $22 million in legal and professional services costs associated with our planned acquisition of Office Depot and $14 million in costs associated with litigation (see Note I - Commitments and Contingencies in the Notes to the Consolidated Financial Statements for additional information). Selling, general and administrative expenses in 2015 reflect $53 million in legal and professional services costs associated with our planned acquisition of Office Depot, $18 million of costs related to the PNI data security incident, and $5 million of accelerated depreciation.  As a percentage of sales, selling, general and administrative expenses were 21.1% in 2016 compared to 21.3% for 2015.
Impairment of Goodwill and Long-Lived Assets: See Note C - Goodwill and Long-Lived Assets in the Notes to the Consolidated Financial Statements for information related to the impairment charges in 2016 and 2015.
Restructuring Charges: See Note B - Restructuring Charges in the Notes to the Consolidated Financial Statements for information related to the restructuring charges in 2016 and 2015.
(Loss) Gain on Sale of Businesses and Assets, net: See Note E - Sale of Businesses and Assets in the Notes to the Consolidated Financial Statements for information related to gains and losses related to the sale of businesses and other assets in 2016 and 2015.
Interest Expense: Interest expense decreased to $81 million for 2016 from $139 million for 2015. Interest expense during 2016 and 2015 reflected interest and fees of $39 million and $94 million, respectively, related to financing arrangements associated with our proposed acquisition of Office Depot. See Note Q - Termination of Merger Agreement with Office Depot in the Notes to the Consolidated Financial Statements for additional information.
Other Income (Expense), Net: Other income (expense), net was income of $13 million for 2016 compared to expense of $(13) million for 2015. The change was primarily driven by $14 million of investment income associated with our supplemental executive retirement plan realized in 2016, compared with $9 million of investment losses recognized in 2015.
Income Taxes:  Our effective tax rate was (30.5)% in 2016 compared to 18.1% for 2015. The primary driver of the lower rate in 2015 compared with 2016 is that in 2015 we recognized a $60 million reduction in our liability for unrecognized tax benefits, primarily due to the expiration of statutes of limitations.
Excluding the impact of items shown in the tables included above in the "Non-GAAP Measures" section, our non-GAAP effective tax rate was 33.5% in 2016 and 31.8% in 2015. The increase in our non-GAAP effective tax rate in 2016 compared with the prior year is primarily due to changes in the geographic mix of earnings.
See Note J - Income Taxes in the Notes to the Consolidated Financial Statements for a reconciliation of the federal statutory tax rate to our effective tax rates in 2016 and 2015 and for information relating to the undistributed earnings of our foreign subsidiaries.
Our effective tax rate in any year is impacted by the geographic mix of earnings. Additionally, certain foreign operations are subject to both U.S. and foreign income tax regulations, and as a result, income before tax by location and the components of income tax expense by taxing jurisdiction are not directly related. The earnings generated primarily by our entities in Canada contribute to the foreign tax rate differential impacting the effective tax rate in 2016 and 2015.    

