Staples Q1 Earnings Conference; Focus To Cut Costs

Staples SPLS reported its first quarter earnings on Tuesday. Shares of the company traded down 12.55 percent, or $1.68, to $11.71.

Below are some key takeaways from the company's conference call.

Ron Sargent, Chairman and Chief Executive Officer

• This morning we reported results for Q1 that were in line with our expectations. After a slow start to the quarter, trends improved in March and in April. Our total company sales, excluding the negative impact of store closures and changes in foreign exchange rates, were down about two percent year-over-year. On a GAAP basis, sales declined three percent to $5.7 billion versus the first quarter of last year.

• Non-GAAP earnings per share for the first quarter were $0.18. During Q1 we had restructuring and other related charges primarily related to closing 16 stores in the first quarter and about 80 stores during the second quarter of this year. We also had a tax charge related to the repatriation of foreign earnings as well as a gain primarily related to the sale of our SmileMakers business. These items had a net negative impact on our Q1 earnings $0.03 per share.

• We're making good progress in re-inventing Staples. As I think everybody knows on this call about 80% of our sales are to businesses of all sizes. 60% of our sales are delivered and about half of our total volume is now in categories beyond office supplies.

• Our re-invention priorities focus on building momentum in each of these areas. We're driving growth with business customers. We're leveraging our supply chain and omni-channel capabilities. We're building scale and awareness in new categories beyond office supplies and we're taking aggressive action to reduce costs and improve store productivity.

• On our fourth quarter call we laid out our plans for 2014 and before we get into the segment results let me just take a minute to highlight the progress we made during the first quarter and I'm going to start with the growth initiatives.

• During the first quarter we invested heavily in the Make More Happen brand campaign to drive awareness with our customers Staples sells a lot more than just office supplies. In North American Contract we saw sales grow 1% year-over-year supported by double-digit growth in Facilities and Breakroom Supplies as well as accelerating trends in adjacent categories like Furniture and Promotional Products.

• We added approximately 300,000 new items on Staples.com in categories like Office Decor, Teaching and Education Supplies and Technology Products and we ended the quarter with over 850,000 products now available from Staples online. We accelerated growth in several industry segments like Restaurant and Retail Stores by investing in marketing to create awareness and by expanding our assortment of specialty products to serve those industries.

• While trends in Office Supplies and Technology remain under pressure we've made good progress on our key priorities during the first quarter. We still have a lot of work to do this year as we evolve to meet the changing needs of our customers and reposition Staples as the destination for every product businesses need to succeed.

• Now let's take a quick look at our Q1 results for each of our three business units. I'm going to start with North American Stores and Online. Computer sales were down about 2% year-over-year, if you exclude the negative impact of the stronger U.S. dollars and the stores we closed in North America during the 12 months prior to Q1. On a GAAP basis, sales declined 5% to $2.6 billion versus Q1 of last year.

• As I mentioned earlier, we drove sequential improvement in same-store sales, which were down 4% in North America during the first quarter. Customer traffic was down 4% and average order size was flat year-over-year. Early in Q1, unfavorable weather had a negative impact on the top line in North America stores with comps down in the high single digits during February. 

Christine Komola, Chief Financial Officer

• Total company sales for the first quarter were $5.7 billion. On a non-GAAP basis sales declined 2% year-over-year. This excludes a 1% headwind from changes in foreign currency
exchange rates and stores were closed in North America in the 12 months preceding Q1 of 2014. On a GAAP basis sales declined about 3% versus Q1 of last year.

• During the first quarter we achieved non-GAAP diluted earnings per share of $0.18 versus $0.26 during the first quarter of 2013. This excludes $46 million of pre-tax return restructuring and other related charges primarily associated with the closure of 16 stores during the first quarter and our plans to close about 80 stores in North America in the second quarter of this year.

• It also excludes an $11 million tax charge related to the repatriation of foreign earnings and a net gain of $22 million primarily related to the sale of our SmileMakers business during the first quarter. On a GAAP basis earnings per share on a fully diluted basis came in at $0.15. Changes in foreign exchange rates negatively impacted EPS by about $0.01 during the first quarter.

• On a GAAP basis gross profit margin for the first quarter declined 105 basis points to 24.9%, although excluding an $11 million pre-tax charge for inventory write-downs related to supply chain optimizations and store closures, gross profit margin declined 86 basis points to 25.1% of sales on a non-GAAP basis during Q1. This primarily reflects lower product margins in North America Stores and online.

• On a GAAP basis total company operating margin decreased 209 basis points during the first quarter to 2.8%. Excluding the restructuring charges and the net gain primarily related to the sale of SmileMakers, non-GAAP total company operating margins decreased 167 basis points to 3.2%.

• Our effective tax rate for the first quarter was 35.1%. Excluding the $11 million tax charge related to the repatriation of foreign earnings as well as the tax impact of restructuring charges and the net gain primarily related to the sale of SmileMakers during the first 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. We are planning for our non-GAAP effective tax rate to be 33.5% for the remainder of 2014.
• During the first quarter we repurchased 5.7 million shares for $70 million and currently have $492 million of remaining authorization on our current share repurchase plan. At the end of Q1 Staples had approximately $1.8 billion in liquidity including cash and cash equivalents of about - excuse me, about $793 million, and available lines of credit of about $985 million.

• Now turning to our outlook, during the second quarter of 2014 we expect total company sales to decrease versus Q2 of last year. We expect to continue building momentum in categories beyond Office Supplies, and will aggressively pursue opportunities to gain share as our industry consolidates.

• On the bottom line, we expect second quarter non-GAAP diluted earnings per share in the range of $0.09 to $0.14. Our Q2 guidance does not reflect any potential impact on the earnings per share related to the 2014 global restructuring and other related activities.

• We've made good progress in our 2014 restructuring plans. During the second half of the year, we expect to close approximately 40 retail stores, bringing our total store closure for the full year in North America to approximately 140 stores. We also plan to make progress streamlining our supply chain in North America, and we'll continue to aggressively manage expenses in North America and in Europe. For the third year, we expect pre-tax global restructuring and other related charges in the range of $240 million to $360 million.

Staples.com

• We generated over 400,000 customer orders and drove over 30% growth on our in-store different Staples.com kiosk, which is now approaching 5% of our total U.S. retail sales mix. Copy and Print same store sales in North America grew in the high single-digits driven by strong business customer

• Staples.com grew 6% in local currency driven by increased sales conversion on our desktop and mobile websites as well as growth from our expanded assortment beyond Office Supplies.

• During the first quarter we grew sales in Staples.com, Quill.com and North American Contract, and we got back to flat local currency sales in Australia and flat same store sales in Europe. We also saw sequential improvement in North American retail comps.
• Copy and print sales on Staples.com were up in the double-digits supported by improvements we've made to our website. To build on our momentum in Copy and Print we recently announced an agreement to acquire PNI Digital Media, a software company that provides customers with access to personalized print products and services in stores, online and through mobile devices.

• Sales trends improved in March and April and were down in the low single digits. Staples.com sales grew 6% in local currency versus the prior year. This growth was supported by improved conversion on both our Desktop and our Mobile websites. Taking a closer look at category trends for North American Stores and Online during Q1, growth in Facilities and Breakroom supplies and Copy and Print was more than offset by weakness in Business Machines and Technology Accessories, Core Office Supplies, Ink and Toner, and Computers. 

Store opening and closures

• We have now re-merchandised over 600 stores in the United States with an expanded offering of categories beyond Office Supplies and remain on track to complete the U.S. change during Q2. We improved our mobile offering with the addition of the Apple iPhone in about 200 stores the United States and we got back to flat same store sales in Europe for the first time 2008.

• Turning to our cost reduction and reshaping activities we've secured $100 million of annualized cost savings so far with early momentum in areas like marketing, store operations and merchandising. We're also on track to eliminate approximately $500 million of annualized cost over the next two years with about $250 million coming in 2014.

• During the first quarter we closed 16 stores and down sized and relocated 4 stores to the new 12,000 square foot format. We finalized our plan to close approximately 80 stores in North America during the second quarter and we're close to finalizing plans to close approximately 40 additional retail stores during the back half of 2014 and to streamline our supply chain in North America.

Shares are currently trading down less than one percent at $11.65 in Wednesday's session.