International weighs on big boxes

While North America appears to be showing signs of recovery, the situation is less encouraging for the big boxes' international operations.

There was a common thread running through the recent fourth quarter and full-year results of the three global big-box players. While there were some encouraging signs coming out of North America, international operations continue to be a drag on Staples, Office Depot and OfficeMax.

The stakes are higher for Staples and Depot. Respectively, approximately 21% and 29% of their total sales come from outside North America and Mexico, while the figure is around 10% for OfficeMax.

Staples certainly grabbed the headlines when it reported its Q4 results, announcing that it would cut “several hundred” jobs at its international division, primarily in Europe and Australia.

Its 2011 international sales declined by 3.5% in local currencies to $5.3 billion with the situation worsening in Q4.

Staples’ European retail operations continue to be a concern. Comparable store sales in Q4 were down by 9%, which was the average decline for the full year.

This was largely driven by a decline of almost 20% in the computer and printer hardware categories and President International Mike Miles claimed the overall picture was not as bleak as the numbers suggested.

He affirmed that the UK retail space is “the right place to be in the long term” and said that it was more a question of “fixing” certain business aspects.

He added that there were no plans for major structural changes in the International division, but that Staples would evaluate its presence in certain unprofitable markets.

European retail continues to be profitable in all countries except Belgium, noted Miles.

The overall level of International profitability continues to be a major worry and CEO Ron Sargent said that this would be one of Staples’ key areas of focus in 2012.

Operating income margin for Q4 fell by 1.7% to 2.5% and was just 1.8% for the full year – a far cry from the 7.5% target that the company had previously set. High-growth markets such as China and Latin America are still in the red, but Staples said that sales are improving and operating losses are declining.

There were rumours recently that Future Group, Staples’ joint-venture partner in India, was looking to sell its stake to the US reseller. Staples has an option to buy Future’s stake in the business that it can exercise this year. Whether, both from a timing and business strategy standpoint, it would make sense for Staples to exercise that option is questionable.

In Australia, experienced executive Jay Mutschler has been in charge since the beginning of the year, another example of Staples parachuting in senior US-based managers to turn around underperforming international operations.

European uncertainty at Depot

At Office Depot, total sales at the International division were down 5% in local currencies in 2011 to just under $3.4 billion, but the decline was nearer 2% on a like-for-like basis.

Responsibility for International was handed to Steve Schmidt last year, which has prompted leadership changes in its key European and Asian regions. A successor to Dirk Collin is yet to be named in Europe, while Jamie Gould has taken over at Depot’s Hong Kong-based Asian operations.

There have been a number of other senior level departures from the European headquarters in Venlo and the region has been in turnaround mode since 2010. Depot revealed that SG&A costs in Europe were reduced by $12 million in Q4 2011 alone, and that it had identified further cost reduction opportunities. It is certainly a situation that has caused a degree of uncertainty about Depot’s operations in Europe.

On the performance side in Europe, the main concern is still over the Viking direct business where sales continue to decline. Contract sales were boosted by a couple of big wins in the UK and the retail sales increased, although Depot’s European store network is limited to the French, Swedish and Hungarian markets.

Asia is performing relatively well. Depot reported double-digit growth in the Asian contract business in Q4 and positive comps at the South Korean retail unit.

It is also worth noting that, as part of its audits for 2009 and 2010, the US Internal Revenue Service is asking Depot for around $126 million in a tax and penalty amount related to its international operations. Depot said it is disputing the assessment.

Mini ‘Max

Excluding Canada and Mexico, OfficeMax’s international operations are limited to the Australian and New Zealand markets and are estimated to be worth around $700 million a year in sales. $100 million of that is thought to come from the New Zealand Croxley manufacturing and distribution business which ‘Max said last year that it is looking to divest.

‘Max doesn’t break out its sales and profit figures for individual markets, but comparable sales at its international operations (including Canada) were down almost 5% in Q4 with Australia singled out as an underperforming market.

Charles Agee has been appointed to head the Australian subsidiary which was being run by former Managing Director David Kelly on an interim basis. Agee has a strong background in B2B telecoms and IT solutions with Telstra and IBM in Australia, so it will be interesting to see how he handles the ‘box-shifting’ side of the OP business.

Margin enhancements are expected to be achieved from the new OfficeMax shared contact centre located in Christchurch, New Zealand.

Olé

One bright spot for Depot and ‘Max is their Mexican operations which are both run as joint ventures with local partners. 

Sales at Office Depot in Mexico exceeded $1 billion in 2011 and the US firm’s share of the net profit was $34 million. OfficeMax reported a 14.2% increase in 2011 same-store sales in Mexico where it now has 82 stores and annual sales of about $220 million.

‘Max’s joint-venture partner in Mexico can require OfficeMax to buy out its 49% stake in the business due to certain earnings targets being met in 2011. ‘Max would have to pay around $28 million in the event of the partner exercising this option, but that does not appear to be too high a price.

Overall, 2012 looks like being largely another damage limitation exercise for the big boxes’ international operations, especially for Staples and Depot with their exposure to the European market. While they do have a presence in emerging markets such as India, China and Latin America, the scale of their operations and their relatively recent market entries have not yet enabled them to achieve the profitability which would help offset depressed market conditions in Western Europe.