B-6

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

2015 Compared with 2014
Sales:  Sales for 2015 were $18.8 billion, a decrease of 4.7% from 2014. The sales decrease was primarily driven by a 3% unfavorable impact from changes in foreign exchange rates and a 2% negative impact associated with store closures. Comparable store sales in North American Retail declined 4%, while sales for North American Delivery increased 1% in both U.S. dollars and local currency. Declines in computers and mobility, business machines and technology accessories, and ink and toner were partly offset by growth in facilities supplies, print and marketing services, breakroom supplies and furniture.
Gross Profit: Gross profit as a percentage of sales was 26.2% for 2015 compared to 25.6% for 2014. The increase was primarily driven by improved product margin rates in North American Retail and Quill.com The increase also reflects the impact of $26 million of inventory write-downs in 2014 related to the rationalization of our SKU assortment and the closure of North American retail stores, which compares with a $1 million write-down in 2015. The favorable impact of these factors was partially offset by the impact of increased logistics expenses for North American Retail.
Selling, General and Administrative Expenses: Selling, general and administrative expenses in 2015 decreased by $103 million or 2.5% from 2014. The decrease was driven by a reduction in compensation, largely due to headcount reductions associated with store closures and reduced incentive compensation, as well as a favorable impact from changes in foreign exchange rates. The impact of these items was partially offset by increased professional, consulting and legal expenses.
Selling, general and administrative expenses in 2015 includes $53 million in legal and professional services costs associated with our planned acquisition of Office Depot and $18 million of costs associated with the PNI data security incident (See Note I - Commitments and Contingencies in the Notes to the Consolidated Financial Statements for additional information). Selling, general and administrative expenses also reflects accelerated depreciation of $5 million in 2015 and $9 million in 2014 primarily related to our initiatives to improve efficiencies in our North American delivery fulfillment operations. As a percentage of sales, selling, general and administrative expenses increased to 21.3% in 2015 compared to 20.8% for 2014, reflecting the negative impact of lower sales.
Impairment of Goodwill land Long-Lived Assets: See Note C - Goodwill and Long-Lived Assets in the Notes to the Consolidated Financial Statements for information relating to the impairment charges in 2015 and 2014.
Restructuring Charges: See Note B - Restructuring Charges in the Notes to the Consolidated Financial Statements for information relating to restructuring charges recorded in 2015 and 2014.
(Loss) Gain on Sale of Businesses and Assets, net:  See Note E - Sale of Businesses and Assets in the Notes to the Consolidated Financial Statements for information related to gains and losses related to the sale of businesses and other assets in 2015 and 2014.
Interest Expense:  Interest expense increased to $139 million for 2015 from $48 million for 2014. The increase was driven by $94 million of fees related to term loan financing for our planned acquisition of Office Depot. See Note Q - Termination of Merger Agreement with Office Depot in the Notes to the Consolidated Financial Statements for additional information.
Other Income (Expense), Net:  Other income (expense), net was expense of $13 million for 2015 compared to income of $3 million for 2014. The expense in 2015 reflects investment losses associated with our supplemental executive retirement plan, while 2014 reflects investment income. The expense in 2015 also reflects the impact of foreign exchange losses.
Income Taxes:  Our tax rate related to continuing operations was 18.1% in 2015 compared to 50.9% for 2014. The low tax rate in 2015 is primarily attributable to a $60 million reduction in the liability for unrecognized tax benefits. The relatively high tax rate for 2014 primarily reflected the impact of certain non-deductible charges (see non-GAAP reconciliation table above). Excluding the impact of these items, our effective tax rate in 2014 was 32.6%.
See Note J - Income Taxes in the Notes to the Consolidated Financial Statements for a reconciliation of the federal statutory tax rate to our effective tax rates in 2015 and 2014 and for information relating to the undistributed earnings of our foreign subsidiaries.
Segment Performance
We have two reportable segments: North American Delivery and North American Retail. Other includes our businesses in Australia, Asia, and South America. The following tables provide a summary of our sales and business unit income by reportable segment. See additional geographic information and a reconciliation of total business unit income to income (loss) from continuing

B-7

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

operations before income taxes in Note O - Segment Reporting in the Notes to the Consolidated Financial Statements.    
 
 
 
 
2016 Increase
(Decrease)
From Prior Year
 
2015 Increase
(Decrease)
From Prior Year
 
 
(Amounts in millions)
 
Sales:
 
2016
 
2015
 
2014
 
North American Delivery
 
$
10,636

 
$
10,731

 
$
10,664

 
(0.9
)%
 
0.6
 %
North American Retail
 
6,662

 
7,169

 
8,055

 
(7.1
)%
 
(11.0
)%
Other
 
949

 
864

 
965

 
9.7
 %
 
(10.4
)%
Total sales
 
$
18,247

 
$
18,764

 
$
19,684

 
(2.8
)%
 
(4.7
)%
 
 
(Amounts in millions)
 
2016
% of Sales
 
2015
% of Sales
 
2014
% of Sales
Business Unit Income:
 
2016
 
2015
 
2014
 
North American Delivery
 
$
672

 
$
621

 
$
595

 
6.3
 %
 
5.8
 %
 
5.6
 %
North American Retail
 
317

 
379

 
432

 
4.8
 %
 
5.3
 %
 
5.4
 %
Other
 
(11
)
 
(16
)
 
(35
)
 
