A 3% fall in first quarter sales may not sound like a positive result for Staples, but take International out of the equation (again) and there were some encouraging messages from the reseller’s Q1 earnings.
To be fair, even aspects of the International division’s performance showed signs of improvement; a 3% comparable sales decline at European retail was the best result since the third quarter of 2010. True, the worst performing stores have been removed, but International President John Wilson maintained that the company was doing the basics better and that there was more integrated planning in European retail. The situation is not likely to become any less challenging over the coming months, but things do seem to have at least stabilised. There are still issues with European delivery and in Australia, although Staples was a bit light on specifics.
However, it’s the North American market that attracted the most attention during the Q1 conference call with analysts, especially with the potential merger of Office Depot and OfficeMax on the horizon.
No merger benefit…yet
Eyes were on the North American Commercial (NAC) division result in Q1 to see if there was any evidence of Staples taking share from Depot and ‘Max as a result of the proposed merger. NAC sales increased by almost 2% year on year and there was positive account acquisition on the contract side. However, NAC President Joe Doody stated that customer wins were not merger related, and this wouldn’t be a major issue until customers were actually faced with a change, which won’t happen until a merger takes place. Nevertheless, sales force and marketing investments combined with reduced margins do suggest a more aggressive approach by Staples.
NAC’s Quill delivery business had a positive quarter, growing by about 3% – its best year-on-year performance in three years – thanks to increased marketing spend and a wider product assortment.
Increased sales of facilities and breakroom products continue to underpin growth at NAC and were up in the double digits, while there was a low single-digit decline in core office supplies.
New store format
At the North American Stores & Online (NASO) division, the key retail same-store sales figure was negative, down by 2% due to lower customer traffic. However, sales per square foot were stable as a downsizing of the retail footprint continues. 48 stores have been closed over the last 12 months and net store closures for 2013 will now be around 40 compared to previous estimates of 30. NASO President Demos Parneros said that this was due more to a better understanding of store networks than to a change to the retail strategy. In addition to the closures, a combined total of 45 stores will either be downsized or relocated this year.
Staples has just opened its first two 12,000 sq ft (1,200 sq m) ‘omnichannel’ stores in Massachusetts and Delaware. These pilot stores are designed to provide an “integrated” shopping experience combining traditional retail, online and a higher level of in-store staff/customer interaction. Parallels can be drawn with the new formats at Depot and ‘Max – while these omnichannel stores are the way forward, they represent just a small fraction of the total retail network and will take years to make a meaningful impact.
One initiative that has made a difference is the revamped Staples Rewards loyalty programme which now gives a 5% discount off all purchases. This is doing better than expected and has resulted in an increase in membership numbers (which are already in the region of 25 million).
SKU expansion
Developing digital commerce is one of the pillars of Staples’ growth strategy. 20,000 new SKUs were added to Staples.com in Q1, taking the total of new SKUs to around 90,000 in the last year. Staples.com sales grew by 3% year on year, although this may seem a bit disappointing given the number of new products and all the online marketing efforts.
CEO Ron Sargent said that the goal was “not to grow the top line at all costs”, but there has clearly been a move to improve sales at the expense of margins, and operating margin declined at all three reporting divisions. The simple premise is that once sales improve, then margin dollars will also grow. That has been an elusive goal for the office supplies giants over the last few years, but Staples is forecasting sales growth in 2013, unlike its two main rivals.
