Staples, Inc. (SPLS)
Q1 2009 Earnings Call Transcript
May 27, 2009 8:00 a.m. ET

Executives

Laurel Lefebvre - Vice President Investor Relations
Ron Sargent - Chairman and Chief Executive Officer
Mike Miles - President and Chief Operating Officer
Peter Ventress - President International
John Mahoney - Vice Chairman and Chief Financial Officer
Demos Parneros - President U.S. Stores
Joe Doody - President North American Delivery

Analysts

Oliver Wintermantel – Morgan Stanley
Kate McShane – Citi Investment Research
Matthew Fassler – Goldman Sachs
Stephen Chick - FBR
Dan Binder – Jefferies & Co
Brian Nagel – Oppenheimer & Co
Chris Horvers – JP Morgan
Michael Baker – Deutsche Bank
Jack Murphy – William Blair
Alan Rifkin – Bank of America-Merrill Lynch
Joe Feldman – Telsey Advisory Group

Presentation

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2009 Staples, Inc. Earnings Conference Call. My name is Mylalaia and I’ll be your coordinator for today. (Operator instructions) At this time all participants are in a listen-only mode. We’ll be facilitating a question-and-answer session at the end of this conference. If at any time during the call you require audio assistance please press * followed by 0 and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Ms. Laurel Lefebvre, Vice President of Investor Relations. Please proceed.

Laurel Lefebvre – Vice President Investor Relations

Good morning everyone and thanks for joining us for our first quarter earnings announcement. During today’s call, we’ll discuss some non-GAAP metrics, to provide investors with useful information about our financial performance. Please see the financial measures and other data section of the investor information portion of Staples.com for an explanation and reconciliation of such measures and other calculations of financial measures that we use to analyze our business. I’d also like to remind you that certain information in this call constitutes forward-looking statements for 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 important factors, including those discussed or referenced under the heading risk factors and elsewhere in Staples latest 10-Q filed this morning

Here to discuss Staples Q1 performance and business outlook are Ron Sargent, Chairman and Chief Executive Officer, Mike Miles, President and Chief Operating Officer, Peter Ventress, President of International and John Mahoney, Vice Chairman and Chief Financial Officer. Also joining us are Demos Parneros, President of U.S. Stores, and Joe Doody, President of North American Delivery. Ron?

Ron Sargent – Chief Executive Officer

Thanks Laurel and good morning everybody and thanks for joining us today. I’m pleased to announce another quarter of solid performance in a pretty tough sales environment. At Staples, our plan for managing through this current recession is simple. We’re focused on just three things. First we’re taking good care of customers, second we’re working hard to tightly manage expenses given our expectation of soft sales all year long, and third we’re investing in growth ideas including integrating Corporate Express, opening new stores and expanding our services businesses, and I think that today’s results reflect this plan.

Sales for the first quarter including the results of Corporate Express were up 19% versus last year to $5.8 billion. Q1 earnings per share, excluding integration and restructuring cost declined 27% from last year to $0.22. Our investments in service and supply chain continue to pay off with our best ever customer service scores in North American Retail where the customer traffic trend improved and was just slightly negative for the quarter. This contributed to a strong sequential improvement in the top line. On the North American Delivery side, we’re very pleased with our customer acquisition activity across all three segments as well as our strong customer service levels which are driving strong retention.

Moving to the expense side, North American Retail team did a nice job on expenses during the quarter. They increased product margins, reduced distribution and delivery expense, tightened marketing spend and managed G&A very well. These efforts more than offset rent and labor de-leverage in North American Retail, as we expanded retail operating margins by 35 basis points despite a -8% comp for the quarter. In contrast North American Retail, the sales trends for both North American Delivery and International were slightly worse sequentially and strong expense management was not enough to offset the impact of fixed expenses. In terms of investing for the future, we’re right on track with the integration of Corporate Express. We got a lot done during the first quarter. In North America we completed vendor negotiations, began integrating our HR systems, developed our supply chain strategy, and continued to reduce small orders for Corporate Express customers. Customer retention remains very strong as we move through the integration process in Europe. We’re working through our reorganization plans and while we’re not as far along as we are in the US, we’re still making steady progress. We’ve also done a lot of work on re-branding and supply chain integration plans in Europe.

With a lot of efforts going into the integration, we continue to focus on growing the business in other areas as well. During the first quarter we opened 31 stores in North America including two new Copy & Print Shops. We drove rapid growth in our Easy Tech business which more than doubled in Q1 and we made investments in key categories like ink and paper and computing which paid off with positive comps in laptops, cartridges and cut sheet paper. Throughout this recession we’ve stuck to our plan and we’ve hunkered down on expenses while improving customer service. We’ve carefully managed our capital spend without sacrificing future growth potential, and we’ve generated record cash flows despite weakness in both the top and bottom lines. During the first quarter our team proved once again that we have the experience to manage through challenging times and I’m confident that we’ll continue to drive strong performance throughout 2009.

I’ll now turn the call over to Mike Miles to talk about our results in North America.

Mike Miles – Chief Operating Officer

Thanks Ron. Good morning. Including the results of Corporate Express, sales for the first quarter in North American Delivery were $2.4 billion, an increase of 41%. If you adjust last year’s Q1 sales to include $1.1 billion from Corporate Express, NAD sales declined 13% in US dollars or 12% in local currency. NAD operating margin declined 285 basis points to 6.64% as a result of absorbing the lower margin Corporate Express business, mix shift to lower margin products in contract, increased amortization expense, and de-leverage of fixed expenses on softer sales. Within North American Delivery, contract Staples business delivery and Quill, all experienced low double digit sales declines primarily reflecting lower sales for existing customers. This was somewhat offset by customer acquisition which remains healthy across each of our NAD businesses and particularly strong in contract.

Sales at Quill and SBD both improved somewhat compared to Q4, confirming the sense we’re getting at retail that the small business segment has stabilized. Contract was sequentially worse as job losses and bankruptcies have had an impact. During the first quarter adjusted to include Corporate Express in 2008, contract sales declined 13% or 12% in local currency. Sales from customers acquired within the past year contributed eight points of growth to the top line, offset by a 13 point decline in sales from existing customers. Our more discretionary lines of business like promotional products print and tech services were down about 25% and accounted for about four percentage points of the overall decline in contract. As was the case last year, we also saw a four point sales decline as the result of lost customers. We’ve seen no change in the historical trend for lost business even as we work with customers in our Corporate Express portfolio to implement our shared value model that drives the lowest total delivered cost.