Staples’ (SPLS) CEO Ron Sargent On Q2 2014 Results – Earnings Call Transcript

Source: Seeking Alpha

We secured over $150 million of annualized cost savings year-to-date with continued momentum in areas like merchandising through improved vendor terms, labor and other expense management in our retail stores as well as more efficient marketing spend.

We’re in the early stages of dramatically changing our supply chain operating model and we’re developing a lower cost operating model in our North American retail stores to offset the negative impact of lower sales per store. We’re on track to eliminate at least $250 million of annualized cost in 2014 and we’re pursuing additional expense reductions beyond our previous target of $500 million by the end of 2015.

In summary we’re accelerating growth in our delivery businesses and stabilizing our international operations as customers turn to Staples for more products beyond office supplies.

We’re increasingly confident that we can continue to build on the early progress we’ve made with our reinvention. At the same time we’ve got a lot more work to do to get our retail business back on track. We continue to close underperforming stores. We continue to downsize and relocate stores to our more efficient 12,000 square feet format and we’re developing plans to move to more aggressively reduced retail expenses to bring our cost structure more in line with our current sales base.

Additionally we’re creating a better customer experience through increased coordination between our retail stores and our online platforms. We’re remerchandising our stores with more categories beyond office supplies and we’ll be more targeted with our marketing and promotional strategies to drive customers to our stores while protecting the bottom line.

Let’s take a quick look at second quarter results for each of our business units. I must start this morning with North America commercial where sales growth accelerated during the second quarter with the top line growth of 3% year-over-year to $2 billion. Over the past year we’ve developed and rolled out our new team-based contract selling model which is more unified and more collaborative. To support this initiative we’ve also added hundreds of product specialist who are focused on driving growth in adjacent categories or what we refer to as beyond office supply sales. This includes facilities in breakroom supplies, furniture, technology, print and promotional products. The investments we’ve made to reinvent our contract business are paying off. During Q2 sales grew in each of these adjacent categories and we saw particular strength in facilities in breakroom supplies which was up in the double digits as well as print and furniture which both grew in the high single digits.

In this business we’re differentiating our offering from the competition. We’re more than offsetting secular pressure in office products and we’re positioning our contract business to become a growth engine for the company. We expect to continue making progress throughout the back half of 2014.

North American commercial operating margin dollars were up year-over-year. Operating margin rate for Q2 decreased 5 basis points versus last year to 6.5%. This reflects reduced marketing expense offset by investments to support our strategic reinvention and increased incentive compensation expense.

Turning to North American stores and online, sales were down about 3% year-over-year excluding the negative impact of the stronger U.S. dollar in the stores we closed in North America during the past year. On a GAAP basis sales decline 6% to $2.3 billion versus Q2 of last year. Staples.com continues to gain momentum with sales growth up 8% versus the prior year, this growth was supported by continued expansion of our assortment beyond office products. During Q2 we increased our marketing investment to drive business customer acquisition. The investments we’ve made over the past year to improve the customer experience continue to drive increased conversion. We’re also building on omnichannel offering with the recent launch of Buy Online pick up in store. This provides customers with the convenience of ordering from staples.com and picking up available products within two hours at the nearby store of choice and early results are running ahead of expectations.

Same store sales in North America declined 5% in Q2 driven by a 4% decline in customer traffic and a 1% decline in average order size year-over-year. Sales trends in computer and technology accessories remain under significant pressure and we’re down on the double-digits during Q2. These categories represent about 20% of our total retail sales mix and drove about two-thirds of our same-store sales decline during the second quarter.

Ink and toner, core office supplies and paper declined year-over-year and we continue to drive growth in copy and print services and facilities breakroom supplies. During the second quarter we completed the remerchandising of our U.S. stores with an expanded assortment categories beyond office products, our wider offering of facilities and breakroom supplies sporting double-digit growth on this category and we’ve also seen encouraging trends in categories like office gifts and early education supplies. We expect to build momentum here as customer awareness of these new categories increases throughout the remainder of the year.

With officially kicked off back-to-school in early July and we’re coming up to the most important selling weeks of the season. Value is certainly top of mind for our customers and we’re making more happen for less this year. We’ve launched our 110% Price Match Guarantee to ensure customers pay the lowest price in stores and online, we’re making it easy for parents to find everything their children need is of great value with our back-to-school less list.

We’ve also teamed up with the global music superstar Katy Perry this season to build on our long history of supporting teachers, students and education.

North American stores and online operating margin decreased 290 basis points versus last year’s second quarter to 1.2%. This was driven by lower product margin online and the investments we’re making to accelerate growth online. We also had investments to support our overall strategic reinvention, increase marketing expense to drive awareness that Staples has every product businesses need to succeed as well as the negative impact of fixed expenses on lower sales. This was partially offset by reduced labor cost in our stores year-over-year.

Turning to international operations sales decreased 1% year-over-year to $941 million versus Q2 of last year or down about 3% in local currency. In Europe retail same store sales were down 1% during the second quarter that was driven by a decrease in customer traffic partially offset by an increase in average order size versus the prior year. Strength in mobile phones and accessories and copy and print were more than offset by double-digit declines, computers and technology accessories.

In Europe contract sales trends continue to stabilize with local currency sales down less than 1% versus Q2 of last year. Our pipeline of new customers continues to build momentum and we’re seeing early benefits from pricing optimization actions we took during the second quarter. In our European online business local currency sales were down in the high single-digits year-over-year and this was driven by weakness in France and Italy where economic conditions remain under pressure and customer acquisition and retention has been challenging.

