Staples, Inc. (SPLS) announced today the results for its third quarter ended October 29, 2016. Total company sales for the third quarter of 2016 were $5.4 billion, a decrease of four percent compared to the third quarter of 2015. On a GAAP basis, the company reported net income of $179 million, or $0.27 per diluted share. Third quarter 2016 results on a GAAP basis include pre-tax charges of $57 million primarily related to impairment of intangible assets in International Operations.

Excluding the impact of the sale of the Staples Print Solutions business during the second quarter of 2016, store closures, and changes in foreign exchange rates, total company sales for the third quarter of 2016 decreased two percent compared to the third quarter of 2015. Excluding the impact of charges taken during the third quarter of 2016, the company reported non-GAAP net income of $220 million, or $0.34 per diluted share, versus third quarter 2015 non-GAAP net income of $226 million, or $0.35 per diluted share.

“During the third quarter we pivoted from planning to execution of the Staples 20/20 strategic plan while delivering results that were right in-line with our expectations,” said Shira Goodman, Staples’ Chief Executive Officer. “Staples 20/20 is a transformational change of our strategy, our mindset, and our operating model to reshape our company for sustainable long-term growth.”

*Indicates a non-GAAP measure. Refer to “Presentation of Non-GAAP Information” and the accompanying reconciliations for more detailed information about these non-GAAP measures.

Third Quarter 2016 Highlights

Staples Business Advantage, the company’s North American contract business, experienced a sales decline of three percent compared to the third quarter of 2015 on a GAAP basis, and a sales increase of two percent after excluding a negative impact of approximately five percent due to the sale of the Staples Print Solutions business.
Excluding pre-tax charges of $57 million during the third quarter of 2016 and $40 million during the third quarter of 2015, the company improved operating income rate by 22 basis points on a non-GAAP basis.
Improved operating income rate in each of the company’s business units.
Ended the third quarter of 2016 with $2.2 billion in liquidity, including $1.1 billion in cash and cash equivalents.
Closed 16 stores during the third quarter of 2016 and 35 stores year to date in North America as part of a plan to close at least 50 stores in North America during 2016.
Acquired Capital Office Products, an independent office products dealer that generates more than $100 million of annual revenue early in the fourth quarter of 2016.
Divested the company’s retail business in the United Kingdom for nominal proceeds early in the fourth quarter of 2016.

North American Commercial sales for the third quarter of 2016 were $2.1 billion, a decline of three percent compared to the third quarter of 2015. Sales growth was negatively impacted by approximately four percent due to the second quarter 2016 sale of the Staples Print Solutions business and also reflects growth in facilities supplies, breakroom supplies, and technology products, partially offset by declines in ink and toner and office supplies.

Staples Business Advantage sales declined three percent on a GAAP basis and increased two percent on a non-GAAP basis after excluding a negative impact of approximately five percent due to the sale of the Staples Print Solutions business.

Operating income rate increased 18 basis points to 8.1 percent compared to the third quarter of 2015. This improvement primarily reflects lower compensation expense. This was partially offset by increased supply chain costs and lower product margin rate.

North American Stores and Online sales for the third quarter of 2016 were $2.5 billion, a decrease of four percent compared to the third quarter of 2015. Store closures negatively impacted third quarter 2016 sales growth by approximately one percent. Comparable sales, which combines comparable store sales and Staples.com sales growth excluding the impact of changes in foreign exchange rates, decreased three percent versus the prior year. Sales declines in ink and toner, business machines, technology accessories and mobility were partially offset by growth in computers and facilities supplies. Comparable store sales decreased four percent, primarily reflecting a decline in customer traffic versus the prior year. Staples.com sales declined one percent compared to the third quarter of 2015.

Operating income rate increased 7 basis points to 7.8 percent compared to the third quarter of 2015. This primarily reflects improved product margin rate in stores and online. This was partially offset by the negative impact of lower sales on fixed expenses in stores and online.

International Operations sales for the third quarter of 2016 were $749 million, a decrease of seven percent in U.S. dollars or five percent on a local currency basis compared to the third quarter of 2015. This was primarily driven by sales declines in Europe, partially offset by double-digit growth in China.

Operating income rate for International Operations improved 76 basis points to an operating profit of 0.7 percent compared to the third quarter of 2015. This primarily reflects improved profitability in Europe.

Outlook
For the fourth quarter of 2016, the company expects sales to decrease versus the fourth quarter of 2015. The company expects to achieve fully diluted non-GAAP earnings per share in the range of $0.23 to $0.26 for the fourth quarter of 2016. The company’s earnings guidance excludes potential charges related to the company’s strategic plans, including restructuring and related initiatives as well as the ongoing exploration of strategic alternatives for the company’s European operations. For the full year 2016, the company has increased its free cash flow guidance from approximately $600 million to approximately $700 million excluding the after-tax impact to operating cash flow of approximately $340 million of charges associated with financing for the proposed acquisition of Office Depot and costs associated with the termination of the Office Depot merger agreement. The company plans to close at least 50 stores in North America in 2016.