Is the glass half full or half empty?
The half-year big box results are in. Has Staples managed to stay ahead of the rest?
Staples latest results still show it ahead of its rivals, but there are concerns about its European retail business.
Staples has said that it is to review its European retail operations after a 9 percent decrease in same-store sales in the second quarter.
The hefty decline at its European stores was the stand-out figure in what was overall another set of solid results from Staples with EPS of $0.20 in line with market expectations, although total quarterly sales of $5.5 billion were below analysts’ average predictions of $5.65 billion.
Speaking during the quarterly conference call, COO Mike Miles said that changes were "clearly needed" to boost top line growth at European retail and announced that previously planned new store openings – about half a dozen stores – would now be postponed until at least next year.
Miles said that there was weakness in all European retail markets and that trends in stronger economies such as Germany were similar to those like Portugal, stating that the problem was one of Staples’ own execution rather than due to the individual economies.
To try and drive sales, Miles said that EU stores would be implementing tried and tested tactics from North America, adding that markets such as the UK and Germany tended to respond in a similar way to the US and Canada. Initiatives will include more of a focus on tech products and services, copy and print, stronger customer loyalty programmes and better offers on everyday supplies like paper.
Miles added that, while changes would have to be made in the long term regarding the European organisational structure, the company was happy with the current leadership team in Europe and did not hint that major changes could be on the way.
There was better news for the EU delivery business, which saw top line growth during the quarter despite a soft May due to the debt crisis in some southern EU markets and a 3 percent improvement in operating margins.
The struggling Chinese operations also reduced losses during the quarter and posted their first top line sales increase in seven quarters. The Australian business was described as "flattish" while Staples said that it saw strong sales growth in South America. Overall, sales at Staples’ International division dropped by 2 percent in local currencies to $1.2 billion.
France boost for Depot
Office Depot’s international sales experienced a similar comparable local currency decline of 2 percent (to $778 million), but there was more positive news from its retail channel which saw positive growth, and was even up in the mid single-digits in France, Depot’s biggest wholly-owned retail market outside the US with around 50 stores.
Another positive was Depot’s Asian business, with double-digit growth in South Korea, India and China.
Turning to the North American market, Staples once again continued to outperform its powerchannel rivals, Depot and OfficeMax, but there wasn’t that much in it at retail.
Recent point-of-sale data from research firm NPD indicates that retail sales of core office supplies at the three big boxes were flat during the second quarter, while furniture sales were down by 3 percent. Sales of the all-important laser toner and inkjet category increased by just under 2 percent (although this figure includes other retail chains, too).
At North American Retail, Staples’ same-store sales for the quarter were flat, as were total local currency sales of $2.0 billion. The key same-store metric is ahead of that of Office Depot (-1 percent) and OfficeMax (-2.1 percent) for the second quarter. Office Depot, however, did see positive comps in its north-east and Midwest markets.
Given the general sluggishness of the US retail sector – Wal-Mart reported a same-store sales decrease of 1.8 percent – the declines at Depot and ‘Max certainly don’t stand out, and even Staples failed to maintain the positive retail comps that it had achieved in the two previous quarters.
The gap between the power channel players continues to be wider in the North American B2B channel.
At Staples’ North American Delivery business, total sales for the quarter were $2.4 billion, a local currency increase of 1 percent. Again, this puts Staples ahead of its two big box rivals with Depot’s Business Solutions Division (BSD) sales down 6 percent in the second quarter and ‘Max’s US Contract sales decreasing by 3.6 percent.
In its contract business – which grew in the low single-digits – Staples said that it had enjoyed strong customer acquisition and retention, although sales from existing customers declined.
CEO Ron Sargent highlighted the Breakroom and Facilities category which recorded top-line growth during the quarter despite comping against the H1N1 spike of last year. Sargent said that Staples had had some key wins in this category amongst customers who had previously just used the company for office supplies.
When quizzed by an analyst on corporate spending trends, Sargent said that he had not seen evidence of a double dip, rather a slow, steady improvement in spending, but described efforts to grow sales as a "slog".
Office Depot continues to face serious challenges in its BSD division, despite the company saying that it had signed up more than 2,000 new accounts during the quarter. The 6 percent decline was greater than the company had expected; with direct sales almost flat that means that contract sales were down by more than the overall 6 percent figure. Although Depot still claims that these figures are due to economic factors in its key markets of Florida and California, rivals are not noting the same trends.
There is still a great deal of uncertainty surrounding the company’s claim that it can hold on to the majority of its US Communities business via its new TCPN contract and dealing directly with public agencies, and its previously exclusive contract with the State of Florida is changing to a multi-vendor contract that also includes Staples and AOPD independent dealer Gulf Coast. Furthermore, an investigation by Washington’s State Auditor Office has concluded that Office Depot overcharged the state by almost $300,000 during a 12-week period in 2009. This is being disputed by Office Depot, but it is nevertheless another dent to its reputation as regards pricing integrity on its public sector contracts.
‘Max said that its Q2 contract sales grew in its vertical healthcare and education markets, and furniture also grew year on year. Looking ahead, the contract division will benefit from the agreement with retailer Food Lion that will see OfficeMax branded products in over 1,300 Food Lion stores and ‘Max says that it is negotiating similar agreements with other regional retailers. It has also just been awarded the Texas statewide contract along with a consortium of independent dealers.
B2B market hampered
The B2B market is still obviously being hampered by unemployment in the US – there was a net loss of over 130,000 jobs in the US in July – and recent surveys indicate a pessimistic outlook for the rest of the year in the small business sector. Walmart-owned Sam’s Club, which has been targeting small businesses with a number of initiatives such as credit facilities, eked out a same-store sales increase of 1 percent in its latest results.
Interestingly, quarterly results from both US national wholesalers, United Stationers and SP Richards, would suggest that the independent dealer community is performing better than its big box rivals, or at least better than Depot and ‘Max.
Even though its overall sales fell by 1 percent in the second quarter, SP Richards said that sales to its independent customers were up in the low single digits, compared to a low double-digit decrease in sales to its major accounts.
There was an even greater percentage spread at United, where year-on-year sales to independents grew by over 8 percent in the quarter, while big box sales decreased by 9 percent.
Some, but not all, of these differences can be attributed to more direct imports and directpurchasing from manufacturers by the big boxes, and price inflation, but the figures do suggest that independent dealers are more than holding their own.