During Q2 international operating margin decreased 25 basis points versus last year to an operating loss of 2.3% of sales; this was driven by incremental general and administrative expenses as we transition to a more centralized Pan European business model as well as a negative impact of fixed cost on slightly lower sales in Europe. This was partially offset by improved product margins in Europe as we continue to benefit from Pan European assortment and pricing optimization and reduced losses in Australia.

We remain on track to drive profit improvements and further stabilize top line trends in international during 2014.

And with that I’d like to turn it over to Christine to review our financial results. Christine.

Christine Komola – CFO

Thanks John. Good morning everyone. Total company sales for the second quarter were $5.2 billion, on a non-GAAP basis sales declined 1% year-over-year. This excludes a 1% headwind from changes in foreign currency exchange rates and stores that closed in North America during the past year. On a GAAP basis sales declined about 2% versus Q2 of last year. During the second quarter we achieved non-GAAP diluted earnings per share of $0.12 versus $0.16 during the second quarter of 2013.

This excludes $101 million of pretax restructuring and other related charges. These charges are primarily associated with the closure of 80 stores during the second quarter and our plans to close about 40 stores in North America in the second half of this year. It also excludes the net tax benefit primarily related to the resolution of certain tax audits. On a GAAP basis earnings per share on a fully diluted basis came in at $0.13.

On a GAAP basis gross profit margin for the second quarter declined 52 basis points to 25.1%. Excluding the $5 million pretax charge for inventory write downs related to the supply chain optimization and store closures, gross profit margin declined 42 basis points to 25.2% of sales. This primarily reflects lower products margins online as well as the negative impact of fixed expenses on our lower sales.

This was partially offset by increased product margins in Europe. During the second quarter, total company SG&A increased $22 million year-over-year or 81 basis points to (28.6%) [ph] on a GAAP basis. Excluding $2 million of accelerated depreciation related to a change in the useful life of certain facilities we plan to close, total SG&A on a non-GAAP basis was up 20 million versus last year, an increase of about 77 basis points. Including the restructuring charges, non-GAAP total company operating margin decreased 123 basis points to 2.3%. We’re making good progress on reducing expenses across the business. At the same time, we remain committed to investing in our growth initiatives.

Over the past year, we’ve invested in new talent, a broader assortment and more competitive pricing to accelerate growth online. We’ve added hundreds of product specialist to our contract sales force in categories beyond office products. We’ve taken important steps to streamline our European operating model and more recently we’ve invested in brand marketing to drive awareness that Staple offers every product business need to succeed. These investments as well as the modest headwind from higher incentive compensation year-over-year have more than offset our cost savings.

Turning to our Q2 tax rate. Excluding the $67 million net tax benefit related to the resolution of certain tax audits and the $40 million benefit related to restructuring charges during the second quarter, our non-GAAP effective tax rate was 33.5% versus 32.5% last year. The modest increase in our non-GAAP effective tax rate versus the prior year was driven by changes in the geographic distribution of earnings.

Year-to-date, capital expenditures came in at a $110 million, a decrease of $14 million versus the prior year. With operating cash flow of about $304 million, we generated free cash flow of a $194 million versus $224 million of free cash flow during the prior year.

During the second quarter, we repurchased 3.5 million shares for $40 million and currently have $452 million of remaining authorization on our current share repurchase plans. At the end of Q2, staples had approximately $1.5 billion in liquidity including cash and cash equivalents of about $417 million and available line of credit of about $1.1 billion.

Turning to our outlook. During the third quarter of 2014, we expect total company sales to decrease versus Q3 of last year. We do expect to continue building momentum in categories beyond office supplies and drive solid top line growth in our delivery businesses in North America. We also expect to get back to growth in our international businesses.

This will be offset by ongoing pressure in our retail business as we close stores and face continued headwinds in core office supplies, computers and technology accessories.

On a bottom line, we expect third quarter non-GAAP diluted earnings per share in the range of $0.34 to $0.39. Our Q3 guidance does not reflect any potential impact on earnings per share related to 2014 restructuring and other related activities.

We expect to record a pre-tax charge in the range of 40 million to 75 million associated with restructuring and other related activities during the third quarter of 2014. During the back half of the year, we expect to close approximately 40 stores, bringing our total store closure for the full year in North America to approximately 140 stores. We also plan to make steady progress, streamlining our supply chain in North America and we will continue to aggressively manage expenses across the company.

For the full year, we expect total pre-tax global restructuring and other related charges to be in the range of 230 million to 310 million. For the full year 2014, we’ve remained on track to generate more than 600 million of free cash flow. Our free cash flow guidance includes an expected use of cash in the range of $60 million to $100 million associated with the 2014 restructuring plan, as well as the use of $50 million to $100 million related to 2013 and 2012 restructuring plans.

I will now turn it back over to our conference call moderator for Q&A.

Question-and-Answer Session

Read the Full Transcript Here

 

Related Posts

• Michael Saylor Responds to Bitcoin Critics @ Coin Stories (Transcript)
• Why Multilingual Human Support Still Matters in Digital Banking
• To Buy Or Not To Buy Cryptocurrency? That’s The Question On Everyone’s Mind 
• Ajay Banga on India, Migration and a Youth Jobs Time Bomb (Transcript)
• A Global Monetary Crisis Is Coming & AI Could Make It Worse – James Rickards (Transcript)