Staples Inc SPLS
Q4 2012 Earnings Call Transcript
Transcript Call Date 03/06/2013

Operator: Good day, ladies and gentlemen and welcome to the Quarter Four 2012 Staples, Inc. Earnings Conference Call. My name is Sheila, and I will be your operator for today. At this time, all participants are on a listen-only mode. We will conduct the question-and-answer session towards the end of this conference. As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Chris Powers, Director of Investor Relations. Please proceed, sir.

Chris Powers - IR: Thanks, Sheila. Good morning, everyone and thanks for joining us for our fourth quarter and full year 2012 earnings announcement. During today's call, we will discuss certain non-GAAP metrics and comparable period measure including or excluding the 53-week in fiscal 2012 to provide investors with useful information about our financial performance.

I'd also like to point out that we realigned our reporting segment during the fourth quarter of 2012. We've restated our historical reporting segment results to reflect our new structure and will refer to those restated numbers when comparing our 2012 results to the prior year.

Please see the financial measures and other data section of the Investor Information portion of www.staples.com for an explanation and reconciliation of non-GAAP measures and other calculations of financial measures that we use to analyze our business and restated historical reporting segment results.

I'd also like to remind you that certain information discussed on this call constitutes forward-looking statements for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed or referenced under the heading Risk Factors and elsewhere in Staples' 10-Q filed this morning.

Here to discuss Staples' Q4 and full year performance and business outlook are Ron Sargent, Chairman and Chief Executive Officer; and Christine Komola, Chief Financial Officer. Also joining us are, Demos Parneros, President of North American Stores and Online; Joe Doody, President of North American Commercial; and John Wilson, President of Europe.

Ron?

Ronald L. Sargent - Chairman and CEO: Well, thanks, Chris, and good morning, everybody. Thanks for joining us today. This morning, we reported our results for the fourth quarter and for the full year of 2012 and I'll start with the headlines. Total Company sales for the fourth quarter increased 3% to $6.6 billion, excluding $461 million of sales during the extra week in the quarter. Total Company sales were down 4% versus the prior year.

We reported earnings of $0.14 per share from continuing operations on a GAAP basis. During the quarter, as you know, we incurred charges which negatively impacted our Q4 results by about $0.32 per share, and if you exclude these items non-GAAP earnings per share from continuing operations increased 12% to $0.46. For the full year, we achieved total Company sales of $24.4 billion. This reflects a 1% decline and a 3% decline on a 52-week basis, compared to 2011.

We reported a net loss of $0.24 per share from continuing operations on a GAAP basis during the year. Excluding charges, our non-GAAP earnings per share for the full year were $1.39, which was an increase of 1% versus last year. Also during 2012, we remain committed to returning cash to shareholders. We repurchased about 5% of our shares outstanding, and we returned a total of $743 million to shareholders through stock buybacks and dividends.

Before we get into segment results, I'd like to just take a minute to update you on the progress we're making on our reinvention plan. During 2012, we took several important steps to improve our business with the launch of a new strategic plan. As we've discussed in the past, our reinvention plan includes four growth platforms; expanding our assortment beyond office supplies, accelerating growth online, redefining the omnichannel experience, and accelerating growth in our services business.

I'm pleased to report that we're gaining momentum in each of these areas, and at the same time we're taking action to reshape our business to fund the future, while building on our core strengths to better serve our customers. During the fourth quarter, we also realigned our structure to support our growth priorities and better address the changing needs of our customers. Under the new structure, our North American retail stores and Staples.com businesses will now be reported in the North American Stores and Online segment.

Our North American Commercial segment includes all of our contract operations in North America, as well as our Quill.com business, and the International segment includes all of our continuing operations outside the United States and Canada. Our new vision is every product of your business needs to succeed, and we're confident that we can accelerate growth in categories beyond office products. A great example of this is our success selling facilities and breakroom supplies. During 2012, we had strong double-digit growth in North America and grew sales in this category by more than $200 million, ending the year with a $1.8 billion facilities and breakroom business.

We more than tripled our assortment on Staples.com during the year, and we hit our goal of 100,000 SKUs offered by year-end. While we're still in the early innings of our assortment expansion, we see big opportunities in areas like technology products, medical supplies, safety supplies, mail and ship, and office decor. We're also excited to report that we now offer Apple accessories on Staples.com, and we'll have this assortment in our stores during the first quarter.

In terms of driving growth online, Staples.com sales were up about 3% for the year on a 52-week basis and we have plans to accelerate the top line. Customers continue to take advantage of the new features we've added to the website. Our customer file has increased and overall sales per customer are up, with sales of new categories more than offsetting softer trends in the core.

From an omnichannel perspective, we're making it easier for customers to shop us wherever and whenever they want. By bringing our North American Retail stores and our dotcom businesses together, we're providing customers with a more consistent shopping experience across the channels. During Q4, we combined our Retail and dotcom merchandising and marketing teams, and introduced new compensation plans which incent associates to drive sales both in our stores and on our website.

We recently launched new features, like Reserve Online and Pick up in Store, and we're seeing a very strong response from our customers. We've also revamped and launched a new website in Canada with significantly improved features and capabilities. And during the fourth quarter, we developed a new 12,000 square-foot omnichannel store with updated Staples.com kiosk and an endless aisle shopping experience. We expect to open our first omnichannel store in Q1, and we're confident that we can retain the vast majority of our sales in this new format, while also driving sales of an expanded online offering.

I'm also pleased to report that just last week we announced a new Staples Rewards program in the United States that significantly improves our value perception with customers. This program is free to customers and offers 5% back in rewards on all products and all services. It also provides free shipping on all Staples.com orders. We believe that the reinvention of our Rewards program will make shopping at Staples even more compelling for customers.

We also continue to build momentum in product-related services, copy and print sales and EasyTech services in North American stores and online grew in the high single digits during Q4. Traffic in our copy centers was up year-over-year and we grew the top line by expanding our offering of instant products, improving quality and by increasing the productivity of our copy and print sales force.

During the fourth quarter, we also implemented new coating process, which has improved our win rates on large customized jobs and we are working with our larger contract customers to provide retail copy and print services to their mobile workforces.

Turning to funding the future activities, we made a lot of progress reducing retail square footage during 2012 and we remain extremely focused on increasing store productivity. In North America, we had a total of 31 net new store closures and additional 30 relocations and downsizings for the year. All in, we took out over 1 million square feet or about 2% of our retail footprint and we are on track to reduce our total North American retail square footage by about 15% by 2015.