(1.2
)%
 
(1.8
)%
 
(3.6
)%

North American Retail Store Activity
Year
 
Stores Open at Beginning of Period
 
Stores Opened
 
Stores Closed
 
Stores Open at End of Period
2015
 
 
1,679

 
1

 
73

 
1,607

2016
 
 
1,607

 

 
48

 
1,559


North American Delivery
2016 Compared with 2015
Sales decreased by $95 million or 0.9% for 2016 compared to 2015. The decrease was primarily due to the divestiture of SPS in the second quarter of 2016 and a decline in sales of ink and toner, tablets and office supplies. These decreases were partially offset by increased sales of facilities supplies, food and breakroom supplies and computers. Sales in 2016 were also favorably impacted by the acquisition of Capital Office Products, an independent regional office products dealer, early in the fourth quarter of 2016. Excluding the impact of divestitures and acquisitions and changes in foreign exchange rates, comparable sales for North American Delivery increased 1% compared with 2015.
Business unit income as a percentage of sales was 6.3% in 2016 compared to 5.8% for 2015. The increase was primarily driven by lower compensation expense, increased gross margin rate, and lower marketing expense in staples.com and quill.com, partially offset by increased incentive compensation and delivery expense.
2015 Compared with 2014
Sales increased 0.6% for 2015 compared to 2014. The increase was primarily due to increased sales of facilities supplies, food and breakroom supplies, promotional products, and furniture. This was partially offset by a 1% negative impact from changes in foreign exchange rates, decreased sales of ink and toner, tablets and paper.
Business unit income as a percentage of sales was 5.8% for 2015 and 5.6% for 2014. The increase was primarily driven by increased gross margin rate, lower marketing expense in quill.com, and lower customer service expense, partially offset by continued investments in sales force to drive growth in categories beyond office supplies.
North American Retail
2016 Compared with 2015
Sales decreased by $507 million or 7.1% for 2016 compared to 2015. The decrease was driven by a 5% decline in comparable store sales primarily resulting from lower customer traffic and an approximate 2% unfavorable impact from store closures. Declines in business machines and technology accessories, ink and toner and tablets were partially offset by increased sales of print and marketing services and facilities supplies.

B-8

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

Business unit income as a percentage of sales was 4.8% for 2016 and 5.3% for 2015. The decrease was driven by an unfavorable impact of lower sales on fixed expenses, partly offset by increased product margin rate and reduced marketing expense.
2015 Compared with 2014
Sales decreased 11.0% for 2015 compared to 2014. The decrease was driven by approximately a 5% unfavorable impact from store closures, a 4% decline in comparable store sales resulting from a lower average order size and lower customer traffic and a 3% negative impact from changes in foreign exchange rates. Declines in computers and mobility, and business machines and technology accessories were partially offset by increased sales of print and marketing services, and facilities supplies.
Business unit income as a percentage of sales decreased to 5.3% for 2015 from 5.4% for 2014. The negative impact of lower sales on fixed expenses was partially offset by increased product margin rate, reduced labor primarily as a result of store closures and lower incentive compensation expense.
Critical Accounting Policies and Significant Estimates
Our financial statements have been prepared in accordance with U.S. GAAP and are based on the application of significant accounting policies (see Note A - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements). Preparation of these statements requires management to make significant judgments and estimates. We believe that the following are the most critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.
Inventory:  We record inventory at the lower of weighted-average cost or market value. We reserve for obsolete, overstocked and inactive inventory based on the difference between the weighted-average cost of the inventory and the estimated market value using assumptions of future demand and market conditions. To estimate the required reserve, we consider factors such as age of the inventory, the nature of the products, the quantity of items on-hand relative to sales trends, current market prices and trends in pricing, our ability to use excess supply in another channel, historical write-offs, expected residual values or other recoveries, contractual terms related to and historical experience with returns to vendors, and new product introductions and other developments in industry.  If actual demand or market conditions are less favorable than those projected by management, additional reserves may be required.  However, past experience has shown little variability in reserve estimates, and we do not believe that deviations from our current estimates and assumptions will have a material impact upon our financial statements in the future.  
Purchase and Advertising Rebates: We earn rebates from our vendors, which are based on various quantitative contract terms that can be complex and subject to interpretation. Amounts expected to be received from vendors that relate to the purchase of merchandise inventories are recognized as a reduction of inventory cost and realized as part of cost of goods sold as the merchandise is sold. Amounts that represent reimbursement for specific, incremental costs we incur related to selling a vendor's products, such as advertising, are recorded as an offset to those costs when they are recognized in our consolidated statement of income. Several controls are in place, including direct confirmation with vendors, which we believe allows us to monitor that these amounts are recorded in accordance with the terms of the contracts.
Past experience has shown little variability in purchase and advertising rebate estimates, no collectibility issues and no significant write-off history. Given the historical accuracy of our estimates, we believe that a significant change in our estimates is not likely.
Impairment of Goodwill See our accounting policy related to testing goodwill for impairment in Note A - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
As noted in Note O - Segment Reporting, in the fourth quarter of 2016 we changed our reportable segments as a result of an organizational realignment related to our 20/20 strategic plan. The realignment also resulted in changes for our reporting units. For our annual goodwill impairment test performed in the fourth quarter of 2016, we first performed a test based on the preexisting reporting unit structure, and then to the extent goodwill balances remained after that test, we performed a second test based on the new reporting unit structure.
We recognized goodwill impairment charges totaling $1.4 billion in 2016. Of this amount, $630 million was recorded in the second quarter of 2016 in connection with an interim impairment test for our Europe Delivery reporting unit (and is reflected in results of discontinued operations in the consolidated statement of income), and $748 million was recorded in the fourth quarter of 2016 in connection with our annual impairment test (charges include $628 million related to our US Stores & Online reporting unit, $72 million related to our China reporting unit, and $48 million related to our Australia reporting unit). We had previously disclosed that these reporting units were at an increased risk of a future impairment charge. Our goodwill impairment testing during 2016 incorporated a significant amount of judgment on the part of management, including significant estimates and

