News Analysis: Taking the positives

Investors pummelled Staples' share price after its Q1 results, but initiatives are gaining traction... slowly

Reinventing Staples was never going to be a question of just hitting an ‘Easy Button’, and it is proving to be an arduous task to try and move the global reseller onto a growth trajectory. But, as CEO Ron Sargent so aptly pointed out during the recent conference call that discussed the reseller’s first quarter results, taking a company the size of Staples with its strong retail legacy and transforming it into an online business, involves “a lot of changes” and “a lot of moving parts”.

Retail spotlight

Despite this shift to online, bricks-and-mortar retail remains very much in the spotlight as Staples gets its new 225-store-closure plan underway and remerchandises the whole US store network. Will that be enough to return to positive sales comps? It’s too early to tell, according to North American Stores and Online (NASO) President Demos Parneros, but he said that customer response to the expanded assortment was “amazing”.

The key will be how quickly Staples can roll out its new 12,000 sq ft (1,200 sq m) store format. It’s been slow going so far, with only 33 out of a total of 1,800 stores in this format and another 25 slated for the current quarter. Parneros said these stores were retaining 96% of the revenues of the previous, larger format, and operate with a much lower fixed cost base.

While the remerchandising of the entire network can be seen as something of a ‘quick fix’ to try and offset the faster-than-expected declines in traditional categories, plonking a pallet of toilet rolls and bubble wrap next to the check-out counter is hardly revolutionising the retail experience and is unlikely to halt the slide in store traffic – down 4% in Q1, although this was impacted by the poor weather conditions in February. The quicker the chain moves to a fresh, modern-looking concept – think Apple stores for the business products channel – the better. A bright spot has been the new in-store kiosks which generated over 400,000 orders in the first quarter, representing almost 5% of total US retail sales.

Online, Staples continues to add SKUs at lightning speed, 300,000 new products becoming available in Q1 – including in categories such as office décor and education – taking the total to over 850,000. However, online growth is still a fairly modest 6% and the addition of more than 700,000 products beyond the core over the past year is still only generating sales of $5 million per week. Compare that to Amazon which regularly reports sales growth in excess of 20%, and from a much larger base.

While the retail outlook remains challenging, there is some impetus in the North American Commercial (NAC) division. Sales comps were positive in Q1 and NAC appears to be benefitting from the move to new categories more so than NASO, particularly in facilities, breakroom, furniture and promotional products. The sales organisation has been revamped and streamlined into a new ‘team selling’ structure (see illustration above) and there should be some more upside due to the Office Depot/OfficeMax integration.

Signs of improvement

International is showing underlying signs of improvement despite some disruptions in Europe last quarter caused by organisational changes and the move of three markets – the UK, France and Italy – to the Quill.com e-commerce platform. Australia performed better, too, with quarterly sales flat year on year.

Against this backdrop of change, another major challenge that Staples is facing is that of trying to maintain margins while price competition hots up. Margins at NASO and NAC were both down in Q1, partly due to ploughing savings back into price investments. And it looks as if there could be more to come as Staples plays catch-up with Amazon – estimates still put Staples at being 10-15% more expensive than Amazon on a basket of products.

Staples Q1 results
 highlights (vs Q1 2013)

  • Total company sales were $5.65 billion, an underlying decline of 2%.
  • Almost half of sales now come from outside the core stationery, paper, and ink and toner categories.
  • Adjusted gross margin fell 86 basis points to 25.1% of sales.
  • Adjusted operating profit was down 36% to $183 million.
  • North American retail revenues were $2.63 billion and same-store sales fell 4%.
  • Staples.com achieved sales of about $590 million, an underlying sales increase of 6.1%.
  • North American Commercial sales rose 0.7% to $2.06 billion.
  • International sales fell 3.9% to $964 million, driven by weakness in the European delivery business.
  • Comparable store sales in Europe were flat, the first time they haven’t been negative since 2008