In Europe, we reduced exposure to our weakest business with 48 net retail store closures. 46 of those were closed in the fourth quarter. This represents a 15% decrease in our European store count in 2012. Beyond our store closures in Europe, we are also making progress on our other European restructuring efforts as we work to consolidate subscale delivery businesses, streamline our cost structure and improve profitability.

We've also simplified our business in India. During Q4, we concluded negotiations with our joint venture partner and terminated our existing agreement. Going forward, we've created a new franchising arrangement in India, which will allow us to continue to leverage the strength of our global brand and capitalize on future growth in this large and highly fragmented market.

Last quarter, we announced a plan to achieve $250 million in annual pre-tax savings in North American by 2015 and during Q4 we developed a very detailed cost saving roadmap for the coming year. In the near term, our biggest opportunities are in product cost and direct procurement and store operations. We've completed more than half of our vendor negotiations and we're already seeing significant savings.

We're also taking a fresh look at the $3 billion that we spend annually on indirect products and services that we used to run our business. And although it's early in the process, we've had success reducing cost in areas like printing and travel, temporary labor. If you put it all together, we have clear visibility to about $150 million of pre-tax cost savings in 2013.

So that's a summary of where we are with the reinvention efforts. Now, I'd like to take a brief look at our Q4 results in each of our business units and I'll start with North American stores and online.

Sales for the fourth quarter were $3.3 billion, that's up 3% compared to Q4 of last year. Excluding $221 million of sales during the extra week in the quarter, sales declined about 4% versus the prior year. Fourth quarter same store sales for retail which exclude Staples.com sales declined 5%, lower customer traffic accounted for the entire comp decline in Q4 with average order size flat year-over-year.

While we are disappointed certainly in our Q4 comp, there were a couple of key drivers worth calling out. Hurricane Sandy and a more competitive holiday season around Black Friday, negatively impacted our Q4 comp by more than 200 basis points. Excluding the extra week during the quarter Staples.com sales declined about 1% versus the prior year as increased customer traffic was more than offset by lower average order size and about a 1% headwind from Hurricane Sandy for our Satples.com business.

During the fourth quarter we saw growth in tablets, e-Readers, facilities and breakroom supplies in copy and print. This was more than offset by ongoing weakness in computers, digital cameras and software. While computers certainly remain under pressure we're building momentum in new technology hardware categories like tablets, e-Readers and mobile phones. We expect continued growth in these categories to more than offset weakness in laptops and computers going forward.

During Q4 North American stores and online operating margin increased 37 basis points versus last year to in the quarter at 9.6%. This increase was driven by lower incentive compensation and marketing expense partially offset by investments to drive growth in Staples.com. Taking a look at our early first quarter trends, we're pleased to report that North American retail comps in February showed improvement versus Q4 and Staples.com sales for the month were up nicely compared to last year.

As I mentioned at the beginning the call, we remain committed to improving productivity of our retail store network. Our plans call for 30 net store closures and another 45 combined downsizes and relocations during 2013. About half of the downsizes and relocations will be to our new 12,000 square foot store format and these actions will remove more than 1 million square feet from our North American store network for the year.

Moving on to North American with commercial, here sales for the fourth quarter were $2.5 billion, that was an increase of 7% compared to last year. If you exclude $159 million of sales during the extra week in the quarter, sales declined about 1% versus the prior year. We have a high concentration of contract customers in the Northeast and as a result our Q4 North American commercial sales were also negatively impacted by the hurricane. We estimate that the storm had about a 1% drag on total commercial sales in the fourth quarter.

Topline growth remained strong in adjacent categories like facilities and breakroom, which was once again up double-digits during the fourth quarter. Excluding the extra week, furniture was also up nicely with sales growth in the mid-single digits. Core office supplies and paper were down in the low-single digits.

Turning to profitability North American commercial operating margin for Q4 increased 31 basis points versus last year to 9.3%. This increase reflects lower incentive compensation, partially offset by reduced product margin. In international operations, our sales for the fourth quarter were $1.2 billion that was a decline of 4% in both local currency and U.S. dollars versus Q4 of last year. Excluding $81 million of sales during the extra week in the quarter, sales declined about 11% versus the prior year.

Topline trends in Europe and Australia remained weak and Europe retail same-store sales were down 9% during the fourth quarter. Customer traffic decreased about 7% and average order size was down about 2% year-over-year. In our European delivery business, sales were down in the high-single digits on a 52-week basis and in Australia the topline was down double-digits versus the prior year.

During Q4, our international operating margin declined 215 basis points versus last year to 0.51%. Excluding $4 million of accelerated Australia tradename amortization, operating margin declined about 177 basis points to 0.89% for the fourth quarter. This decline was driven by lower product margins in Europe and deleverage of fixed expenses in Europe and Australia and that was partially offset by savings related to headcount reductions in Europe and Australia.

While results in Europe remained tough, I'm very pleased with the progress that John Wilson and his team have made in a few short months. They've challenged our assumptions in Europe. They've significantly improved our forecasting accuracy and done a great job executing a very complex Pan-European restructuring program.

While we still got a lot of restructuring to do over the next several months, John is developing a clear long-term strategic plan with an increased focus on our delivery businesses and on simplifying operations.

With that, I'll turn it over to Christine to review our financial results.

Christine T. Komola - CFO: Thanks Ron. Good morning, everyone. During the fourth quarter, total Company sales were $6.6 billion, an increase of 3% compared to the fourth quarter of 2011. Excluding $461 million of sales, during the 53rd week in 2012, total Company sales decreased 4% compared to Q4 last year.

On a GAAP basis, we reported diluted earnings per share from continuing operations of $0.14. Our results for the fourth quarter of 2012 include $181 million of pre-tax charges related to our European store closures and restructuring, U.S. store closures and accelerated Australia tradename amortization.

Q4 results also include a $57 million pre-tax charge related to the early extinguishment of debt, a $26 million pre-tax charge related to the termination of the Company's existing joint venture agreement in India, as well as a pre-tax income of $83 million related to the extra week in 2012. Excluding the impact of these charges we took during the fourth quarter, we reported non-GAAP diluted earnings per share from continuing operations of $0.46, up 12% compared to $0.41 per share achieved in the prior year.

On a GAAP basis, fourth quarter 2012 operating income rate decreased 257 basis points versus the prior year to 4.8%. Excluding the impact of the charges we took during the quarter, operating income rate improved 18 basis points to 7.5% compared to the fourth quarter 2011. This reflects reduced incentive compensation and marketing expense partially offset by lower product margin.

Our effective tax rate for the quarter was 53.3%. Excluding the impact of the charges we took during Q4, our effective tax rate for the quarter was 32.5%. Capital expenditures for 2012 were $350 million compared to the $384 million we spent last year. Full year operating cash flow of $1.2 billion. We generated $870 million of free cash flow in 2012. Our free cash flow came in below our expectation of about $1 billion for the full year.