B-9

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

assumptions relating to identification of interim impairment indicators. See Note C - Goodwill and Long-Lived Assets in the Notes to the Consolidated Financial Statements for the key factors underlying these charges.

In the first step of the impairment test, we determined the fair value of our reporting units using a combination of the income and market approaches, specifically the discounted cash flow (“DCF”) and guideline public company methods. Key judgments made by management in step one included developing long-term projections for rates of sales growth and profitability, selection of guideline companies and appropriate market multiples, and discount rates. The fair values of our reporting units are based on underlying assumptions that represent our best estimates. Many of the factors used in assessing fair value are outside of the control of management. To validate the reasonableness of our reporting units' estimated fair values, we reconcile the aggregate fair values of our reporting units to our total market capitalization.  
    
In the second step of the impairment test, we assigned the reporting unit’s fair value to its individual assets and liabilities, including any unrecognized assets or liabilities, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment charge. The fair value estimates incorporated in step two for intangible assets were primarily based on the income approach, specifically the multi-period excess earnings and relief from royalty methods. For real property, we used a combination of the income and market approaches to determine fair value.   For leasehold interests, we used the income approach to determine fair value. Key judgments made by management in step two of the impairment test included customer attrition rates, market-based royalty rates, and market comparables for real property and leasehold interests.

As of the end of 2016, we had $1.3 billion of goodwill remaining on our balance sheet, which primarily relates to our North American Delivery reporting unit. In connection with our impairment testing in the fourth quarter of 2016, we concluded that the fair value of the North American Delivery reporting unit exceeded its carrying value by a significant amount (under both the preexisting and new reporting unit structures). The following are key factors that could potentially result in future impairment charges for these reporting units:

Deterioration in macroeconomic or industry conditions
A failure to manage our businesses successfully
A sustained and significant decline in our stock price
    
