Staples Earnings Call Insights: North America Stores and Core Office

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

North America Stores

Bradley Thomas – KeyBanc Capital Markets: Want to first talk about the North America stores, you know over the last year, the Company has obviously closed about 54 stores and it sounds like you are seeing very good results when you do a remodel or relocation, as you alluded to in your prepared remarks are on recognizing this is still a very profitable segment for you overall, I was hoping you could just talk about how many stores maybe candidates for closures and relocations, and what kind of returns you see when you do those store actions?

Ronald L. Sargent – Chairman and CEO: Sure, yeah, we spend a lot of time on that. And I will ask Demos to answer that one.

Demos Parneros – President, North American Stores & Online: So, the first on the closures, we try very hard to get the right closures. In some cases there is no benefit to us when we close the store and when we are able to reposition a portion of the network, we’re able to see good sales and proper transfer to the rest of the network, therefore giving us a good positive lift to the – that specific market. So, we’ll continue to go down the path of making closure decision upon lease, and we have between 175 and 200 lease decisions over the next three years. With respect to the downsizings, we’re seeing good success with downsizings. Our new store size is 12,000 square feet and we’re seeing roughly a 95% sales retention on that. A little bit early, since we don’t have a ton of stores done, but we’re encouraged by the early results, obviously we need to continue to work on the mix inside the store and getting the precise assortment inside those stores. But the combination of less rent and the good omni-channel capability inside stores looks like a very positive combination for us.

Bradley Thomas – KeyBanc Capital Markets: If I can then, just add a follow-up on a bright spot for the Company, the facilities and breakroom category. Ron, it seems to me that, a few years ago, when you hosted Analyst Day, it was categorized as a category with over $20 billion in opportunity, and the share of Staples was low-single digits. Could you just give us an update maybe of what inning you are of growing share here and how high the attachment rate is? Does it still remain a bright spot for the Company?

Ronald L. Sargent – Chairman and CEO: Yes, it does. We’ve got several other categories that we’re working on hard just like facilities and breakroom. But facilities and breakroom already is way over $1 billion in sales force, and the contract area, in particular, it’s growing in the 20% range last quarter. So we think it’s very early, probably in the first inning or maybe even the second inning of our plans for facilities and breakroom. Retail, we’re a little bit further behind because we were slow to kind of break it out as a separate category. But we’ve continued to expand stores. Demos, we’re up to now 500.

Demos Parneros – President, North American Stores & Online: It’s close to 500 stores where they are fully expanded. But I know we mentioned close to 20% in our commercial business. We’re lagging a little bit, but it was a high mid-teens comp last quarter. So it’s a good retail idea as well.

Ronald L. Sargent – Chairman and CEO: It’s really natural for a retail small business manager who’s in there buying office supplies and ink to pick up breakroom supplies and cleaning supplies as well. So it’s early days. It’s a big category, and it’s growing nicely. I wish we’re growing a little faster because I think some of the core office supplies are shrinking a little faster than we thought they would.

Core Office

Dan Binder – Jefferies & Company: I had a couple of questions. First, just given your last statement, which is maybe core office is shrinking faster than you thought. I’m just curious what your thoughts are, plans are for accelerating some of the change and particularly, how you react on a cost-cutting basis to prevent too much hemorrhaging on the bottom line?

Ronald L. Sargent – Chairman and CEO: Yes. I think the core supplies weakness has been more of a retail phenomenon although, it certainly affects our contract and delivery business as well. Not only, does it affect our top line, but it also the mix when you are evolving your mix from paper-based products to more technology-based products, the margins aren’t nearly as good. At the same time, I think, given that that is probably a reality that the core office supplies are going to continue to shrink. We do have to be more aggressive in cost take out and whether that’s looking more carefully that of stores are about to be renewed or whether that’s being more aggressive on SG&A, I think, we’ve done a nice job controlling costs, but obviously, our job is to improve earnings per share and we’ll continue to take cost out going forward. There is a lot of great new stuff that’s coming and I don’t know, Demos, you’ve got a whole lot of exciting things that are coming to replace core office supplies and many of the categories that we’ve recently launched are doing quite well. So, Demos?

Demos Parneros – President, North American Stores & Online: Yes. If I can just add, I mean, you said it. It is – the game that how quickly can we reduce space in our stores in these unproductive categories. We are doing that through the overall store reductions and in addition to that we’re reflowing stores to eliminate or reduce space in the sort of let’s call dying categories or weak categories and then replacing that with things like mobile phones where we’re going to a 1,000 stores, talked about facilities and breakroom, which is catching fire in retail stores, and that’s soon to be in over 1,000 stores. We have a lot of test categories that are in place today including safety, early education, office gifting, et cetera, and those are continuing to grow as well. So, we’re very active in – sort of freshening up the stores and we’re seeing that in the productivity on a per foot basis in the stores that we’ve touched…

Dan Binder – Jefferies & Company: That leaves me with the second part of my question, which is on – on those categories that you’re adding, you focus on mobile and technology product. You’ve got – you had Best Buy report yesterday nice share gains in mobile and notebooks. It’s been a little bit tougher for you guys. I’m just curious, would you think that you need to accelerate price investment as well as, sort of just take the haircut now, get it over with and try and stabilize the comps?

Ronald L. Sargent – Chairman and CEO: We’ve been taking price investments over the last year. I think we’re going to continue to take intelligent price investments. We think the direction we’re on ought to be able to allow us to stabilize comps. We expect comps to stabilize certainly the remainder of the year. I agree, I think there are some categories where particularly when you are comparing online competitors, where we’re too high and we’re continuing to take those prices down.

A Closer look: Staples Earnings Cheat Sheet>>