In early Q4 we built inventory in anticipation of stronger top line results. Our sales came in below our expectations. We did pull back on inventory replenishment, but we continue to pay down accounts payable. We pay our vendors a little faster than we turn our inventory, so this had a negative impact on working capital. Additionally, we came up short of our sales and earning goals for the year and as a result accrual for incentive compensation was lower than expected.

During the fourth quarter, we repurchase 7.4 million shares for $87 million, bringing our total share repurchase for 2012 to 34.8 million shares for $449 million. During Q4, we also issued $1 billion on debt including $500 million of five-year notes, with 2.75 coupon and $500 billion of 10-year note with a 4.375 coupons. We use proceeds from these offering to tender $633 million of our $1.5 billion note due in January 2014.

We do expect to repay this with cash for the remaining $867 million of the note upon maturity. At the end of 2012, Staples had approximately $2.5 billion in liquidity, including cash and cash equivalent and about $1.3 billion and available lines of credit of about $1.2 billion. Based on our healthy cash flow and strong liquidity this morning, we announced that our Board of Directors has declared a 9% increase in our quarterly cash dividends.

As Ron mentioned at the beginning of today's call, our strategic reinvention is on track. Our ultimate goal is to increase sales and earnings growth. There are a number of other key metrics that we are planning to track and planning to share with you each quarter. We believe that these are important indicators of our progress and closely in line with our vision.

First, we're highly focused on driving sales and categories beyond office supply. This year we have plans to drive meaningful acceleration here. Second, one of our top priority is to hyper grow online. In, we have plans to accelerate growth throughout the year and achieve high single digit growth in Staples.com.

Third, we'll continue to rapidly expand our assortment. Today, we have more than 100,000 SKUs on Staples.com and by the end of 2013 we plan to more than triple that number. Finally, we'll continue to update you on our reshaping activities as we plan to make progress against our multi-year cost savings plan, our square footage reduction plan and our European restructuring efforts.

Turning to guidance, we expect full year 2013 sales to increase in the low single digits compared to 2012 sales, on a 52-week basis of $23.9 billion. We expect full year 2013 diluted earnings per share and continuing operations to be in the range of $1.30 to $1.35 versus non-GAAP diluted earnings per share from continuing operations on a 52-week basis of $1.30 achieved in 2012. We expect to generate more than $900 million of free cash flow and plan to continue repurchasing common stock through open market purchases during 2013.

Our strategic reinvention is focused on accelerating sales and earnings growth and we expect momentum on the top and bottom-line to build throughout 2013. To achieve this, we need to make a number of investments. This year we're planning to reinvest majority of our expense savings in sharper prices, increased investment in IT, expanded brand marketing, customer acquisition and talent and associate to better serve the need of our customers.

We're also wrapping up the final stages of our European restructuring programs. While the associated costs won't be large enough to exclude from our GAAP earnings per share, they will be a headwind on the bottom line early in the year.

Thank you for your time this morning and now I'll turn it back over to Ron for a quick wrap up.

Ronald L. Sargent - Chairman and CEO: Thanks, Christine. We know we got a lot of work ahead of us, but this isn't the first time we've transformed Staples to meet the needs of our customers. We started out as a cash and carry retailer and when customers wanted more in the 1990s we transformed into a multichannel company and we became a power in the delivery space. When customers wanted online shopping we transformed into one of the world's largest e-commerce companies.

When customers around the world wanted to shop at Staples, we grew to a global organization with operations throughout North and South America, Europe, Australia and Asia. And when customers wanted to shop at Staples for more than office supplies, we expanded into new categories things like facilities and breakroom and today we're once again responding to the changing needs of our customers, are rapidly expanding our assortment into new categories and by making it easy to shop at Staples however and whenever they want.

I'd now like to turn the call back over to our moderator for Q&A. Sheila?

Transcript Call Date 03/06/2013

Operator: Gary Balter, Credit Suisse.

Gary Balter - Credit Suisse: I just have a clarification or a numerical question and then I will ask a strategic follow-up. Could you talk about – like you show cash flow is going to be rising next year to $900 million, I think from $800 million something and yet you guided earnings lower. Could you talk whether the component to that is CapEx going down? I don't think you gave us what the CapEx projection is for next year.

Christine T. Komola - CFO: Gary, it's Christine. So, yes, we do expect an increase. A couple of things. One is, I think, we should be able to have benefit from our account payables. We had a big headwind this year based on the timing of the working capital that I've talked in Q4. So, that should benefit from us. The other benefit is, we do plan to have an accrual related to the incentive compensation. So, that should benefit as well. It will be not significant improvement over $900 million compared to the $870 million. We do have a plan to invest in inventory. So you're right, but I do expect some benefit to come through.

Gary Balter - Credit Suisse: Just I don't know if you – I have been traveling while you were speaking, so I may have missed it. But did you talk about divisional profitability without that 13th week or 14th week whatever it works out to mathematically in this quarter, like because were divisional profit margins actually lower in the three divisions if you take out the benefit for the extra week?

Christine T. Komola - CFO: Yeah, I think – we didn't actually give these specifics by business unit. You can probably allocate it around the sales mix. But without the incentive compensation, yes, you're right, we are a little bit below last year.

Gary Balter - Credit Suisse: Then here is the little bit more strategic question. First of all, you can stop me early, but are you are going to not comment on the potential benefits for the combination in the sector?

Ronald L. Sargent - Chairman and CEO: I guess the merger question is mine, and maybe I should start – by first of all saying congratulations to Neil and to Ravi in the Office Depot and Office Max teams. As I've said before, I believe the merger is going to be good for customers and I think it's going to be good for our industry, but at this point, I think it's just way too premature to say much more given the Federal Trade Commission review and really at this point, from my perspective, lacking any definitive details of the transaction.

Gary Balter - Credit Suisse: so given that, could you talk to like the guidance – like, you said a lot of positive things during the call about the efforts that you're doing and how you're repositioning the Company and the expenses look like they have nice control in the quarter, but the guidance for the year is lower. One of the things we see at one of your competitors is they have all these initiatives to cut costs and if you look, I think it was Slide 13 of their presentation that they (never did) basically all the cost savings were economic and lower sales and the concern I think for people, for investors in your Company is we continue to see negative comps. We just trade basically lower sales and it offsets all the initiatives you have, how should we think about that, like how do we get back to a growth earnings portfolio for the Company?

