Staples Earnings Call: Delivery Business Breakout and Top Line Growth

Staples (NASDAQ:SPLS) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Delivery Business Breakout

Dan Binder – Jefferies & Company: I had a couple questions for you. First on the delivery business, I was wondering if you could breakout for us what your – in terms of the positive sales that you saw there, how much of it was generated from acquisition of accounts versus growth in spend for existing accounts?

Joseph G. Doody – President, North American Commercial: First, let me break (it out) a little bit between Quill and contract. Now, Quill had a very good quarter; in fact, Quill had their best quarter in more than five years, with a positive 3% growth. There, it was heavily driven by new business, also the marketplace ramp up with the expanded assortment was a clear driver of growth for them, and they continued to have a strong growth in facilities and breakroom. But, clearly, it was a combination thereof both, the new business and some increased sales to existing customers, primarily though the assortment expansion and facilities and breakroom. In contract, there we had positive sales growth, over 200 basis points improvement from Q4. Sales to existing customers were up slightly. We also continued to see very strong growth facilities and breakroom. Our new business acquisition was up slightly in terms of number of new accounts and as far as new business from those accounts, it was up more significantly. So little bit bigger average new customer it was brought on and that we continue to see a very strong growth in facilities and breakroom there as well.

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Dan Binder – Jefferies & Company: Once you get to the SKU count that you want to online in delivery, I know you noted that there was about $1 million per week coming in from those extra – from those new SKUs that you’ve added over the last year. I think you’re doing like 300,000 or 400,000 SKUs, but what do you ultimately think that can generate in terms of incremental dollars either per year, per week however you want to frame it?

Joseph G. Doody – President, North American Commercial: I don’t think we’ve really given out a forecast on that Dan. First I’d say that the $1 million per week right now is essentially the run rate on our Staples.com site. We also noted that Quill.com is getting some good growth there as well, probably more like a third of that, that in terms of size of magnitude, but we’re very happy with the ramp up and we continue to add new SKUs, get incremental sales and incremental margin dollars from those…

Dan Binder – Jefferies & Company: Then Ron, my last question was around the sales guidance for Europe. Obviously, with the negative number in Q1 you sort of start out, bit of a whole you have to make up some ground. I’m just curious, at what point do you think the business could inflect. Is it as early as next quarter or are we thinking more back half?

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Ronald L. Sargent – Chairman and CEO: It’s hard for me to predict what our sales going to be three months from now, but our plan is certainly to accelerate from the first quarter every quarter this year and I think the online expansion is a big part of that, but we’ve also got a lot of new things coming on our retail side of our business. I do think we will have a drag from the stores we closed throughout the year, but we expect the sales to continue to grow from here and in the year at slight positive top line sales growth, which I think would be not only our plan, but what we’re expecting even after the first quarter.

 

Top Line Growth

Gary Balter – Credit Suisse: I wanted to ask more a theoretical question of the direction where you are taking the company, because in the past years – not last year, a year before, but in past years you used to give us, here is the goal for operating margins in North American stores and commercial and international, contracting international and now we are looking at it and this quarter we had overall 50 basis points, but bigger declines in the North American side of the business and it seems like you’re constantly making investments to drive the top line. What – could you step back maybe and talk to us about what you see is the strategic direction where Staples is going now. Are you looking more for market share and willing to sacrifice margin? Do you view these as temporary investments, how should we be thinking about it?

Ronald L. Sargent – Chairman and CEO: Well, I mean I think, when I – I look at our two biggest challenges, we got to get the top line growing again and I think we’ve got to improve our results in international. I think as we outlined during the – when we announced the strategic reinvention plan, we think we’ve got four areas to grow the top line and whether that’s online or omni-channel or services or assortment. Those are the areas we’re going to make the investments in and we think, obviously, if you’re growing the top line, I mean, sales tends to cure all ills and I think the bottom line will follow. So it’s a little hard for me to say, this quarter, next quarter, whatever the operating margin is going to be, because I think the focus has really been on delivering the guidance that we gave you this year, which is the $1.30 to $1.35 while continuing to take cost out of the business and reinvesting a good portion of that cost we’re taking out of the business to grow the top line. So we’re really trying to run the business for the next several years, not just quarter to quarter, but we think the investments in online and other growth areas is really important and we’ll continue to do that. But we still feel very confident that the $1.30 to $1.35 earnings per share that we articulated is there.

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Gary Balter – Credit Suisse: Well, maybe to say it another way. How much margin deterioration are you willing, like is the top line the goal right now and it will come at whatever is necessary on a margin line? Is that the way we should be thinking about it?

Ronald L. Sargent – Chairman and CEO: No, I wouldn’t say that we’re going to grow the top line at all cost because we know we have kind of bottom line expectations from our shareholders as well. But I think we tried to frame it with our guidance this year, that we expect to get the top line growing again and we think that will accelerate even further in ’14 and I think you’ll see that as the quarters unwind this year. But at the same time, I think our bottom line guidance is relatively flat from year-over-year and I think this is the investment year and we, obviously, expect those investments to payoff in ’14, ’15 and ’16.

Gary Balter – Credit Suisse: Is there any assumption built into the second half of the year about when the merger of your competitors closes?

Ronald L. Sargent – Chairman and CEO: No, there is not at all. I mean we’re basically just kind of working the plan that we articulated, first of all, last September, but more recently last quarter. If there is any benefit of that merger happening, that would be on top of and in addition to anything that we’re planning on ourselves. So we’re assuming that we’re a standalone industry that is going continue to grow with our plan versus expecting something from somebody else.

A Closer Look: Staples Earnings Cheat Sheet>>