Staples Announces Q2 Revenue Decline

Staples Inc., parent company of Top 40 distributor Staples Promotional Products (asi/120601), announced that company revenues in the fiscal second quarter declined 3.7% year-over-year to $4.75 billion. In a conference call with analysts, interim CEO Shira Goodman mentioned that the company’s promotional product business was up by a double-digit percentage for the quarter.

Gross profit for the company decreased 5.7% to $1.19 billion, as gross margin fell an estimated 50 basis points to 25.1%. The company’s adjusted operating income increased by 1.5% to $128 million, while the adjusted operating margin improved slightly by 2.7%, compared to 2.6% a year ago.

On a GAAP basis, the company reported a loss of $766 million ($1.18 a share), compared to a profit in the fiscal second quarter of 2015 of $36 million, or 6 cents a share. Significantly contributing to the total revenue loss is $986 million in pre-tax charges and restructuring costs associated with the company’s operations in Europe and the failed merger with Office Depot, which received a $250 million breakup fee from Staples. A federal judge blocked the proposed union in May, valued at $6.3 billion, agreeing with regulators that it would reduce competition and raise prices in the business-to-business office supply sector.

In the quarter, sales in North American retail locations and online fell to almost $2 million, a decrease of 5.7%. Sales at grew just 1% in the second quarter. The company’s North American Commercial sector, which includes Staples’ Business Advantage contract operations and promotional products business, overall fell .2% to $2.04 million. The company said that Commercial’s sales were negatively impacted by about 1% by the sale of Staples Print Solutions, which was acquired by Taylor Company in April.

In the conference call, Goodman emphasized the company’s commitment to its Staples 2020 strategy, which “includes a dramatic change in our mindset and our operating model. We're doubling down on Staples Business Advantage, our North American contract business where we have solid momentum on both the top and bottom line, as well as a best-in-class offering to build on. At the same time, we're focusing on maximizing profitability and reducing risk in our underperforming retail and European businesses.”

Goodman went on to cite the estimated 2 million customers who visit Staples stores and website each day. “I'm confident that our future is bright,” she added. “We have what we need to win. …We have a world-class distribution network that provides next-day delivery to business customers of all sizes. Half of our sales now come from categories beyond office supplies, and we have expertise in these adjacent categories that allows us to expand our share of wallet with customers.”

The company closed five stores in the second quarter, and 73 stores in fiscal 2015. Since 2011, the company has shuttered over 300 stores in North America, and has plans to close at least 50 in fiscal 2016. At the same time, Staples plans to add more than 1,000 associates to its mid-market sales team, as well as increase its product offerings and expand its services.

The company has proposed a new cost-savings program that would bring in almost $300 million of pre-tax cost savings annually by the end of 2018. Staples also resumed share repurchase in the second quarter and expects to return an estimated $100 million to shareholders in 2016.

Management warned that it expects third-quarter earnings to be lower than those in Q3 of fiscal 2015, projecting that adjusted earnings per share will be in the range of 32 to 35 cents. Staples does plan to generate approximately $600 million in free cash flow for the full year, excluding a $340 million charge associated with the failed Office Depot merger.

After the earnings announcement, made before the markets opened on August 17, Staples shares subsequently fell more than 7% to 8.67.

Staples Promotional Products ranks first on Counselor’s list of the top 40 largest distributors, with estimated 2015 revenue of $554.1 million.