Christine T. Komola - CFO: So Gary, just to kind of clarify, so our guidance is sales to increase on a 52 week basis and earnings to increase slightly on a 52 week basis. What we're doing is really making sure that we can invest to grow even quicker over time and I think you'll see every quarter sales momentum and some earnings momentum as we go throughout 2012. We do want to make sure that we preserve investment opportunity and as we look at the business and need to invest in our IT, our infrastructure, customer acquisition on the Staples.com, we're getting a lot of great momentum. We want to take advantage of that and be able to invest in it. So, it is a balance of being able to invest and drive momentum this year. But I do think over each quarter you'll see improvements.

Ronald L. Sargent - Chairman and CEO: I think the cost reduction initiatives are in place and you should feel very comfortable that we're going to get those costs that we've talked about this morning.

Operator: (Greg Hessler, Bank of America).

Greg Hessler - Bank of America: I wanted to ask you – I just want to make sure I heard the comments correctly. For the 2014 notes for that stuff that remains outstanding. The balance is $867 million. You intend to use cash on hand to repay that debt?

Christine T. Komola - CFO: Yes, that's our intention, Greg.

Greg Hessler - Bank of America: Then my second question would just be in terms of the overall credit rating, the overall commitment, has anything changed with regard to that? Do you still target a mid BBB credit rating and is paying down that debt, is that kind of an action that you see as justified towards maybe moving you up to a higher rating is mid BBB where you're comfortable?

Christine T. Komola - CFO: So, mid BBB is where we're comfortable. We'll have some kind of wiggle room in that as we do pay down the debt. But I think we'll continue to work with our credit rating agencies, but mid BBB is where we like the flexibility and it continues to be the right target for us.

Ronald L. Sargent - Chairman and CEO: And it's not just balance sheet. From my perspective, it is not just balance sheet. We have to show that we can grow the top and bottom lines. I think that's the other messaging for the rating agencies.

Greg Hessler - Bank of America: Then just maybe one follow-up from me. As you look at the balance sheet, is there sort of a minimum cash balance that you typically like to manage to? I'm just wondering if, you get in a situation where maybe free cash flow comes in a little bit below where you had expected whether or not potential debt pay down plans could change or any comments you have on that?

Christine T. Komola - CFO: Sure. So Greg, as we look at our kind of minimum cash hold threshold that's probably between $500 million to $600 million, but we do have seasonal dips that we know that happen as we buy for example in back-to-school time. In general, we can use CP in and out, if we need to, but on average, it's probably $500 million to $600 million.

Operator: Michael Lasser, UBS.

Michael Lasser - UBS: What it sounds like is that you are generating the cost savings. You have a pretty visible plan to achieve that, but some of that – a good portion of it's going to be reinvested in price. Could you give us some indication on where you think you are today in terms of how competitively priced you are versus perhaps where you need to be, and what the margin implications of getting there will be?

Ronald L. Sargent - Chairman and CEO: I think you can look at each segment of the business, and I think in general the headline is, I think, we are competitively priced given what our customers are looking for. I think you look at our pricing strategy, it's really to maximize margin dollars, and the way we're going to do that is by accelerating our top line, and that may mean the gross margin rate will see a modest decline, but I should note that our value proposition is not just about price. I mean, our customers want service, our customers attach great benefits to the rewards program and the announcement of that – you can walk in our store and if you are rewards member, you are going to get 5% back every day on every item in every service in the store. I think it helps us a lot in terms of value. Free next day delivery, that's big news. Before we had a minimum delivery charge, it had to be $50 in order to get free delivery. Our free delivery doesn't require an annual fee or a monthly fee or any fee. And I think customers are looking for assortment, and we're certainly responding there, and I think they are looking for an easy shopping experience. So, I think – I'm not as focused on pricing pennies as I am on value equation for our customers. I think in many cases, we were getting a (lift) from some of the online players on certain items and we have taken aggressive action over the last six months, and I think you will see more of that over the next few months as we try to make sure that our customers don't have any reason to shop anywhere else.

Michael Lasser - UBS: So, and I think this is important, so I don’t mean to pick on it, but – so it sounds like you think you are closer to where you need to be, but not fully there yet?

Ronald L. Sargent - Chairman and CEO: No, I think many of the actions we made today, I think the 5% off and the free delivery, I think gets us a lot closer. There is not going to be SKUs that we're going to be higher priced on or lower priced on, but I think the value proposition is a little different than online. I mean, first of all, our customer base is a lot more business than it is maybe consumer. I think the free next day delivery is something that our customers attach value. We have customized pricing for – 3,000 sales reps go out and negotiate prices, and I think in that case we're probably the low price leader certainly on the contract side. We deliver on our own trucks. We’ve got $25 million rewards numbers, we've got relationships with about 10 million SMB customers, and I think to me the omnichannel equation is important. I mean, we've got 1,900 stores in North America and we've got people there, we've got service there. We've got same-day offering, if that's what a customer wants. And having said all that, I mean, we're constantly evolving the model to make us even more competitive.

Michael Lasser - UBS: My follow-up question is on the omnichannel store. It sounds like you developed that late last year. What opportunity have you had to test it, and perhaps if you could provide a little more detail on what it looks like and how scalable it will be to the rest of the fleet?

Ronald L. Sargent - Chairman and CEO: Let me ask Demos to respond. He and his team have done a great job in pulling the store together, and right now we haven't tested it, because it exists in a lab. But Demos?

Demos Parneros - President, U.S. Retail: Thanks, Ron. Good morning. We're really excited about the 12,000 square foot omni store. One thing I should begin with is that we have over 200 stores in our network today that are below 14,000 square feet, so we have a lot of experience in operating small stores and urban stores, and have a high skill in dealing with space management. What we've done with the 12K is really transformed the store experience completely, and so you can imagine that we've gone through a very thorough process to get the right SKUs in the store. We've used different techniques to be more space efficient. We have featured our services which are a huge part of our growth initiatives. We have reduced unproductive categories that we have been talking about over the last year or so, so we have started to right size. We have a completely different operating model in the store, where our associates are trained completely differently and are equipped to help every customer with every need the way they want to shop. So we're very excited about this. We have several stores that are in construction mode as we speak, and we'll have some up and running in the first quarter.

Operator: Chris Horvers, JPMorgan.

Chris Horvers - JPMorgan: So, I want to follow-up on the price investment question. Can you talk about on the North American contract side, the investments in price, are they the same ones that emerged in the second quarter and was the pace of that investment stepped up in 4Q versus the pace that you saw in the second and third quarters?

Ronald L. Sargent - Chairman and CEO: Joe?