Impairment of Long-Lived Assets: We evaluate long-lived assets for impairment on a held-for-use basis whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. In 2016 we recorded impairment charges related to assets held for use of $35 million related to assets at North American retail stores, $27 million related to assets at European retail stores, and $30 million related to a customer-based intangible asset in Europe. The charges related to Europe are reflected in results of discontinued operations in the consolidated statement of income.
Our policy is to evaluate long-lived assets for impairment at the lowest level for which there are clearly identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. Recoverability is measured based upon the estimated undiscounted cash flows expected to be generated from the use of an asset plus any net proceeds expected to be realized upon its eventual disposition. Our cash flow projections are based on historical cash flows and our latest forecasts and projections. An impairment loss is recognized if an asset's carrying value is not recoverable and if it exceeds its fair value.
We estimate the undiscounted cash flows that will be generated over the asset's remaining useful life, or, in the case of an asset group, over the remaining useful life of the primary asset from which the group derives its cash flow generating capacity. Upon the occurrence of indicators of impairment, we reassess the remaining useful life of the asset or primary asset in the case of an asset group. The projections, estimates and assumptions reflected in our long-lived asset impairment testing require a significant degree of judgment on the part of management.
For retail store impairment testing, in general we consider the individual store to be the lowest level at which to test store assets for impairment. For stores that have been approved for closure, we estimate future cash flows to be generated by the stores through their planned closure dates. For other stores, we estimate future cash flows over the stores' remaining lease terms, or if the store is owned, over the remaining depreciable life of the building. Forecasting future sales and profitability for an individual store, in some cases over long periods, requires a significant amount of judgment. If actual results are less favorable than management's projections, estimates and assumptions, additional write-offs in the future may be necessary.
For stores or other assets that failed the recoverability test, we measured the fair value of the impaired assets using the income approach, specifically the discounted cash flow method, which incorporated Level 3 inputs as defined in Accounting

B-10

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

Standards Codification ("ASC") Topic 820 Fair Value Measurement ("ASC Topic 820"). We considered the expected net cash flows to be generated by the use of the assets over the remaining useful life of the primary asset, as well as the expected cash proceeds from the disposition of the assets, if any.

Income Taxes:  The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Interest is accrued, where applicable. We recognize net tax-related interest and penalties in income tax expense. If we do not believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities due to closure of income tax examinations, new regulatory or judicial pronouncements, the expiration of statutes of limitations, or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly and annual basis.
We record deferred income tax assets for timing differences related to tax payments. We record a valuation allowance to reduce our deferred income tax assets to the amount that is more likely than not to be realized. We have considered estimated future taxable income and ongoing tax planning strategies in assessing the amount needed for the valuation allowance. If actual results differ unfavorably from those estimates used, we may not be able to realize all or part of our net deferred tax assets and additional valuation allowances may be required.
Definition of comparable sales

Comparable sales represents a comparison of sales in the current period with sales in the corresponding period in the prior year excluding the impact of acquisitions, divestitures, store closures, and foreign currency translation.

Definition of comparable store sales

Comparable store sales represents a comparison of sales for a particular store in the current period with sales for that same store in the corresponding period in the prior year. Stores become comparable as of the beginning of the 13th full fiscal month in which they are open. For stores that we close, the stores remain comparable through their last full fiscal monthly period of sales. For relocations, if the new store location opens within four days of the closure of the old location, and within a five mile radius of the old location, then the sales for the new location are compared with the sales for the old location; otherwise, the old location is treated as a closure and the new location is treated as an opening of a new store. For foreign locations, comparable stores sales exclude the impact of foreign currency translation. Comparable store sales figures exclude online sales. Transactions at in-store kiosks are included in comparable store sales if payment is made through the Company's point-of-sale systems.
Recently Adopted Accounting Pronouncements
See Note A - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements for a summary of recently adopted accounting pronouncements.    
Liquidity and Capital Resources
Cash Flows
2016 Compared to 2015
Cash provided by operations was $934 million for 2016 compared to $978 million for 2015, a decrease of $44 million. The decrease was primarily driven by unfavorable changes in operating assets and liabilities, partly offset by increased net income adjusted for non-cash and non-operating items. Cash provided by operations for 2016 reflects the payment of the $250 million merger termination fee to Office Depot, and the payment of $88 million of interest and fees related to the financing agreements associated with the proposed merger, partly offset by approximately $130 million of cash savings attributable to tax benefits related to these items.

