Source: Seeking Alpha
Staples, Inc. (NASDAQ:SPLS)
Q2 2014 Earnings Conference Call
August 20, 2014 08:00 AM ET
Chris Powers – VP, IR
Ron Sargent – Chairman and CEO
Christine Komola – CFO
Demos Parneros – President, North American Stores & Online
Shira Goodman – President, North American Commercial
Gary Balter – Credit Suisse
Aram Rubinson – Wolfe Research
Michael Lasser – UBS
Brian Nagel – Oppenheimer
Mike Baker – Deutsche Bank
Greg Melich – ISI Group
Matthew Fassler – Goldman Sachs
Alan Rifkin – Barclays
Simeon Gutman – Morgan Stanley
Anthony Chukumba – BB&T Capital Markets
Dan Binder – Jefferies
Scott Tilghman – B. Riley
Good day, ladies and gentlemen, and welcome to the quarter two 2014 Staples, Inc. earnings conference call. My name is Sheila, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)
As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Chris Powers, Vice President of Investor Relations. Please proceed, sir.
Chris Powers – VP, IR
Thanks, Sheila. Good morning, everyone and thanks for joining us for our second quarter 2014 earnings call. During today’s call, we will discuss certain non-GAAP metrics. Please see the Financial Measures and Other Data section of the Investor Information portion of Staples.com for reconciliation of these measures.
Certain information we will discuss constitutes forward-looking statements for the 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 factors, including those discussed or referenced in Staples’ 10-Q filed this morning.
Here to discuss Staples’ Q2 performance are Ron Sargent, Chairman and Chief Executive Officer; Christine Komola, Chief Financial Officer. Also joining us are Demos Parneros, President of North American Stores and Online; Shira Goodman, President of North American Commercial; and John Wilson, President of Europe. Ron?
Ron Sargent – Chairman and CEO
Thanks, Chris, and good morning, everybody. Thanks for joining us for our second quarter earnings conference call. I will start with the headlines. During the second quarter, total company’s results were in line with our expectations and sales trends improved sequentially over Q1. If you exclude the negative impact of store closures and changes in foreign exchange rates, sales were down less than 1% year-over-year. On a GAAP basis, sales were down about 2% to $5.2 billion versus the second quarter of last year.
Non-GAAP earnings per share for the second quarter were $0.12. During Q2 we had restructuring and other charges, primarily related to closing 80 stores in North America. We also had a net tax benefitrelated to the resolution of certain tax audits during the second quarter. And these items benefited Q2 EPS by about $0.01. So on a GAAP basis, second quarter earnings per share came in at $0.13.
As you know, we are working hard to position Staples for the future and to build a stronger foundation for long-term growth. Our reinvention strategy is focused on investing in our best growth opportunities, aggressively reducing costs and changing the way we work to stabilize our underperforming businesses. With the early investments that we’ve made to drive growth on our delivery businesses and to expand our assortment beyond office supplies are paying off.
During Q2, sales growth accelerated in both North America commercial and in Staples.com. We also continue to see stabilization in Europe and Australia. At the same time, trends in our North American retail stores remain weak. We are not satisfied with our results here. We are focused on improving traffic, we are taking aggressive action to further reduce retail expenses and we are closing underperforming stores.
Before we get into our segment results, let me give you a quick update on our key accomplishments for Q2. We grew sales in North American Commercial, 3%, that was our fastest growth rate in three years. This was supported by the investments we’re making to evolve our selling model, to accelerate growth beyond office supplies and to enhance the customer experience on our websites.
We also saw accelerating growth in Staples.com with sales up 8% during Q2 that was driven by marketplace sales that were in line with our expectations and increase in business customer acquisition and improved customer service or customer conversion driven by improvements we’ve made to our desktop and mobile websites. We added more than 250,000 new products on Staples.com in categories like furniture, teaching and education, tools and hardware and business technology ending the quarter with over 1 million products now available on staples.com. Our expanded assortment is also driving growth in staples.ca, quill.com, and contract as well. We drove double digit growth in our in-store staples.com kiosks which now accounts for more than 5% of our U.S. retail sales mix. We continue to build momentum in copy and print with same-store sales in North America up in the mid-single digits driven by increased productivity from our retail sales force as well as strong growth in categories like signs, banners and color printing.
We completed our previously announced acquisition of PNI Digital Media which will help us further build on our momentum in copy and print. PNI provides customers with access to personalized print products and services in stores, online and through mobile devices. And in our international business sales were stabilizing with local currency sales in Europe contract and same store sales in Europe retail down about 1% and local currency sales in Australia down about 2% year-over-year.
Turning to our cost reduction and restructuring activities. During the second quarter we closed 80 stores in North America that brings our total store closures during the first half of 2014 to 96. We expect to close approximately 40 stores in North America during the back half of 2014 and we remain on track to close approximately 140 stores for the full year.
We downsize and relocated 8 stores to our 12,000 square feet format during the second quarter we now have 40 of these stores which continue to retain over 95% of sales. 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.