Joseph G. Doody - President, North American Delivery: I think it's – from a pricing standpoint, there we clearly have been in a mode of ensuring that we are maintaining our base of business, and there has been some pressure throughout the year in terms of bids and tenders to hold on to that base. So, I'd to say there has been any change in the trajectory of pricing within the contract area. We – clearly it’s a competitive marketplace out there, continues to be most of the pressure is in enterprise type accounts, and the team has done the great job of ensuring as we forward that we are going to be getting price back in the case of cost increases that are passed on, but we see less pressure there from our vendor. So, I think I wouldn't say there is any change in trajectory there, Chris, as we look throughout the year, and I'd say potentially less pressure as we look into 2013 and beyond.

Ronald L. Sargent - Chairman and CEO: I guess just a factoid is, looking at the Office Depot and the OfficeMax contract gross margins, both of them improved their gross margins by over 60 basis points during the fourth quarter, which would kind of reinforce Joe’s comments.

Chris Horvers - JPMorgan: Then on the $150 million of targeted savings, also a follow-up. I'm not sure you’re willing to come out and say, hey, you know what, $75 million of that's going to flow to the bottom line. But could you put some guide post around how you think about how much of the $150 million needs to be reinvested back in the business versus what perhaps can help drive the EBIT margins?

Christine T. Komola - CFO: Sure. Chris, it's Christine. So, we plan to probably invest the majority of it back into the business. That is going to be important as we look at the various levers that we have to make sure that we growth the top line, and I think you'll see it invested back in margin, you'll see it invested back in operating expenses to drive with marketing expense. So, we'll drop some of it as we go throughout the year. You'll see the improvement, but in general the majority will be driving sales.

Chris Horvers - JPMorgan: Then finally, just curious on the store overlap that you see with Office Depot and OfficeMax. Can you talk about maybe the top 100 MSAs, where you overlap with them or how many you overlap and how many don't, and maybe how many stores could be potentially up for you to look at if the transaction goes through?

Ronald L. Sargent - Chairman and CEO: Yeah, again, I can't even begin to speculate on kind of what a merger scenario would be. I can tell you the facts are that, we don't operate in markets like Alaska, Hawaii, St. Louis, New Orleans, Buffalo, New York, and I think pretty much every other kind of market in the 50 states, we do compete with both of them, but those are the markets that we don't have a single store and both of them compete, I believe.

Chris Horvers - JPMorgan: So that sounds like a pretty small number overall?

Ronald L. Sargent - Chairman and CEO: Yeah, in terms of where we don't compete with them, yes.

Operator: Brian Nagel, Oppenheimer.

Brian Nagel - Oppenheimer: My question, I want to ask about on Europe, your International operations. You called out in your press release that you closed some stores in Europe and, Ron, you made a comment in your prepared remarks about some of the progress you're beginning to make there. As we follow the issues in Europe for Staples, one of the things that keeps coming up is the tough time you've had in really rationalizing the infrastructure, particularly on the retail side. If something is beginning to change – that's my question – if something is beginning to change there, are you starting to see some more opportunities or start maybe taking some capacity at that division which should eventually lead to better operating margins down the road?

Ronald L. Sargent - Chairman and CEO: You're right. Yeah, I was there just two weeks and I'm feeling better about our business in Europe, and I think it all starts with the strong leadership and a strong plan. And I think John and his team have made a lot of progress in a very short amount of time. Having said all that, and I'll let John comment, but the European economic situation shows no sign of improving in 2013. So with that, let me ask John to kind of weigh in. He is on the phone.

John Wilson - President of Staples Europe: In addition to what Ron just said about the challenging macro environment, I do believe there is significant opportunity for us to streamline our business operations here and reduce our complexity. That's the focus that I've been looking at over the last four or five months. I have been putting together a plan, as Ron mentioned as well, to really help us guide our future thinking here. But there is certainly opportunity for us to rationalize beyond Retail, and looking at moving to a more harmonized and more streamlined overhead throughout our three channels in Europe. We have very complex – overly complex systems, overly complex assortments and very different business processes across the markets, and we've been working very hard to come up with a plan to harmonize those processes and streamline our overhead and to move to a more common business model across all the channels. Certainly, Retail is a big part of that, but it is about one-third of the business and we are looking at improving the operations across all of our channels.

Brian Nagel - Oppenheimer: So, at some point in the not too distant future, will you be able to articulate maybe operating margin – for a long time Staples has talked about longer-term operating margin targets for Europe and International business. Would you be able to sort of, say, update us on that guidance?

Christine T. Komola - CFO: Brian, it's Christine. We probably over time will do that, but right now we're really focused on just what does it take to fix the business. We don't expect to update that guidance or change it anytime soon.

Operator: Matt Fassler, Goldman Sachs.

Matthew Fassler - Goldman Sachs: First question, so in the fourth quarter, your revenue run rates were kind of flat to down across your businesses when you back out the impact of Sandy and you're guiding to a low single-digit improvement. You talked about February being a little bit better in Retail specifically. What's the path through the year for revenue recovery and if you look across your three businesses, how would you assess the revenue outlook segment by segment?

Ronald L. Sargent - Chairman and CEO: Well, I mean, I think certainly given all the investments we are making early in the year that will bode well for later in the year. So, I think, you'll see a slow build throughout the year. In terms of segments, I would say that our contract business has recently comped some losses maybe about 16, 18 months ago. So, we should see a better contract sales certainly starting in the first quarter. I think our dotcom investments we should see some positive growth in that business in the first quarter. We I think have a little ways to go in our retail business because of all the other changes we've made and I think, John you may want to weigh in on this, but I think international business certainly Europe would be kind of a continuation of the current trend. Hopefully, it will get better throughout the year and I'm sure hoping that Australia starts to show some real improvement this year as well.

Matthew Fassler - Goldman Sachs: John, were you going to say something, I'm sorry?

John Wilson - President of Staples Europe: I would just add to that, I would say as Ron mentioned the trends continuing in Europe on the sales are top line basis getting moderately better towards the latter half of the year, but we're also constantly making some decisions, particularly I think in the online business to refocus our marketing efforts and to spend more energy on retention than new customer acquisition as we look at the marginal economics of that business. We may intentionally reshape our P&L and trade-off some top-line that has been uneconomic for better bottom-line results, not short-term but long-term thinking. So, there may be a bit of headwind there as we reshape our business in the omni.

Matthew Fassler - Goldman Sachs: My second question, particularly for Christine relates to the magnitude of the decline in inventive comp in the fourth quarter, and I'm curious in that context did you accrue S4 levels throughout the year and only back it off in Q4, did that accrual change over the course of 2012?

Christine T. Komola - CFO: We did actually accrue it throughout the year, but a little bit less every quarter, but the substantial reversal was in Q4 when we realized that our sales were going to miss, as well as…

Matthew Fassler - Goldman Sachs: Can you quantify that?