B-11

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

    Cash used in investing activities was $311 million for 2016 compared to $374 million for 2015, a decrease of $63 million. Capital spending decreased by $126 million year-over-year, resulting from narrowing our focus for spending on strategic priorities and timing of expenditures. In 2016 we received a net $83 million of cash related to the sale of SPS, which was partly offset by the impact of a $28 million outflow related to cash on-hand at the time of the closing of the sale of our UK Retail business. In 2016, we spent $44 million to acquire Capital Office Products, a component of our North American Delivery segment, which compares with $22 million spent in 2015 to acquire three small businesses. Also in 2016, in connection with financing arrangements associated with our proposed acquisition of Office Depot, we transferred $66 million of cash into escrow accounts, which was disbursed directly to the lenders and underwriters as payment of interest and fees incurred.
Cash used in financing activities was $318 million for 2016 compared to $378 million for 2015, a decrease of $60 million. The decrease was primarily attributable to higher debt repayments in 2015. We paid quarterly cash dividends of $0.12 per share in both 2016 and 2015 for an aggregate payment of $311 million in 2016 compared with $308 million in 2015.
2015 Compared to 2014
Cash provided by operations was $978 million for 2015 compared to $1.04 billion for 2014. The $65 million decrease was driven by lower net income adjusted for non-cash expenses, partly offset by favorable changes in operating assets and liabilities.

Cash used in investing activities was $374 million for 2015 compared to $375 million for 2014, a decrease of $1 million. Capital spending increased by $20 million year-over-year, primarily due to investments in our online businesses and investments aimed at improving the productivity of existing stores. In 2015, we spent a net $22 million to acquire three small businesses, which compares with $78 million spent in 2014 for the acquisition of two small businesses. In 2015 and 2014 we received net proceeds of $29 million and $64 million, respectively, related to the sale of businesses and other assets.

Cash used in financing activities was $378 million for 2015 compared to $493 million for 2014, a decrease of $115 million. As a result of cash planning related to our proposed acquisition of Office Depot, we did not repurchase any shares under our share repurchase plan in 2015, whereas in 2014 we spent $189 million to repurchase 15.3 million shares. We paid quarterly cash dividends of $0.12 per share in both 2015 and 2014 for an aggregate payment of $308 million in 2015 compared with $307 million in 2014.

Contractual Obligations and Commercial Commitments
A summary, as of January 28, 2017, of our contractual obligations and balances available under credit agreements is presented below (amounts in millions). The amounts relate to continuing operations unless otherwise noted.
 
 
 
 
 
 
Payments Due By Period
Contractual Obligations and Commercial Commitments (1)(2)(6)
 
Available
Credit
 
Total
Outstanding
Obligations
 
Less than
1 Year
 
1-3 Years
 
3-5 Years
 
More than
5 Years
January 2018 Notes (5)
 
$

 
$
500

 
$
500

 
$

 
$

 
$

January 2023 Notes (5)
 

 
500

 

 

 

 
500

November 2021 Revolving Credit Facility
 
1,000

 

 

 

 

 

Other lines of credit
 
76

 
1

 
1

 

 

 

Other notes and capital leases
 

 
51

 
21

 
29

 
1

 

Total (5)
 
$
1,076

 
$
1,052

 
$
522

 
$
29

 
$
1

 
$
500

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest payments
 

 
$
145

 
$
36

 
$
44

 
$
44

 
$
21

Operating leases (3)
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
 

 
2,024

 
559

 
780

 
427

 
258

Discontinued operations (7)
 

 
202

 
47

 
67

 
39

 
49

Purchase obligations (4)
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
 

 
460

 
264

 
113

 
51

 
32

Discontinued operations
 

 
6

 
5

 
1

 

 

Total
 
$
1,076

 
$
3,889

 
$
1,433

 
$
1,034

 
$
562

 
$
860


B-12

STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)


