Surge at Staples



Dan Binder, SVP of Buckingham Research, reads between the lines of Staples’ stunning set of Q4 and 2005 results and compares its prospects to those of rival Office Depot


The announcement of some dazzling Q4 and end-of-year results at Staples this week topped what has already been an astounding year for the retail giant. News of the profits sent the company’s shares up more than a 6.4 per cent to close at $24.54 on Tuesday.
"Staples’ numbers did look good and came in modestly ahead of expectations," Dan Binder, SVP at Buckingham Research, told OPI+. "Total sales were in line with our expectations, but gross margin was slightly better, so it beat estimates by $0.01 and reported EPS of $0.39… the results definitely warrant the [share] valuation." 
Q4 profit soared by 15 per cent and quarterly net income rose to $290 million from $251.3 million a year earlier. Sales jumped 9 per cent to $4.46 billion, compared with $4.08 billion a year ago.


For the full year of 2005, the company reported a net income of $834 million, up 18 per cent from $708 million in 2004. Sales rose 11 per cent to $16.1 billion from $14.4 billion.


The results were largely down to strong North American sales at both Staples’ retail stores and office supply delivery business. "By division, I would say profitability was slightly better in North American delivery as Joe Doody continues to do a phenomenal job with that business," said Binder. "Demos Parneros has also done a great job in keeping the retail momentum up and should now benefit somewhat from consolidation in the industry."


Strong sales in North America also helped to boost Q4 figures at Office Depot, reported two weeks ago, in which profits more than doubled to $106.3 million from $52.1 million the previous year. Revenue, meanwhile, grew 7 per cent to $3.72 billion. However, Depot CEO Steve Odland urged that the results resulted from "the strong impact of the holiday season" and cautioned people "not to expect this level of performance going forward".


At Staples, improved overseas results were also a boosting factor. International sales grew 9 per cent based on local currencies, and comp sales were up 3 per cent, Staples’ best performance by that measure since 2003. However, the overall result was flat compared to 2004 due to a weakness in the US dollar. But Staples chairman/CEO Ron Sargent – and Binder – believe that the importance lies not in the results themselves but in their suggestion that a tide is turning for Staples’ international division.


Sargent told analysts in a conference call that he expects "a nice turnaround for our European business" this year in part because of an improving economy and declining integration costs.

Binder added: "While North America looked good, I think the stock is getting a positive reaction on the European results since it has been a ‘show me’ story for that division. Staples’ results in Europe were in line with our expectation after adjusting for a modest charge in the quarter related to unsold real estate, but I think investors gained a new level of confidence about the European profit contribution for next year. I would say many observers probably hoped Staples could see a big profit swing in 2006 and now Q4 gives them some evidence that it could be real.
"Europe sounds like it may be showing some signs of an early recovery based on some of the headlines I have been reading, particularly Germany. This combined with better execution (ie management changes, customer segmentation work in catalogue, marketing optimisation and store conversion activity completed) should allow for mid to high single digit growth for the international division in 2006."

Over at Depot, Q4 international revenue declined for the second straight quarter. Odland, who said that the results were "not where we would like them to be", said at the time that the company was trying to boost its international presence in the face of growing global competition. "It may take us some time to stabilise this situation," he said. "We need to re-ignite profitable growth in Europe and over time increase our geographical reach."

But Binder believes it is tough to compare Staples and Depot at present, with the two retailers adopting such different growth strategies. He said: "Office Depot is a different story as it has a much larger cost cutting component to its earnings growth in 2006 and 2007. With that said, Office Depot is getting strong comp store sales out of an older store base, which is being driven by remerchandising efforts and a greater exposure to technology hardware (versus Staples). Delivery showed good growth at Office Depot and one could argue that it should accelerate now that the Viking integration has been put behind it." 
When it comes to international store presence around the globe, Depot is ahead of Staples. And if the international retail tide does turn, Binder believes Depot is in a better positioned to ride the wave. "International [at Depot] showed modest sales improvement, but huge cost cutting progress. However, if Europe does actually turn from a macroeconomic perspective, Office Depot is heavily exposed to the region and should benefit from that. We have not yet built that into our sales and profit expectations for 2006."