Staples 2Q15 Earnings Call Notes

Office Depot merger continues to progress

“We continue to make good progress on the regulatory review process. During Q2 we received anti-trust approval from China and New Zealand and just last week we received clearance in Australia. In the United States, we continue to work cooperatively with the Federal Trade Commission, and we remain on track with our response to the second request for information. Outside the United States, we are also on track with the regulatory review process and related filings in the European Union and Canada.”

Back to school has been in line with our expectations

“While most of the big back-to-school weeks are still ahead of us, early results have been right in line with our expectations.”

Store closures are boosting comps

“Our store closures I think are helping our comps by, I don’t know, 150 or may be 200 basis points, but recognize the ones we are closing are kind of farther apart from each other or in many cases in single store markets where you don’t get a lot of transfer. I think Office Depot in many cases are closing stores that are across the streets from each other. So my guess is that their comp lift would be better. But when we look at our total comp trends, it’s really all in technology, and we are hoping that with the Windows 10 launch we’ll see better technology sales in the second half.”

Pronounced shift in tablet and reader business

“on tech; what I’d say about that particular quarter is that there was a more pronounced shift down in the tablet and reader business, that’s shifting away at this point. [Indiscernible] pressure around the PC business as we’ve seen in prior quarters.”

We all agree that paper is going away, but it was flat

“paper which we all think that’s going away; paper which is almost 10% of our mix was flat if you take out the store closures and FX.’

Euro weakness pressuring margins in European business

“with the euro down as much as it has been, it has had a substantial impact on our product cost, and unfortunately many of our contracts particularly with government entities, it’s not possible to pass those cost increases along fully. So that’s the pressure we’ve been facing and we are working to mitigate that and renegotiate many of those contracts.”

Where does the business go when a location closes

“With respect to where does that business go, remember these are stores that are closing, not as much to get, and it goes to a variety of places. A little bit goes online, a little bit probably goes away and a little bit goes to whoever is around, where was the most convenient and that’s close to the store or customers just figure out a way, they just spread that around”

Our contract business is a lot different than Sysco/US foods

“We certainly feel that our industry is really dramatically different from the food distribution industry. It’s an industry that I know well. If you look at all office supplies customers, they routinely split their purchase of the office supplies in the way of the products, and they do that among many different suppliers.

And in contrast when you look at restaurants, they primarily rely upon suppliers that offer one-stop shopping, unlike the food service business, they often supply distributors. They can really on third party distribution infrastructure, such as Ascendant or S.P. Richards to serve these regional and national accounts.”

This is a competitively intense industry

“Obviously Amazon recently launched Amazon Business which we expect to pose a significant threat to the B2B office products industry. Along with there are a lot of other e-commerce competitor. So I think it’s more competitively intense in our industry.”

We know we have to fundamentally reinvent the company

“We said all along, we said three years ago, we could ride this business a while longer and continue to show improvements and profitability, but we weren’t sure that was the right solution for the long term. We said, given what’s going on with the product trends of paper based office supplies and the channel shift and the competitive factors out there. We said, we fundamentally have to reinvent the company. We have done a lot of hard and heavy lifting over the last three years and we also implied that it was going to be a three year challenge to do that.”