(1)
See Note J - Income Taxes in the Notes to the Consolidated Financial Statements for information related to our unrecognized tax benefits.
(2)
The above table excludes expected future contributions to our pension and post-retirement benefit plans. See Note L - Pension and Other Post-Retirement Benefit Plans in the Notes to the Consolidated Financial Statements for details about these future contributions.
(3)
The operating lease payments reported above do not include common area maintenance or real estate taxes, which are expected to approximate 30% of the related operating lease payments. Utility costs related to leased facilities have also been excluded from this table because the payments do not represent contractual obligations until the services have been provided. Future annual minimum payments include restructuring-related obligations as of January 28, 2017.
(4)
Many of our purchase commitments may be canceled by us without advance notice or payment, and we have excluded such commitments, along with intercompany commitments. Contracts that may be terminated by us without cause or penalty but require advance notice for termination are valued on the basis of an estimate of what we would owe under the contract upon providing notice of termination.
(5)
See Note G - Debt and Credit Agreements in the Notes to the Consolidated Financial Statements for information related to our $500 million 2.75% senior notes due January 2018 ("January 2018 Notes") and $500 million 4.375% senior notes due January 2023 ("January 2023 Notes"). The amounts shown in the table above represent the par value of the debt obligations. The funds provided by these issuances were used for general corporate purposes.
(6)
As of January 28, 2017, Staples had open standby letters of credit totaling $89 million.
(7)
Staples guarantees certain lease obligations of its divested retail business in the United Kingdom. The underlying lease obligations are not reflected in the table above, since Staples is not the primary obligor for these leases. See Note D - Discontinued Operations in the Notes to the Consolidated Financial Statements for additional information related to these commitments.

There were no instances of default during 2016 under any of our debt agreements.
Off-Balance Sheet Financing Arrangements
We do not have any off-balance sheet financing arrangements as of January 28, 2017, nor did we utilize any during 2016.
Sources of Liquidity
To cover seasonal fluctuations in cash flows and to support our initiatives, we use cash generated from operations and borrowings available under various credit facilities and a commercial paper program. As of January 28, 2017, we had $2.2 billion in total cash and funds available through credit agreements, which consisted of $1.1 billion of available credit and $1.1 billion of cash and cash equivalents.
Of the $1.1 billion in cash and cash equivalents, approximately $713 million is held at entities located in jurisdictions outside the United States and for which there could be tax consequences if such amounts were moved out of these jurisdictions or repatriated to the United States. Of the amount held outside the United States, approximately $129 million was disposed of in connection with the sale of a controlling interest in our European operations on February 27, 2017 (representing $182 million of cash on-hand, net of $53 million of cash proceeds received from the buyer - see Note D - Discontinued Operations). Certain of our foreign subsidiaries may be able to remit cash to the United States in the future without a tax cost. We currently intend to use most of any remaining cash and cash equivalents held outside of the United States to finance the obligations and current operations of our foreign businesses.  The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.

On November 22, 2016, we entered into a new credit agreement with Bank of America, N.A., as Administrative Agent and the other lending institutions named therein (the "November 2021 Revolving Credit Facility"). The new credit facility provides for a maximum borrowing of $1 billion, which pursuant to an accordion feature may be increased to $1.5 billion upon our request and the agreement of the lenders participating in the increase. Amounts borrowed may be repaid and reborrowed from time to time until November 22, 2021. The new credit facility replaces the credit agreement dated as of May 31, 2013, which provided for a maximum borrowing of $1.0 billion and was due to expire in May 2018. As of November 22, 2016, no borrowings were outstanding under the prior credit agreement, and the Company did not borrow under the new credit facility during 2016. See Note G - Debt and Credit Agreements in the Notes to the Consolidated Financial Statements for additional information related to our new credit facility.

We have a commercial paper program that allows us to issue up to $1 billion of unsecured commercial paper notes from time to time, and for which our $1 billion revolving credit facility serves as a back-up. Borrowings outstanding under our commercial

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STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

paper program reduce the borrowing capacity available under our revolving credit facility by a commensurate amount. The maximum amount outstanding under the commercial paper program during 2016 was $188 million. As of January 28, 2017, there was no commercial paper outstanding. See Note G - Debt and Credit Agreements in the Notes to the Consolidated Financial Statements for additional information related to our commercial paper program.

We also have various other lines of credit under which we may currently borrow a maximum of $76 million. At January 28, 2017, we had outstanding borrowings and letters of credit of $1 million, leaving $75 million of available credit at that date. During 2016 we entered into new capital lease obligations of $34 million.

