United cuts the slack

 

United Stationers’ board of directors has approved a restructuring plan that will eliminate corporate staff positions.

 

The number of job cuts has not been disclosed but the action is expected to cost the Deerfield-based company between $4 million and $8 million towards the end of its current financial year. The sizeable bill relates to one-time employment termination benefits.

 

A report filed with the US Securities and Exchange Commission (SEC) outlined the company’s restructuring plans. The downsizing programme should aid United’s long-term financial objective of achieving earnings per share growth of between 12 and 15 percent.

 

The announcement signals a new phase of the company’s War on Waste (WOW) initiatives across the business. The initiatives have been in place since 2003, aiming to reduce United’s cost structure by simplifying processes, increasing operating efficiency, achieving productivity improvements and reducing corporate overheads.

 

Back in August, Dick Gochnauer, president and CEO, said: "We are continuing to aggressively pursue our WOW initiatives, which have been very effective in taking costs out of our operations. We will pursue further opportunities to reduce our cost structure by extending our WOW initiatives to other areas of our business. We believe these actions will position us to further improve our sales and earning performance in the long term."

 

George Sanders, VP of compensation, benefits and development, added that "in rough numbers" the firm was trying to take $100 million of cost out of its business over a three-year period.

 

According to analyst Jim Rice at Susquehanna International Group, the WOW initiatives have already proved effective. The strategy reduced expenses by $20 million last year and by the second quarter had achieved over 60 percent of its $20 million target for this year.

 

Rice claims that some cost reduction will come from increasing global sourcing. Only 10 percent of the company’s inventory is currently sourced globally but United has pledged to increase this to 20 percent or more.

 

He also believes that the restructure will allow the wholesaler to increasingly rely on more efficient technology and globally sourced merchandise. Technology costs will start to fall now that the company’s heavy investment in IT over the past few years is nearing its end.

 

Dan Binder, senior VP at Buckingham Research Group, said: "United Stationers has built up a lot of costs in recent years, so cutting labour is designed to streamline the organisation."

 

Binder added: "However, certain parts of the cost structure will be difficult to reduce simply because there were several investments made that were designed to drive top-line growth. The best way to leverage these costs is to grow the top line. This may take a few quarters to occur given headwinds the company is facing like slower sales growth from the national players and slowing job growth."

 

United’s cost-reduction methods are obviously proving successful. Benefiting from the sale of two distribution facilities and the completed sale of its Canadian division, United’s Q2 net doubled to $41.4 million, compared to $20.9 million in the previous year.

 

United hopes that WOW will give it the advantage in its ever-close race with rival SP Richards. Its competitor also posted a buoyant Q2 with operating profit up eight percent to $38.5 million, compared to $35.6 million a year earlier.

 

As part of its plan to grow earnings per share, United is planning to further expand into the small office/home office (SoHo) sector, the fastest growing market segment. In 2004 there were reported to be 13.5 million income-generating home businesses in the US, with research predicting the figure will jump to 14.5 million by 2008.

 

The wholesaler is also moving into new distribution channels including Costco, aided by eCommerce initiatives. This is a growing trend across the industry as retailers continue to increase their product offerings by trading online.

 

United is keen to build on its jan/san business and take a piece of the lucrative $22 billion market. Twelve years ago, it took its first steps into the market by acquiring Lagasse, a jan/san wholesaler. More recently United has acquired jan/san wholesale distributor, Sweet Paper Group. The sector currently accounts for approximately 16 percent of the company’s net sales.

 

Despite the immediate costs associated with its restructuring plan, the company is well positioned to branch out into less developed areas. Its cost-reduction strategy has allowed it to better direct its spending to ensure long-term growth.