) reported fourth quarter and full-year 2012 results on
Wednesday; for the full year, the company reported sales of $24.4
billion, down 1% from fiscal 2011 and down 3% after accounting
for a 53
week in the current fiscal year. The 10-K provides a nice
breakdown by product category to show the annual change:
Category (% of Total)
|Office Machines & Related
|Computers & Related
And then actual sales dollars (and year-over-year change), after
adjusting 2012 to a 52-week period:
Category (% of Total)
|Office Machines & Related
|Computers & Related
The weakness in PC sales isn't too shocking - Gartner estimates
that global PC shipments were down 3.5% for 2012, with the U.S.
declining at more than twice that rate (7.6%) according to IDC.
In regards to PC sales for the fourth quarter, Demos Parneros,
the president of North American Sales & Online, said the
following on the call:
"Specifically with respect to PCs, PCs were under pressure in Q4.
There was a lot of anticipation and build for Windows 8, as you
mentioned, and that really slowed sales down, that in combination
with people moving to tablets. And then the Windows 8 release,
honestly, was below what we expected. One of the products was
introduced. The pro model was introduced just recently to
reasonably good reviews and decent sales but definitely below
expectations. I would also say that touch product, which really
makes Windows 8 a better experience, was scarce in the quarter.
And also mobile phones, which integrate the tablet, the PC and
phone experience together into really a new platform and a new
ecosystem were also slow to be introduced. So we believe in
Windows 8, we're excited about it. I like the recent things that
we've seen. But it's got to build a little faster."
Looking by segment, we can see that international continues to be
a major headwind for Staples; here are the revenue results by
segment over the past two years (using 53-week data in 2012 only
because that level of granularity isn't provided):
2011 Increase Over 2010
2012 Increase Over 2011
|NA Stores & Online
International will receive further discussion in my future posts;
I would like to see the changes John Wilson, who used to be
Staples CFO in the mid-1990s (recently brought back to the
company as president of European Operations), can implement
before I comment further.
Overall, retail sales were weak in Q4 - comps fell 5%, with the
entire decline due to traffic; the company missed internal sales
estimates, and this impact flowed through to the bottom line and
caused SPLS to miss cash flow targets, as noted by CFO Christine
"Our free cash flow came in below our expectation of about $1
billion for the full year because as -- in early Q4, we built
inventory in anticipation of stronger top line results. As sales
came in below our expectations, we did pull back on inventory
replenishments but we continued to pay down accounts payable. We
pay our vendors a little bit faster than we turn our inventory,
so this had a negative impact on working capital. Additionally,
we came up short of our sales and earning goals for the year."
For the full year, Staples' comps declined 2% (with full-year
sales for NAR & Online at $11.8 billion, and Staples.com
sales up 3%), compared to a 2.2% decline for Office Max ($3.3
billion in annual sales from retail) and a 5% decline for Office
Depot ($4.5 billion in annual sales from North American Retail);
as those numbers show, the combined OMX/ODP (assuming 100% sales
retention) would be about two-thirds as large as Staples North
American Retail & Online business.
In North American Commercial, sales declined by 0.3% for the full
year, and were flat after adjusting for the impact of Hurricane
Sandy (pegged at 1% headwind in the fourth quarter); this decline
was essentially by choice, as the company voluntarily walked away
from two sizable contracts in late 2011 that didn't provide
adequate returns to the business (also known as "sound business
practice"). Operating income was $680 million in the segment for
2012, up 3% from a year ago and 10 basis points as a percentage
of sales (to 8.4%). This business continues to be overlooked by
individuals stuck on insisting that Amazon will be the end of
Management's fourth quarter commentary presented something that I
haven't quite seen before for the future of Staples; here's a bit
of what caught me in the company's discussion on their strategic
"While our ultimate goal is to increase sales and earnings
growth, there are a number of other key metrics that we're
planning to track and planning to share with you each quarter. We
believe that these are important indicators of our progress and
closely align with our vision.
First, we're highly focused on driving sales in
categories beyond office supply.
This year, we have plans to drive meaningful acceleration here.
Second, one of our top priorities is to hyper-grow
In 2013, we have plans to accelerate growth throughout the year
and achieve high-single-digit growth in staples.com.
Third, we'll continue to rapidly expand our assortments.
Today, we have more than 100,000 SKUs on staples.com, and by the
end of 2013, we plan to more than triple that number...
Our strategic reinvention is focused on accelerating sales and
earnings growth, and we expect momentum on the top and bottom
lines to build throughout 2013. To achieve this, we need to make
a number of investments. This year, we're planning to reinvest
the majority of our savings -- our expense savings
in sharper prices, increased investment in IT, expanded
brand marketing, customer acquisitions and talent and associates
to better serve the need of our customers.
We're also wrapping up the final phases of our European
restructuring program. While the associated costs won't be large
enough to exclude from our GAAP earnings per share, they will be
a headwind on the bottom line early in the year."
Consider that commentary from Mrs. Komola, as well as this from
CEO Ron Sargent (it's quite long, but I think it's important):
Our reinvention plan includes 4 growth platforms: expanding our
assortment beyond office supplies, accelerating growth online,
redefining the Omni channel-experience and accelerating growth in
our services business. I'm pleased to report that we're gaining
momentum in each of these areas...
Our new vision is, 'Every product your business needs to
And we're confident that we can accelerate growth in categories
beyond office products. A great example of this is our success
selling facilities and breakroom supplies. During 2012, we had
strong double-digit growth in North America and grew sales in
this category by more than $200 million, ending the year with a
$1.8 billion facilities and breakroom business.
We more than tripled our assortment on staples.com during
the year, and we hit our goal of 100,000 SKUs offered by yearend.
While we're still in the early innings of our assortment
expansion, we see big opportunities in areas like technology
products, medical supplies, safety supplies, mail and ship and
We're also excited to report that we now offer Apple accessories
on staples.com, and we'll have this assortment in our stores
during the first quarter...
From an Omni-channel perspective, we're making it easier for
customers to shop us
wherever and whenever they want.
On bringing our North American Retail stores and our dot-com
businesses together, we're providing our customers with a more
consistent shopping experience across the channels. During Q4, we
combined our retail and dot-com merchandising and marketing teams
and introduced new compensation plans which incent associates to
drive sales, both in our stores and on our website.
We recently launched our new features like Reserve Online
and pick up in store, and we're seeing a very strong response
from our customers.
And we've also revamped and launched a new website in Canada with
significantly improved features and capabilities. And during Q4,
we developed a new 12,000-square-foot Omni-channel store
with updated staples.com kiosk and an endless aisle shopping
We expect to open our first Omni-channel store in Q1 and we're
confident that we can retain the vast majority of our sales in
this new format while also driving sales of an expanded online
I'm also pleased to report that just last week, we announced a
new Staples rewards program in the United States that
significantly improves our value perception with customers. This
program is free to customers and offers 5% back in rewards on all
products and all services.
It also provides free shipping on all staples.com
We believe that the reinvention of our rewards program will make
shopping at Staples even more compelling for customers..."
Let's think about all of that - Staples is focusing on driving
better pricing (their global leadership position in office
supplies certainly helps), is number two in ecommerce behind
), offers free shipping on ALL orders (regardless of size and
without the need for an annual membership of any kind), and
offers next day delivery (as well as other options like in-store
pick up, or likely in-store availability today on many products);
I look at all that and think I know what management is setting
their sights on - they want to become the Amazon for businesses,
with an ability to service anybody from the small shop with a
handful of employees that might need ink ASAP, or the large
enterprise that needs a dedicated relationship via Staples
Commercial division. Unlike the actual Amazon (which is focused
on eBooks, tablets, AWS, etc.), Staples' management team is 100%
focused on meeting the multi-channel needs of businesses (and
cost isn't always No. 1); I've never really thought about SPLS in
this manner prior to the call (as being on the offensive), but
think it might be where they're focusing - and is a space where
they have a good change of giving AMZN a fight.
Looking at guidance, management expects full-year sales to
increase low single digits off of 2012 sales (52-week basis) of
$23.9 billion. On the bottom line, management expects $1.30 to
$1.35 in diluted EPS from continuing operations, suggesting 0-3%
EPS growth for the year. Based on what was said during the call,
this assumes no change from the OMX/ODP merger ("I think it's
going to be good for our industry, but at this point I think it's
just way too premature to say much more"), and also includes $150
million in expected cost savings in 2013 (largely from vendor
negotiations), which instead of flowing through to the bottom
line will be reinvested in the business; ironically, if that
investment would have come in the form of capex (as opposed to
being expensed), management would have easily cleared analyst
estimates for fiscal year 2013 - which goes to show you just how
irrelevant the headline numbers can be without further analysis.
The balance sheet is solid, with the current ratio over 1.4x and
cash in excess of $1.3 billion. Management plans on completely
repaying $867 million in January 2014 notes in the coming year,
at which point the company will have just $1 billion in long term
debt; considering that the company's target credit rating can
support debt-to-EBITDA north of 2x, this leaves the company with
plenty of flexibility as we look beyond fiscal 2013.
In addition to paying down debt, the company continues with a
strong buyback program - and repurchased about 5% of outstanding
shares in 2012; including dividends, the company returned $743
million - or 8.6% of the current market cap - to shareholders for
the year. In addition to the fourth quarter call, management
announced a 9% increase in the dividend; with an annual payout of
$0.48 per share, the current yield is just shy of 3.8%.
To be clear, international struggles are concerning, and North
American retail still faces long-term headwinds (although
starting to be run-off via downsizings and closures at lease
expiration, with plenty of opportunity to continue doing so thru
fiscal year 2015); with that said, Staples continues to offer a
balanced approach to reinvestment in the business along with
return to shareholders. With the OMX/ODP deal, the benefit of
lower-rate debt, and continued improvement in the economy (and
the commercial business), I'm content with sitting still and
watching how the coming quarters unfold at Staples.
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