Staples Earnings Conference Call Nuggets: Inflationary Pressures and European Business

Staples Inc. (NASDAQ:SPLS) reported its third quarter earnings and in its subsequent conference call, the company answered the following analysts’ questions we thought you’d like to know.

Improving European Business

Oliver Wintermantel – ISI Group asked: With many European countries looking like they can’t avoid a recession next year and your productivity and the comps down already, what levers in the international business can you could pull to keep that business from deteriorating further?

Michael Miles – President and COO responded: I think they are the same levers but probably more of the medicine than we had been planning to take.

I think G&A remains our principal lever for improving profitability in Europe, both in office products business and PSD. We’ve got significant plans already in place to take G&A down.

We’ve have teams right now going back and re-scrubbing those to account for the current economic reality. Obviously the key for us is to balance the reduction in headcount that we need to do, with severance expenses that are part of the European environment and managing that through P&L.

That’s a challenge for us but I think we still see plenty of opportunity to reduce expense in Europe just as we have; it’s harder to show leverage with the current economic results.

Customer Wins

Matthew Fassler – Goldman Sachs asked: Are the rate exchanges improving to the extent that the overall sales growth decelerated a little bit?  Can you talk about what’s transpiring with new customer wins and whether there might be another number that explains via the divergence in those trends?

Joseph G. Doody – President, North American Delivery answered: I think the sales to existing customers tends to be a number we use in the Contract business; it is geared more towards Contract than it is to the others.

We are still slightly negative in terms of sales to existing customers but it’s still negative in our Contract business. That’s continuing to hold a spec.

We are very happy with our acquisition activity and had a good quarter for new customer acquisitions. But it’s still the weightiness of some of our larger customers. Those are the ones that are most cautious right now, the bigger Fortune 1000 customers are concerning us.

We also had a weak quarter in terms of federal government, down over 20 percent. There are some areas of weakness here but overall, the trend is a little bit better in terms of existing customer sales.

Inflationary Pressures

Ivan Holman – Citigroup asked: Can you comment on this quarter’s inflationary pressures and how this compares to prior quarters? Which categories are you seeing the most pressure and which ones have you able to pass along price increase?

John J. Mahoney – Vice Chairman and CFO responded: I think it sort of varies by category.

A good chunk of our technology business is pretty much immune to inflation and almost has deflation in it as advances the technology lease at more competitive pricing.

Paper has been a category that traditionally is an important part of our business and over the last couple of years, we’ve seen fairly substantial inflation here. It’s abated a little bit this year and we’ve generally been able to pass on increases that we’ve seen.

Throughout the rest of our core office supply categories there has been relatively limited amounts of inflation and what we have, we’ve generally been able to pass on as you see with our gross margin rates.

We’ve done a pretty good job overall in maintaining combination of mix and pricing, to deliver improving margins.

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