Christine T. Komola - CFO: We actually haven't specifically quantified it and don't want to get into that level of detail.

Matthew Fassler - Goldman Sachs: Then final kind of more strategic question. You made some changes to the loyalty program it looks like you're giving a lot to your customers. Can you talk about the economics of the new program and perhaps some of the breakeven points that you'll need to achieve to make that work?

Demos Parneros - President, U.S. Retail: I'll begin with the highlights. It's Demos. Good morning, Matt. We're excited about the program. It's a much simpler program from our store execution standpoint. It's a much simpler program from a customer standpoint. It's not limited to key categories alone. We expect a huge ramp in new customers getting on to the program. The economics needed to breakeven are very manageable. In our mind we've got our field team fully committed behind it and as we mentioned before the combination of the rewards program 5% back on all products and all services in combination with free delivery we feel like will more than cover (all) costs to launch the program.

Ronald L. Sargent - Chairman and CEO: Certainly part of the funding is going to maybe in many cases we have been incredibly well priced because of promotional efforts and I think we're going to be tweaking promotional efforts in order to pay for that. In terms of the delivery cost it's interesting, but a lot in fact probably most of our deliveries were being delivered free anyway because they past the $50 threshold. So we figured if 98% were going free anyway why don't we just tell the world we're free and take credit for is and get the marketing popped out of it.

Operator: Greg Melich, ISI.

Greg Melich - ISI: I had two questions, one on the cash flow again and then online. As you mentioned before the cash flow of $900 million a bit of a build up there, could you just give us the number for CapEx what you've budgeted for this year versus last year and also what the cash cost of restructuring ended up being in 2012 and what you think they'll be in 2013?

Christine T. Komola - CFO: So, for capital, we probably will be about the same maybe slightly higher in 2013. In terms of the cash cost for the restructuring that's the bulk of it, it will probably be or a little bit less than $50 million in Q4, the remaining amount, which will be more significant throughout 2013 is probably about $100 million, if you look at the severance that has to get paid out and the lease payments that happen throughout the year.

Ronald L. Sargent - Chairman and CEO: (indiscernible) the P&L this year.

Greg Melich - ISI: That's for the charge you've already taken out for I think an additional that you might decide to do?

Christine T. Komola - CFO: No, that's not anything incremental.

Greg Melich - ISI: Then second, the online assortment expansion up to 100,000 SKUs and going to 300,000 is that -- how many of those SKUs will be from your own DC and fulfillment and how should be think about that from a working capital and serve logistics perspective is to how that link some of the rest of business?

Joseph G. Doody - President, North American Delivery: Greg, Joe here. Heavily, heavily will be drop ship and working with our key wholesalers that we have relationships with today. So, you shouldn't think of it as really much being added to our current inventories. Now, obviously, throughout the process, we continue look at the type of velocity on those SKUs that we add in and as they would build to the point that would justify, we would bring them in. Then we continually go through this process in all of our buildings to destock and restock those SKUs that are the high runners with others that are low runners take those out relay on wholesalers for though. So, it will be a process somewhat really followed in the past, but for the most part the vast majority of what we're adding now is dropship or in relationships with our existing wholesalers.

Greg Melich - ISI: Maybe just as a follow-up to there. Could you remind us right now roughly how many SKUs you carry in your own DCs, is it still around 20,000-ish?

Ronald L. Sargent - Chairman and CEO: Yes, that's a good number. It varies obviously based on the size of our buildings out there, but that's a good number.

Greg Melich - ISI: Then lastly, on the – and this could be, I guess, for any part of the business, but probably Demos. Where do we sit now in getting the technology in the smartphone products into the stores and how is particularly smartphones helping the gross margin, if at all?

Demos Parneros - President, U.S. Retail: So, today we have 500 stores in the U.S. that carry mobile phones. We have the three-carrier model. It's been a build over the last year and a half. We've actually transitioned from a partner relationship to our own staff departments which we like to operate better. It's been a little bit below where we expect, obviously we set fairly aggressive goals, but building very nicely, and really it's a function of what's hot in the marketplace, there were some hot phones out there in the past quarter and we've definitely enjoyed a lot of that success though. Our plans over the next couple of quarters are to continue to expand the store count eventually getting to roughly 1,000 stores for mobile phones. We expect it to be a more meaningful contributor. From a margin standpoint, it's a much better margin place and computers, but clearly not to the level of some of the consumables like ink.

Operator: Dan Binder, Jefferies & Company.

Dan Binder - Jefferies & Company: Couple of questions, first I was curious, when you went through the integration with Corporate Express, what base assumptions did you have for customer attrition given sort of the natural disruption that occurs with integration and customer choices that are being made?

Ronald L. Sargent - Chairman and CEO: Where we had customer attrition was really only in the U.S., and Joe?

Joseph G. Doody - President, North American Delivery: As far as target did you say it Dan?

Dan Binder - Jefferies & Company: Yeah. What were you planning on at the beginning of the process and that did you ultimately realize once you got through it?

Joseph G. Doody - President, North American Delivery: Yeah, less than 10% and we are within that range.

Dan Binder - Jefferies & Company: Also on the follow-on to that endless aisle SKU expansion online. Can you give us a little bit of the math behind the contribution from those incremental SKUs? In other words, if you look at the – I realize it's still ramping, but if you look at that incremental SKU assortment that's been added, how much of the sales did it actually generate and is it favorable from a margin perspective?

Ronald L. Sargent - Chairman and CEO: Yeah, I mean, certainly, as we're ramping now, it's a pretty small percentage and I don't want to share the actual sales for competitive reasons. But obviously, it's doing well enough that we think we can expand and grow from here. In terms of margin, it's a lower margin rate, certainly incremental margin dollars and from return on invested capital or RONA basis, it's terrific. It's a model that I think Amazon has done a great job with and credit to them I think for kind of showing us the way of that.

Dan Binder - Jefferies & Company: Then finally, I was wondering if you could comment on same account sales in contract. I think they were under some pressure for several quarters. Just curious if that's changed at all.

Ronald L. Sargent - Chairman and CEO: Yeah, the fourth quarter, Dan, they were still under some pressure. They are down modestly I would say in the quarter and I think some of that too was – we saw some reluctance, I think you can say, as a result of the fiscal cliff, but down modestly as far as existing.

Operator: David Gober, Morgan Stanley.

David Gober - Morgan Stanley: Just curious on the Staples.com business, obviously you've been investing there for the last two or three quarters or so and 4Q looked like it was down slightly and I guess flat, if you exclude Sandy and some other impacts, but just curious, if you could talk a little bit about the product mix there and what drove the softness in the dotcom businesses, is that also a technology similar to the stores business?