We expect that our cash generated from operations, together with our current cash, funds available under our existing credit agreements and other alternative sources of financing, will be sufficient to fund our planned capital expenditures, obligations associated with our restructuring and transformation initiatives, and other operating cash needs for at least the next twelve months.
Uses of Capital    
We did not repurchase any shares under our share repurchase program in 2016. The remaining authorization under our existing share repurchase program is $373 million. We plan to balance our allocation of capital for open-market share repurchases with allocations for merger and acquisition opportunities.
    
We consider many types of acquisitions for their strategic and other benefits. We plan to focus on acquisitions of contract stationers, business-to-business service providers and companies specializing in categories beyond office supplies. 

We are committed to maintaining our current quarterly dividend of $0.12 per share. We paid quarterly dividends of $0.12 per share during 2016, 2015 and 2014. While it is our intention to continue to pay quarterly cash dividends for 2017 and beyond, any decision to pay future cash dividends will be made by our Board of Directors and will depend upon our earnings, financial condition and other factors.

We expect a moderate increase in capital spending in 2017 compared to 2016 in part due to spending for certain projects being deferred from 2016 to 2017, and in part due to investments to support our Staples 20/20 strategy. We expect that operating cash flows will be the primary source of funds for our capital expenditures.

Inflation and Seasonality
While neither inflation nor deflation has had, nor do we expect them to have, a material impact upon our consolidated operating results, we may see price increases in certain categories from time to time. Our business is somewhat seasonal, with sales and profitability historically higher during the second half of our fiscal year due to the back-to-school and January back-to-business seasons.
Quantitative and Qualitative Disclosures about Market Risks
We are exposed to market risk from changes in interest rates and foreign exchange rates. We have a risk management control process to monitor our interest rate and foreign exchange risks. The risk management process uses analytical techniques, including market value, sensitivity analysis and value at risk estimates.
Interest Rate Risk
    
At January 28, 2017, we did not have any material variable rate debt obligations.

Foreign Currency Risk
We are exposed to foreign exchange risks through our business operations and investments in subsidiaries in Canada, Europe, Australia, South America and Asia. The currencies for which we have the most significant exposure to exchange rate fluctuations include the Canadian Dollar, the Australian Dollar and the Chinese Renminbi. We expect our exposure related to the Euro, British Pound Sterling, Norwegian Krone, and other European currencies will decrease significantly in the future compared with 2016 and prior periods, given the disposal of our European operations in fourth quarter of 2016 and February 2017.
Revenue and expense transactions in our foreign subsidiaries are primarily denominated in the respective local currencies. The income statements of our international operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions results in increased revenues and operating expenses for our international operations. Conversely, our revenues and

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STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)

operating expenses will decrease for our international operations when the U.S. dollar strengthens against foreign currencies. While the matching of local currency revenues and local currency expenses provides in effect a natural hedge, such matching does not completely reduce the foreign currency exchange rate exposure. Revenues from our foreign operations accounted for approximately 14% and 15% of revenues for combined continuing operations and discontinued operations in 2016 and 2015, respectively. As a result of the disposal of our European operations, which accounted for 10% of such combined revenues in 2016, we expect that foreign currency translation risk for our consolidated financial statements related to the Euro and other European currencies will be lower in future periods compared with 2016 and prior periods.    
The conversion of our foreign subsidiaries' financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of Other comprehensive income (loss) in stockholders' equity. We recorded consolidated foreign currency translation gains of $25 million in 2016 and losses of $132 million in 2015. In addition, certain of our foreign subsidiaries have assets and liabilities that are denominated in currencies other than the relevant entity's functional currency. Changes in the functional currency value of these assets and liabilities will result in a transaction gain or loss. In 2016, our foreign currency transaction net gain was de minimis. In 2015, we recorded foreign currency transaction net losses of $4 million, which are recorded in Other income (expense), net in our consolidated statement of income.
Our international businesses are subject to risks, including, but not limited to differing economic conditions, changes in political climate, differing tax structures, and other regulations and restrictions, all of which may influence foreign currency exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors. As exchange rates vary, our international financial results may vary from expectations and adversely impact our overall operating results.
In accordance with our risk management policies, we use derivative instruments on a limited basis to hedge our foreign currency exposures. As of January 28, 2017 and January 30, 2016, we had no outstanding foreign currency derivative agreements designated as hedges.

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Item 8
 
APPENDIX C

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS