Group & Industry News
24

More reason for greater collaboration within the IDC. Especially in technology, eContent, and rid ourselves of operational inefficiencies, duplicate services, conflicting programs and redundant activities. – Mike Gentile

The following article is from Peter Frost’s Proficiency Post about Staples:

Financial Review Q1 2016 vs. Q1 2015
Sales were $5.1Bn, down 1.3% on an organic basis. Operating profits were $108m or 2.1%/sales compared with $98m or 1.9%/sales.

“We delivered a solid first quarter and we made good progress on our critical priorities,” said Ron Sargent, CEO. “We grew sales in key categories beyond office supplies, drove growth in our mid-market contract business, and improved customer conversion in stores and online. We plan to build on our momentum as we pursue our strategic plan to enhance long-term value."

North American Stores and Online (44% sales mix)
Sales were $2.2Bn, a decrease of 5%. Store closures negatively impacted first quarter 2016 sales growth by approximately 2%. Sales growth was also negatively impacted by approximately 1% by FX. Comparable sales, which combines comparable store sales and Staples.com sales growth excluding the impact of changes in foreign exchange rates, decreased 3%. 

Sales declines in business machines, technology accessories, computers and mobility, and ink and toner were partially offset by growth in furniture, office supplies, facilities supplies, and copy and print.

Comparable store sales decreased 4%, reflecting a 2% decline in average order size and a 2% decline in traffic versus the prior year.

Staples.com sales were flat in U.S. dollars and grew 1% on a local currency basis during the first quarter of 2016.

Operating income rate decreased 40 basis points to 2.8 percent compared to the first quarter of 2015. This primarily reflects the negative impact of lower sales on fixed expenses and lower product.

North American Commercial
(42% sales mix - NA chief Shira Goodman) 
Sales were $2.1Bn, flat in U.S. dollars or an increase of 1% on a local currency basis compared to the first quarter of 2015. This primarily reflects growth in promotional products, facilities supplies, and breakroom supplies, partially offset by declines in ink and toner, and paper.

Operating income rate increased 63 basis points to 7.0 percent compared to the first quarter of 2015. This improvement primarily reflects lower labor costs and marketing expense.

International Operations (14% sales mix - John Wilson)
Sales were $738m, a decrease of 6% in U.S. dollars or 3% on a local currency basis. This was primarily driven by sales declines in Europe, partially offset by double-digit growth in China. Comparable store sales in Europe declined nine percent during the first quarter of 2016, primarily reflecting a decrease in traffic versus the prior year.

Outlook
For the second quarter of 2016, the company expects sales to decrease versus the second quarter of 2015.

The company’s earnings guidance excludes costs related to the company’s proposed acquisition of Office Depot and costs associated with the termination of the Office Depot merger agreement, as well as the impact of ongoing store closures.

For the full year 2016, the company expects to generate approximately $600 million of free cash
flow excluding the impact of payments associated with financing for the proposed acquisition of
Office Depot and costs associated with the termination of the Office Depot merger agreement. The company plans to close at least 50 stores in North America in 2016.

Editor's Comment

Ron Sargent gave a very bullish view of Staples refocused future. "If we can't win in court, we'll win on the street" was his powerful message to his team. Recruiting 1000 sales people to focus on the US SMB market (10-200 employees) with a broader business supplies range (1.3m sku's inc. an expanded OP, hygiene and refreshments range); aggressive lower prices plus faster service was the immediate priority.

Staples recruited Mike Bhaskaran from Amazon last year to lead its sharper supply chain plans. 

Sargent highlighted the shift in Staples focus as follows:

  • North America to increase sales mix from 85% to 95%
  • Delivery business to move to 80% sales from 60%
  • Beyond Office Supplies range to rep over 60% sales from less than 50%

Sargent said it was exploring the sale of its European business that includes retail, commercial, direct mail and online. The plans to combine sales with Depot has ceased.

With regard to the future of retail stores, Sargent would not commit. Depot has announced it would close up to 500 Depot/Max stores and would now have to foot the closure costs not Staples. Staples will close 50 retail stores this year in line with its forecast to cut 300 in total. "We like Amazon see the importance of a retail presence for customer's convenience and showrooming capabilities and pickup". 

Re-Depot’s future, Sargent would not speculate too much. Would Amazon buy Depot to enter the contract market? "Why would they when they have the capability to develop systems and service now?" How about Genuine Parts/Motion/ S.P. Richards? "I see the logic but why get involved in closing stores, DC's etc?" Graingers? "I don't believe they want to get involved in more stores. Alibaba might consider it as a basis for entering the US market?" The latter would be a strong possibility to compete with Amazon.