SPLS

Staples, Inc. (SPLS)

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Staples Inc. (SPLS)

Q2 2010 Earnings Call

August 19, 2010 8:00 am ET

Executives

Laurel Lefebvre - VP of IR

Ron Sargent - Chairman and CEO

Mike Miles - President and COO

John Mahoney - Vice Chairman and CFO

Demos Parneros - President of U.S. Retail

Joe Doody - President of North American Delivery

Analysts

Chris Horvers - JPMorgan

Gary Balter - Credit Suisse

Oliver Wintermantel - ISI

Brad Thomas - KeyBanc Capital Markets

Kate McShane - Citi Investment Research

Will Truelove - UBS

Michael Lasser - Barclays Capital

Michael Baker - Deutsche Bank

Jack Murphy - William Blair

Daniel Binder - Jefferies

Colin McGranahan - Bernstein

Alan Rifkin - Bank of America

David Strasser - Janney Montgomery

Stephen Chick - FBR

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Staples Inc. earnings conference call. (Operator Instructions) I'd now like to turn the presentation over to our host for today's call, the Vice President of Investor Relations, Laurel Lefebvre.

Laurel Lefebvre

Good morning and thanks for joining us for our second quarter 2010 earnings announcement. During today's call, we'll discuss some non-GAAP metrics to provide investors with useful information about our financial performance. Please see the financial measures and other data section of the investor information portion of staples.com for an explanation and reconciliation of such measures and other calculations of financial measures that we use to analyze our business.

I'd also like to remind you that certain information discussed on this call constitutes forward-looking statements for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed or referenced under the heading Risk Factors and elsewhere in Staples' latest 10-Q filed today.

Here to discuss Staples Q2 performance and business outlook are Ron Sargent, Chairman and Chief Executive Officer; Mike Miles, President and Chief Operating Officer; and John Mahoney, Vice Chairman and Chief Financial Officer. Also with us are Demos Parneros, President of U.S. Stores; and Joe Doody, President of North American Delivery.

Ron?

Ron Sargent

Thanks, Laurel, and good morning, everybody. Thanks for joining us today. I'm pleased to report strong earnings growth for the second quarter. Our operations are solid. Our growth initiatives are gaining traction, and we are delivering good earnings performance despite soft topline trends. Compared to last year, total company sales were flat at $5.5 billion, and adjusted earnings per share increased 25% to $0.20.

North American Delivery grew topline by 2%. North American Retail also grew sales by 2% and had flat same-store sales, which was a 200 basis point improvement in our three-year comp trend. And our international business declined 6% in U.S. dollars, but only 2% in local currency. On the bottomline, we expanded operating margin in all three of our businesses for the second consecutive quarter.

Our view of the business for the back-half of 2010 remains unchanged. We expect to see a modest recovery in the economy and unemployment to remain high. We'll continue to drive the topline by investing in key growth initiatives, areas like facilities and breakroom supplies, business technology and copy and print where we're already seeing positive signs. And we'll accomplish important milestones on the Corporate Express integration, particularly in the areas of supply chain and systems.

Turning to our business units, starting with North American Delivery, sales for the second quarter were $2.4 billion and increased up 2% in U.S. dollars or 1% in local currency compared to Q2 of 2009. In Staples Business Delivery, we grew the topline in the mid-single digits. In Contract, sales grew in the low-single digits. And Quill's topline improved versus last quarter, with declines in the low-single digits.

Core office supplies and business technology were stronger in the second quarter, while durables like business machines and furniture remained weaker than the house.

The pricing environment contract remains rational. And during the second quarter, customer acquisition and retention in our contract business was strong. Sales from new customers drove topline improvement in the high-single digits. This was offset by lower spend from existing customers.

We're seeing good trends in the facilities and breakroom category. A growing percentage of customers have started to think of Staples for more than just office supply, particularly in contract where we've had some recent wins with larger customers who previously came to us for only their core supplies.

Our expanded assortment, better training for our sales associates, sharper pricing and increased marketing efforts drove topline growth in this category during the second quarter despite difficult comparisons from sales of H1N1 related products last year.

NAD operating margin increased 79 basis points to 8.7% compared to the same period last year. Our better buying and more favorable mix of discretionary products and lower amortization expense, all contributed to this improvement.

We continue to increase our average order size. For Q2, average order in contract was just under $206, which was an increase of almost $8 compared to Q2 of 2009. We also reduced the percentage of small orders, under $50, by a couple of hundred basis points compared to last year.

The integration of our supply chain is a multi-year project and includes development of common back-end systems as well as physical integration of our networks. Systems work is complete, and we're now making great progress with integrating the physical network.

During the second quarter, we closed two fulfillment centers. We upgraded 10 facilities with the capability to serve both Staples and legacy Corporate Express customers. The scope of our integration also includes our last-mile delivery homes, and we consolidated over 30 of these locations during the first half of 2010 and approximately 35 more are in the works.

This year, we've taken on more infrastructure projects than in any other time in Staples' history. Despite the additional complexity and resources required, the team has done an excellent job executing these projects while maintaining great customer service.

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