This summary is based on the first quarter fiscal 2008 earnings call conducted by Staples Inc. (SPLS) on May 20, 2008.
Management:
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Chairman of the Board, Chief Executive Officer: Ronald L. Sargent
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President, Chief Operating Officer: Michael A. Miles Jr.
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Vice Chairman of the Management Board, Chief Financial Officer: John J. Mahoney
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President - Staples North American Delivery: Joseph G. Doody
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President- U.S. Stores: Demos Parneros
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Vice President, Investor Relations: Laurel Lefebvre
Key Investors Issues
- Sales increased 6.4% to $4.89 billion from $4.59 million in 2007.
- Net income was up marginally to $212 million or 30 cents a share.
- The firm bought back 2.8 million shares for $65 million.
First Quarter Highlights
Total company sales of $4.9 billion were up 6.4% from $4.59 billion in the prior year and including the currency benefit in the Canadian and international businesses, sales grew 3.1%.
- Gross profit margin increased by seven basis points to 28.07% during the quarter, as improvements in product margin and leverage and logistics expense were partially offset by deleverage of rent expense in North American retail.
- Net income rose 2% to $212 million or 30 cents a share, from $209 million or 29 cents in the prior year due to revenue growth.
- Operating and selling expenses were 48 basis points unfavorable versus last year’s first quarter at 17.03% of sales.
- North American retail tightly managed expenses but saw modest deleverage on many expense lines on negative comps.
In North American delivery, there was good leverage in contract operating expenses, offset by investments in marketing and in the catalog business.
- G&A as a rate of sales deleveraged 2 basis points year over year at 4.36%, reflecting good expense control across the board in a soft sales environment.
- Although total inventory turns were down 18 basis points versus last year to 5.66 turns on softer sales, total inventory declined during the quarter.
- By carefully managing the working capital, the firm generated $299 million in operating cash flow, which is over $100 million more than the prior year period.
- Staples had $2.0 billion in liquidity, including cash and short-term investments of $1.2 billion and available lines of credit of about $800 million.
The firm bought back 2.8 million shares for $65 million, as diluted weighted average shares outstanding declined by just under 21 million shares year over year for the quarter, as a result of the repurchase program, offset by stock option exercises.
- The firm is not currently buying back shares in anticipation of the acquisition of Corporate Express and have about $1 billion remaining on authorization.
- CapEx came in at $74 million, up from the $64 million spent for the same period in 2007, reflecting higher store openings, increased investment in information systems, and investments to build the business in Asia.
Operational Highlights:
- The firm finished the quarter with lower inventory per store, which contributed to strong free cash flow during the period.
- The focus on doing the right things for the customer continued to pay off, as customer service scores reached record levels across the board.
- In North American retail, the firm has seen slower customer traffic and weak sales of big ticket items, and in North American delivery, it has seen a decline in sales per account.
In North American retail, the firm continues to gain market share through store growth in both new and existing markets and by improving the customer service programs.
- The firm is sharpening its merchandising to make the stores more exciting to shop and is are fine-tuning the mix of marketing vehicles to drive traffic.
- In North American delivery, the firm is doing a great job both acquiring and retaining customers and is also selling more product categories to drive sales.
Regional Highlights:
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North American retail sales were $2.4 billion, up 1.9% versus of the prior year as same-store sales were down 6%, driven in equal parts by lower average order size and slower traffic.
- Laptops were again the strongest comping category and the firm also achieved positive comps in ink, successfully defending this destination category.
- Copy center, although negative, was also stronger than the average for the house, though overall, consumables were only slightly negative while durables performed poorly.
The weakest performing categories were business machines and furniture, categories that contain a lot of higher ticket discretionary items.
- Segment operating profit declined 11.2% from last year to $168 million and operating margin dropped 100 basis points to 7% of sales.
- The strength in supplies and services relative to tech hardware and good discipline in pricing and promotion resulted in higher product margins.
-The process improvement program and global sourcing initiative continue to drive improvements in the cost structure, however, the combination of rent inflation and active new store program and negative 6 comps created major deleverage on the rent and depreciation line.
