Wednesday, November 16, 2011

Staples' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Although this blog is about the reprographics business and industry, there are similarities between the reprographics industry and the office supplies industry, and, add to that the fact that Staples operates a fairly large “Copy & Print” business, considering the number of stores Staples operates and the geographic reach of Staples’ operations. Staples’ Copy & Print business, which is growing, definitely competes with all companies who offer small and large-format imaging services. In this post, I’m going to “bold type” (v.) comments made about Staples’ “Copy & Print” business, just to make sure that those comments stand out from the rest of the information.

Staples Q3 2011 Hurt By Weak International Sales; Trims 2011 Outlook

The Framingham, Massachusetts-based world's largest office products company reported net income of $326.38 million or $0.47 per share for the third quarter, higher than $288.68 million or $0.40 per share in the prior-year quarter which included integration and restructuring costs of $5.64 million.

On average, 17 analysts polled by Thomson Reuters expected earnings of $0.47 per share for the third quarter (Q3 2011). Analysts' estimates typically exclude one-time items.

Total sales for the quarter edged up 0.5 percent to $6.57 billion from $6.54 billion in the same quarter last year, but missed thirteen Wall Street analysts' consensus estimate of $6.71 billion. Sales declined 1 percent in local currency.

For fiscal year 2011, Staples lowered its adjusted earnings guidance to a range of $1.35 to $1.39 per share from the prior forecast range of $1.39 to $1.45 per share, but continues to expect sales growth in the low single-digits.

The day before yesterday, Staples’ Management, and Financial Analysts who follow and report on Staples, participated in an “earnings call” and, yesterday, published a Transcript of the earnings call. Below, I’ve copied into this post some of the comments made during the earnings call.

First up, Ronald L. Sargent - Chairman, Chief Executive Officer and Chairman of Executive Committee, handled the initial discussion about Staples’ US business, and, among the many comments he made, near the beginning of the Transcript, the CEO said this…..

We saw strength in computers, technology peripherals and Copy & Print, while paper was down slightly. We also drove solid growth in other adjacent categories during the third quarter. Promotional products grew double-digits and achieved record sales for the quarter, and Print Solutions achieved high single-digit organic top line growth.

Later on in the Transcript, the CEO said this …..

Taking a look at our adjacent businesses, we had low single digit comps in Copy & Print during the third quarter. This reflects the benefits from investing in our sales force, as well as the recently expanded range of products and services offered in stores and on our website. And our EasyTech business also continues to comp above the house as customers took advantage of our $9.99 PC Tune Up promotion. North American Retail operating margin was 10.7% for the quarter, and that was up 12 basis points year-over-year. This reflects improved product margins as a result of more efficient marketing, partially offset by higher labor expense and investments in growth initiatives.

We have big plans to drive traffic this holiday season. This year, we'll have a wide assortment of the hottest new products and brands, including Kindle Fire, Nook tablet, Keurig coffee makers and a variety of gift products from Brookstone. We're also now selling Apple products in our stores in Canada, including the iPad 2. We're working to further increase awareness of our Copy & Print services by offering discounts on holiday cards, invitations and calendars. And we're very excited to be partnering with Martha Stewart in launching a broad line of innovative and fashionable products early next year.

During the third quarter, we opened 4 stores and we closed 3 stores, ending Q3 with 1,908 stores in North America. That's 1,575 in the United States and 333 in Canada. We remain on track for net addition of 20 stores in North America for the full year. We continue to make progress with 150 store leases up for renewal this year as well. We've had a lot of success renegotiating rents, in many cases below our current rental rates. We also remain focused on increasing store productivity by continuing to invest in new growth ideas. Year-to-date, we've added over 375 mobile phone departments, bringing our total for the chain to about 450 at the end of the quarter, and we're on track to add about 50 more of these by the end of the year. This year, we've also remodeled more than 60 copy centers. We've added 80 Copy & Print account managers and made great headway improving the quality of this $600 million business for the company.

Michael A. Miles - President, Chief Operating Officer and President of Staples International, made this comment during his discussion of Staple’s European-operations results …..

In Europe, our business turned negative in August, coinciding with the escalation of sovereign debt concerns. Europe office products declined 5% in local currency for the quarter after showing 2% growth in Q2. Delivery continues to outperform retail, with particular strength in Contract, which grew sales 2% in local currency versus last year. Our European Retail comps were down 12% for the quarter, with weakness across all markets other than Norway, where we had low single-digit positive comps.

John J. Mahoney – Staples’ Vice-Chairman and Chief Financial Officer, made these comments during the Analyst Q&A session …..

I'd just maybe add that, I think, Gary, as you take a look at our growth initiatives, the 3 big ones, the tech, the Copy & Print and the facilities and breakroom initiatives, facilities and breakroom, I think, we mentioned has now gotten to about $800 million and it's growing mid-teens. We're trying to invest in that as fast as we can, adding sales force, adding products, vendor relationships. And I think the dollars in sales growth are going to accelerate and hopefully soon will begin to offset some of the declines and some of the categories like computer media and software and some of those categories that customers are changing the way they access that product. Tech and Copy & Print similarly are beginning to get to the point where the critical mass is going to hopefully deliver strong sales growth, enough to carry the whole company as it gets bigger in total dollars. The challenge is how much can we absorb of some of the new things that we're doing. And we're trying to push the teams as hard as we can to take as much investment and absorb as much of both capital and P&L that will help drive those businesses and hopefully continue to transform Staples as a business.

And, later on, Mr. Mahoney said …..

Well, I think that's absolutely the key is the mix towards services is driving a big chunk of the improvement. As we've seen over the last several quarters, Copy & Print and tech services grow substantially faster than the rest of the store, and as services is approaching 10% of our total sales at this point. So it's probably the biggest driver. But we also continue to see good success with Staples branded products, which has higher margins. And I think we've been -- as we've evolved our tech initiative, we've been less item-priced promotional with low-end PCs, and that's helped our margin as well.

You can read the full Transcript of Staples’ Q3 2011 Earnings Call at this Internet address …..

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