Staples suffered revenue and earnings declines in all three business segments due to weakness in computer sales, core categories, and Europe. Retail store productivity also declined. During Q2, Staples continued to build momentum in non-core office supplies, such as facilities and breakroom supplies and copy and print.
Staples' top priority will be to grow revenues both in North America and internationally. However, its international business will need more than top line growth and Staples may consider closing some international stores when leases expire. Overall, Staples will be willing to sacrifice margin to grow sales.
North American Delivery
In its contracts segment, Staples is retaining customers, but at an increased expense. In Q2, it began giving an instant discount to its biggest customers and reduced its threshold for free delivery. It priced aggressively to gain market share. It also saw an increase in paper prices, which take longer to pass on to its largest customers. Sales to existing customers slowed in the quarter. The deceleration in contract business in the quarter came mostly from state and local governments.
Staples believes its dot com business is a very strong business and is likely to be its fastest growing business category. It has allowed free delivery on ink, regardless of the size of the order. Frequency of orders on Staples.com is up, but the average order size is down.
North American Retail
In retail stores, computers and software sales were soft, while there was strength in copy and print, mobile phones and accessories, and facilities and breakroom supplies. Staples is still having success in selling Apple products in Canada. It expects computer sales to remain soft ahead of the Windows 8 release at the end of October.
Copy and print and facilities and breakroom supplies saw revenue growth. Traffic to the copy centers increased in Q2. Staples has expanded its breakroom products, lowered prices and increased its assortment of brands, and customers have responded favorably. Staples is looking reducing prices in ink and toner, paper, and facilities and breakroom supplies.
Staples back-to-school program started a few weeks ago. It offered a back-to-school savings pass, which allowed customers to save 15 percent on school supplies. It also launched a binder recycling program.
A few weeks ago, Staples started selling the Google Nexus tablet. So far, demand for the tablet has been very strong.
In Q2, Staples opened 6 stores and closed 5 stores. At the end of the quarter, it had 1915 stores in North America. Of those stores, 1,579 were in the United States and 336 were in Canada. So far this year, Staples has relocated 12 stores to smaller formats and downsized 4 stores. It expects to downsize 16 more stores by the end of the year. It expects to reduce overall size by 600,000 square feet by the end of this year.
Staples International
Sales continued to be very difficult internationally. Sales were especially weak in southern Europe due both to the economy and increased competition. Sales in the Nordic region were stable. Improving international performance is a top priority for Staples.
Financials.
Total sales declined 6 percent from Q2/2011. Sales declined by 3 percent in constant currency. Currencies impacted sales by 250 basis points. Due to the recent weakness in its business and slowing in the economy, Staples expects sales to be flat for full year 2012.
In North American Delivery, sales declined by 1 percent and were flat in constant currency. Sales at Staples.com increased in the low single digits. However, contract business declined by 2 percent. Staples' failure to renew contracts with 2 large businesses in Q3/2011 resulted in a loss of 70 basis points. Sales in facilities and breakroom supplies increased by 20 percent and Staples is ahead of its plan in this category. It expects to reach almost $1 billion in facilities and breakroom supplies in North American delivery in 2012. Staples has also added new products to its website in categories such as safety and education, technology and industrial supplies.
In North American Retail, sales declined by 3 percent, or 2 percent in constant currency. Same store sales declined by 2 percent, traffic declined by 2 percent, and the average order size was flat. Half of the sales decline was due to a decrease in computer sales. Sales of copy and print grew by mid-single digits. Facilities and breakdown had double digit increases.
In Staples International, sales declined by 10 percent in local currency and 18 percent in U.S. dollars. Sales declined in Europe by 7 percent in local currency and same store sales declined by 9 percent. Sales in Australia declined by double digits, but Staples expects sales to increase sequentially in Australia through the rest of the year.
Gross profit margin was 26 percent, a decline of 51 basis points. SG&A expenses were 21.7 percent, an increase of 28 basis points. The increase was a reduce of a decline in sales, not an increase in expenses.
Total operating margin was 4 percent, a decline of 78 basis points.
Operating margin in North American Delivery was 7.7 percent, a decline of 72 basis points. Margins declined as a result of lower margins in core products. Additional investments in Staples.com, such as free delivery, resulted in a lot of margin pressure there and was a major factor for the gross margin decline in North American Delivery. Operating margins also declined in contract. The reduction in margin was somewhat offset by lower marketing expenses, as Staples continues to move away from more traditional marketing.
Operating margin in North American Retail was 4.4 percent, a decline of 59 basis points. Most of the decline was due to deleveraging of fixed expenses on lower sales and increased labor costs in Canada.
Operating margin for Staples International was 2.0 percent, a decline of 325 basis points.
Earnings per share in Q2 was $.18, a decline of 28 percent. Staples has revised its full 2012 earnings outlook to EPS growth in the low single digits.
At the end of Q2, Staples had $2.1 billion in liquidity, consisting of $1 billion of cash and cash equivalents and $1.1 billion in lines of credit.
In Q2, Staples repurchased 12.1 million shares for $159 million. It will continue to use excess cash to buy back stock throughout the second half of 2012. It also plans to use cash to repay a $325 million note that matures in October.
The transcript of the earnings conference call can be located on Seeking Alpha at the following link:
http://seekingalpha.com/article/809261-staples-management-discusses-q2-2012-results-earnings-call-transcript
Copyright 2012 Jaygo's Earnings Conference Call Summaries
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
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