Staples eyes international

More headcount reductions in European retail was one of the key takeaways from Staples’ third quarter conference call in November as concerns over its International division prompted many questions from analysts.

While Staples’ overall International sales declined by 7% in local currency terms during the third quarter, European retail saw a 12% like-for-like drop and only the 21 stores in Norway – a country bolstered by its oil economy – showed positive comps.

The company didn’t provide specific plans about how it would affect a turnaround in European retail sales, but International President Mike Miles said that a 7% G&A headcount reduction had already taken place and that more reductions would be made in the fourth quarter.

 Staples began the year with 381 international stores, 332 of those in Europe. The current store count is 377, so there has not been a major closure programme. That could now be a possibility, with the Portuguese market – where there are around 30 stores – an obvious candidate given the economic conditions in that country, as well as the six stores in Belgium which are currently not profitable.

However, Miles reiterated Staples’ long-term commitment to the European retail channel which he described as profitable (except for Belgium), although he admitted that near-term growth was likely to be restricted to the mid-market and online channels.

One issue that Miles said he had to contend with is European redundancy regulations and severance requirements, which could offset salary savings in the short-term.

Taking retail out of the equation, the European results were solid enough. CEO Ron Sargent said that Contract channel results in Europe were in line with those being seen in the US, up by about 2% in local currencies.

Australia and China changes

Turning to Staples’ other International division markets, former European supply chain VP Jo Verbeek was named President of Staples China during the third quarter. Verbeek’s appointment demonstrates the areas that Staples is focusing on as it looks to move its Chinese business into profitability, although losses are still narrowing.

Achieving satisfactory gross margins is an issue for the Indian and Chinese markets. Staples is taking a long, hard look at the business model in those countries and is unlikely to ramp up investments until it finds the right ‘recipe’.

Australia had a “weak” quarter with the double-digit sales declines sequentially worse than in the second quarter. 

Things were not helped by an SAP switchover which cost the business two days in lost sales.

The experienced Jay Mutschler has been appointed to run the Australian/New Zealand operations, and will officially take over this month, replacing Paul Hitchcock.

Leader of the pack 

European retail and Australia aside, it was another solid quarter for Staples with profitability improving despite pressure on the top line.

A number of initiatives in North America such as the expanded breakroom and facilities management category – now an $800 million business in the North American Delivery division – and the revamped Copy & Print centres are paying dividends. There are other programmes too, including mobile phone departments in around 450 stores, which put Staples ahead of its main rivals.

However, given the continued economic headwinds and renewed uncertainty in Europe, the company lowered its full-year earnings outlook slightly, something which didn’t go down too well on Wall Street. 

Still, while Staples’ share price has fallen by around 11% between its release of its results on 14 November and this issue of OPI going to press, those of Office Depot and OfficeMax have dropped by 22% and 26% respectively, showing that, once again, the Framingham-based giant continues to be the most resilient of the power channel players in times of adversity.

Tax debate

Back in Europe, Staples revealed that it is in a contractual dispute with Lyreco over the €30 million ($40 million) that Lyreco received in relation to the Corporate Express acquisition in 2008. 

Lyreco received the €30 million, but is now claiming compensation for the income tax it incurred as a result of the payment. 

In its quarterly 10Q filing with the SEC, Staples said that there is a “reasonable possibility” that an arbitral tribunal could rule against the company, which would require it to pay Lyreco all or part of the claim. 

Keywords: Staples, financial, international, market, report