Ronald L. Sargent - Chairman and CEO: Demos?

Demos Parneros - President, U.S. Retail: A very short answer, technology. I mean that was really it and while there were some positives along the way, the overwhelming negatives in technology drove it down. What we're excited about is what we're working on right now, the other thing I should mention is that the similar hit that we took in the part of our sort of northeast store network also affected our customers who shop at Staples.com, but a lot of the things we've been talking about, the extended assortment, the customer acquisition efforts have really been ramped up and really the prices continue to unlock by putting our stores and online teams together both in merchandising and marketing, really making it much easier for customers and make the relationships with our vendors much more meaningful. So, we're excited about getting out of the challenges, keep moving forward with our plan.

David Gober - Morgan Stanley: Just a quick clarification on the Apple side. I know you've launched Apple accessories. Is there anything in the agreement about actually selling hardware in the future, is that the extent of where you guys are today?

Demos Parneros - President, U.S. Retail: At this point, I'm really excited about the work that our team has done. We've had a very nice partnership with Apple. I should mention that Apple products, we previously sold in Staples Canada and many places around the world, and now in the U.S. we're selling accessories on Staples.com also in our commercial group and will be in store in a few weeks. So, now word on hardware at the moment, but we're excited about the rollout and early few weeks already we're encouraged by what we see and hope to discuss this in the future calls.

David Gober - Morgan Stanley: For Christine, I was wondering if you could dig a little bit and say capital allocation and maybe kind of the philosophical thought process behind increasing the dividend and maybe helping us to try to size the share repurchases of 2013, obviously you have the maturity this year, you've got a little bit more of a commitment from the dividend, should we expect buybacks to be relatively flat year-over-year?

Christine T. Komola - CFO: So, as you know our goal is to continue to remain BBB – in the BBB range, mid 2s is kind of debt to EBITDA – adjusted debt to EBITDA ratio that we're looking at. We do have a big outlay with our final payment of those bonds that we've got, almost $900 million. So, as we think about our cash flow and we think about our flexibility, we did want to give some back to the shareholders which is why we did and the Board approved the increase in our share – in our dividend program. And as we look forward, the buyback program, it is going to be down from this year. We haven't given the precise number because we want to make sure that we have as much flexibility as we can throughout the year, but we definitely plan to make sure that continues to be part of our plans for 2013, and as we go forward, we'll continue to let you know how that progresses, but I think we need to make sure that we've preserve flexibility this year as we invest in the business and as we plan to pay back the remaining of the still 1.5 bonds.

Operator: Colin McGranahan, Sanford Bernstein.

Colin McGranahan - Sanford Bernstein: Most of my questions have been asked, but first question just on Australia. Clearly, continued negative double-digit top line a little surprising what's the outlook there and what's the prognosis for that business to turn the corner?

Ronald L. Sargent - Chairman and CEO: Well, let me ask Joe Doody, who – Australia now reports to Joe because it's a contract business and Joe is our contract expert and even more importantly Joe was down there last week. So, Joe?

Joseph G. Doody - President, North American Delivery: Well, we are in a rebuilding stage there in that business. There is no doubt about it. I think we've had to rebuild the team. It's needed and gotten a new country leadership, sales management leadership. We've replaced pretty much all of our line of business heads down there over the last 12 months. I see a path going forward that's certainly much brighter and on the uptick from where we've been. We've stabilized the business and it's becoming more predictable now in terms of being able to hit their numbers, but it takes a while to recapture business lost business in some cases and build up a new book of business. So, they have gone aggressively after cost and taking cost out. So, I am looking for a strong year-over-year improvement, but mostly geared towards the second half of the year.

Colin McGranahan - Sanford Bernstein: Then with Australia, it sounds like making progress, but still obviously a long road. On Europe, Ron, I think you said no real improvement expected in '13 and you're closing the stores. So, getting to the low-single-digit top line growth sounds like it's dependent on positive comps and some positive growth in North American Commercial?

Ronald L. Sargent - Chairman and CEO: Yeah, we certainly think North America is our big opportunity in 2013 and '14.

Colin McGranahan - Sanford Bernstein: If you struggle to get there, what else can you do on the cost side this year in excess of the $150 million of kind of line of sight cost you've already identified?

Ronald L. Sargent - Chairman and CEO: Well, I think we're pretty good at kind of managing cost and managing expenses and we'll continue to do that and obviously we're going to be aggressive on the cost take out side. We have a plan that I think all things together in the event that we have to make mid-course corrections, we're always prepared to do that and we do that every year. I mean, somebody had told me that we were going to have negative five comps and we were also going to generate $0.46 of earnings I would have kind of wondered how we're going to pull that off, but I think we're pretty good at kind of managing as we go and we'll do that in '13 as well.

Operator: Anthony Chukumba, BB&T Capital Markets.

Anthony Chukumba - BB&T Capital Markets: Most of my questions have been answered, but I did have a question a little bit about technology. I mean, you did negative 5% comp, it sounds like technology aside from Hurricane Sandy was a big part of that. I mean, is it fair to say that Windows 8 has been disappointing for you guys and do you expect Windows 8 to catch on at all in fiscal year '13 or is it just more the secular shift away from PCs and towards tablets?

Ronald L. Sargent - Chairman and CEO: Demos?

Demos Parneros - President, U.S. Retail: A couple thoughts on technology for Q4. One is, as we mentioned before Black Friday has changed I think forever as far as stores are concerned. Black Friday used to be one day as we knew it and today it's more a Black Friday week and in fact even the weekend before and a weekend after and the online play is completely different. All that said, it's just changed the nature of that business and for us it was better online, worse in stores. In terms of the specific, what happened in technology, a couple of quick thoughts, one consumer type continues to just suffer and I'm talking about categories like digital cameras, software, peripherals, GPS devices, et cetera all those tend to go into decline as they eventually go away and customers move onto the tablets and mobile phones. Specifically with respect to PCs, PCs were under pressure in Q4. There's a lot of anticipation and build for Windows 8, as you mentioned and that really slowed sales down. That, in combination with people moving to tablets and then the Windows 8 release honestly was below what we expected. One of the products was introduced, the Pro model was introduced just recently to reasonably good reviews and decent sales, but definitely below expectations. I would also say that touch product which really makes Windows 8, a better experience was scarce in the quarter and also mobile phones which integrate the tablet, the PC and phone experience together into, really a new platform, a new ecosystem were also slow to be introduced. So, we believe in Windows 8. We're excited about it, like the recent things that we've seen, but it's got to build a little faster.

Operator: Denise Chai, Bank of America Merrill Lynch.

