Staples Executive Insights: Costs and International Improvement

On Wednesday, Staples, Inc. (NASDAQ:SPLS) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Cost

Gary Balter – Credit Suisse: A couple questions, one first, just a technical clarification. On the charges in the quarter, how much was the Corporate Express thing versus the other one?

Ronald L. Sargent – Chairman and CEO: The $28 million I believe, around $6 million give or take a few dollars, it was related to the Corporate Express legal settlements and about $21 million, $22 million on the overhead reduction expense.

A Closer Look: Staples Earnings Cheat Sheet>>

Gary Balter – Credit Suisse: And question is, in the Retail business, your margins dropped about 20-ish basis points after the charge, could you discuss – you mentioned some investments, could you discuss that and is that a trend you expect to see throughout the year or is that just first quarter because of these investments and we should expect to see margins stability or margins start to rise again?

Ronald L. Sargent – Chairman and CEO: I’ll ask Demos to answer that one.

Demos Parneros – President, U.S. Retail: I would say it’s primarily the first quarter. It’s essentially result in a couple of things, one is flat sales and a little bit of expenses rising in various different line. We have a big one though is our continuation of our 500 store mobile phone initiative, so we are now up and running in all 500. Some of the expense comes ahead of obviously the sales and the ramp-up, but primarily it, not much more to say on it.

Ronald L. Sargent – Chairman and CEO: The mix of business not a lot of change year-over-year.

Gary Balter – Credit Suisse: Okay.

Demos Parneros – President, U.S. Retail: Yeah, I would say not much happening in the way of change; probably the same sort of trend for the second quarter as really any new product is not slated to happen until either very late in Q2 and certainly Q3 and beyond with some of the Windows 8 introduction.

Gary Balter – Credit Suisse: And then, you’re doing such a super job in the Contract business and in terms of like you talked about facilities and how much you’re adding, have you thought – is there a way to tie in your retail stores as essentially distribution networks for Contract or for customers in Contract? Have you thought about that?

Ronald L. Sargent – Chairman and CEO: Yeah, we have.

Michael A. Miles, Jr. – President and COO: Well, as far as tying in the stores, Gary, we’ve got great growth as well within our store operations for cleaning and breakroom products as well, but as far as delivery goes, we’re not tying those in. We give next day delivery throughout our network and that really very much meets the needs of those customers. There is very little need for customer pick-up, there is some exceptions to that where they might need something the same day, but even in that case we can do that out of our delivery network. So, tying them in from a delivery standpoint, no, but certainly from a product assortment standpoint and driving that category within the stores, they’re seeing 20% plus growth there as well of a smaller base than we have in delivery.

Ronald L. Sargent – Chairman and CEO: I think where you’re seeing in opportunity is not the contracts as much as it is in the dotcom space where we’re – Demos, you want to talk to…?

Demos Parneros – President, U.S. Retail: Yeah, sure, I’d love to. Yeah, there is obviously a very strong connection between our dotcom and retail dotcom business and our retail store business. One of the things that is available to customers today is to shop online and to shift to stores; so, it generates a trip to the store that way, and really just trying to provide the customer with shopping experience their way and whether it’d be offer coordination or use the store as a pick-up point, that is something that we’ve been doing and it’s actually growing today.

International Improvement

Bradley Thomas – Keybanc Capital Markets: I wanted to just follow-up on the International segment and recognizing that there are some economic headwinds that you’re up against. What are the expectations for margins in that segment this year? Do you believe you can start driving some improvement as we move through the year?

Ronald L. Sargent – Chairman and CEO: Mike?

Michael A. Miles, Jr. – President and COO: I think our expectation is that the first half of the year is going to continue to be very difficult, but given the cost reductions that I described and other expense measures that as I am sure you can imagine we’re taking in response to the sales environment, we expect that picture to get better as the year progresses. It’s a little bit hard to make predictions about exactly what the leverage will look like given uncertainty around the sales environment, but in terms of cost reductions and our cost performance, you should see that continue to improve throughout the year.

Bradley Thomas – Keybanc Capital Markets: As we look at the Company, it’s – and try and parcel out how well Staples is doing versus overall worldwide GDP performance, I was wondering if you all could just talk a little bit about how you think you are performing versus other segments at Retail like Mass versus some of the independent channels and contract that seem to be doing well versus the Internet. How do you feel like you guys are performing from a market share standpoint?

Ronald L. Sargent – Chairman and CEO: Yeah. I’ll take a stab at that and others can weigh in as well. I think you’re right, I think the consumer side has performed a lot better than the business side. Unfortunately, if you look at our dotcom business our Quill.com business, our Contract business, it’s virtually all businesses of some size or another. And even in our Retail side, half of our sales go to small business. I think you asked about the economy, we’re still seeing a very sluggish economic recovery with the pretty weak jobs growth and really jobs – white collar jobs are the big drivers of our top line. I think during the recession, I think we lost 8 million or 9 million jobs, 3 million have comeback in the last 18 months, but many of those have come back in areas that are not high paper consumption jobs, things like manufacturing and hospitality and utilities and transportation. Some of our best customers like financials and large companies really haven’t added a lot of jobs in the recovery. When you look at our sales, I think our month-to-month sales trends have been pretty choppy. We have seen our North American Delivery sales up nine consecutive quarters. So, I think that’s a bit of an indication that things are better. But in Retail sales have been flat. We have plus one comp, minus one comp, even comp as small businesses continue to be under pressure. I remain cautiously optimistic about improving economic trends as the year goes on. And I feel like our North American business is performing okay in a difficult environment. When you look at Europe, the bulk of the eurozone countries are in recession. I think probably Scandinavia and Germany are performing a little bit better, but it feels in Europe a lot like it did in the United States in 2009. So, we don’t expect any improvements in the European economy during 2012. We do expect improvements in our business – in terms of Staples business during the second half, as Mike noted. So, In terms of how we’re performing versus others like us, there is not a lot of other companies out there that are like us. But I would just caution you to kind of consider us a B2B player more than a B2C player.