Denise Chai - Bank of America Merrill Lynch: I just want to know, for the stores that you've closed, have you seen any benefit to sales at nearby stores?

Ronald L. Sargent - Chairman and CEO: In terms of the store closures, many of the store closures have come late in the years. For the specific list of stores, I'd say it's too soon to tell. Our experience to store closures as we go through a very careful and thoughtful process is to benefit our stores, particularly these are stores that we've closed that are end of lease and obviously we closed them because we feel like there is a benefit to the network. So, our experience on sales transfer and profit dollar transfer, I would say has been pretty much right on target to this point. So, we're encouraged by our real estate repositioning plan and our square-footage reduction, we feel like we're reducing the square that we don't want and it makes our overall network more efficient. That coupled with our new store format makes the stores more productive from a margin dollar standpoint. So, I'd say, it's right on plan at this point.

Denise Chai - Bank of America Merrill Lynch: So, for the stores that you're downsizing this year to 12,000 square feet, what are your expectations for sales retention?

Ronald L. Sargent - Chairman and CEO: Sales retention should be around 95% of what the prior number was off by a point or 2. That's been our experience. The exciting thing about those stores as we take out unproductive areas and obviously reduce rent substantially that our profit dollars increase in the process.

Denise Chai - Bank of America Merrill Lynch: Just one follow-up. I know you've been asked on dotcom several times now. But I just want to know what gives you confidence in your high-single-digit guidance in 2013 given that you've already tripled your SKUs and actually we saw momentum kind of maybe slowing or really not going anywhere last year.

Ronald L. Sargent - Chairman and CEO: Certainly the start of the new year shows that momentum is growing again and obviously, we're investing heavily to grow the top line. So, I feel like if we've got a growth engine for the Company in 2013, it's really going to be around our Delivery business and primarily dotcom given the trends we are seeing, the customers we are acquiring and the growth we are seeing in the SKU expansion.

Joseph G. Doody - President, North American Delivery: Just the other thing I would add to that is that with our omni-channel efforts every single store associate in the country is essentially sales person for expanded assortment and really there's no reason for any customer to walk out of a Staples store without the purchase they want, whether they buy it in the store or online, now, that we've got the availability of the new assortment.

Ronald L. Sargent - Chairman and CEO: As I mentioned earlier I mean our store managers are now incented to drive sales on a trade area and not just in the retail store. So, obviously dotcom is increasingly important and that's, I think, one of the great values of putting the two businesses together and combining incentive plans. So, we feel like our store network team is really going to get behind this thing and drive it this year.

Operator: (Helen Pan, Barclays.)

Helen Pan - Barclays: Just a quick question on $150 million in cost cuts for '13. How much of that is coming from vendor negotiations and direct procurement and other buckets?

Christine T. Komola - CFO: We haven't delineated specifically, but there is a substantial part that's related to the product cost, but the rest actually is sprinkled kind of throughout the P&L and that includes indirect procurement, but it includes things that Demos is doing on the store labor model that he's got with the new smaller format. It includes marketing more effectively and efficiently in a lot of places. So, it really does kind of fall throughout the P&L.

Helen Pan - Barclays: Then looking out into '14 and '15, do you plan to reinvest all of the cost savings back into the business as you alluded to for '13?

Christine T. Komola - CFO: Helen, it's still too early to determine that. We really are focused on making sure we understand what's working and what's not this year. Part of that will be contingent on how things work with all of the different initiatives that we've got going on, but we'll get more clarity as see this year unfold.

Helen Pan - Barclays: Then I just had a really quick question on the smaller format stores. You mentioned that you have 200 currently. Do you have a longer term target for that?

Ronald L. Sargent - Chairman and CEO: So, the 200 stores that I mentioned are stores that are just smaller stores, so they are not this new transformational 12K Omni store. Often, we read about retailers going to smaller stores and I was just mentioning that based on where our stores are and our experience in multiple formats that we have become good at this. Our plans are to deploy this model in as many places as we can and overall to continue to move towards square footage productivity in any store we have, so whether it's just a straight reduction or a store that we relocate, we want to go with our best practice which is we believe this Omni 12,000 store.

Operator: Katherine McShane, Citigroup.

Katherine McShane - Citigroup: I know Europe has been talked about a lot on the call today and I just wondered with regards to the store closure strategy. Were any of the stores closed to the end of their leases or is that that really not an option when it comes to Europe, because I know they are longer lease times and going forward, is private label and private brands still part of the equation to bring that to be more prevalent with the program in Europe?

Ronald L. Sargent - Chairman and CEO: Well, let me ask Christine to talk to the first one and a few of those were near the lease term, but basically we tried to get rid of bad stores is the answer, but let me let Christine to answer that one and then maybe John can talk about his plans in the private label side in Europe.

Christine T. Komola - CFO: Great, so yes, Kate, most of those leases are long-term. It is hard to get out of them. They have the bulk of it is in the U.K. which is over six years on average and then there are some stores that we actually own that we'll sub lease and get rid of, but most of them are long lease terms, difficult to get out of without taking this write off now. We will, as we go throughout the next couple of years look as we tighten the lease life, see if we can continue to get out of them, but hopefully that answers your question.

John Wilson - President of Staples Europe: Then with respect to private label, we're going through a major assortment harmonization project across Europe, retail, online and contract and a significant part of that effort is to expand our online offering. Today, that's in the mid-20s dependent on the channel, but the mid-20s is a percentage of our sales, and we think there's significant opportunity to expand that and we're looking at a number of vehicles for that, not just the Staples brand, but potentially even a finer line and expanding the assortment to the adjacent categories with some of the other private label names we've used in the U.S. Brighton and so forth. So, private label will be a significant focus for us going forward.

Katherine McShane - Citigroup: My last question is with regards to the free shipping and 5% off, is that a global program? Are you offering the same thing to the contracts in Europe?

Ronald L. Sargent - Chairman and CEO: Yeah, virtually all of our contract business ships free anyway, because the average order size tends to be large, and that's part of a negotiated agreement with the customer. This is in the U.S. today. We're looking to see if it makes sense to expand it to Canada and then we'll look to see if it makes sense to expand it to Europe.

Operator: I would now like to turn the call over to Ronald Sargent for closing remarks.

Ronald L. Sargent - Chairman and CEO: Well, my remarks are brief. We've done a pretty good job, kind of managing expenses over the last few years on a pretty tough economic climate. Now, I think it's all about getting the top line going and generating gross margin dollars. So, thanks for joining us on the call this morning and we look forward to speaking to all of you again very soon.

Operator: Thank you for joining today's conference. This concludes the presentation. You may now disconnect and have a great day.