The largest U.S. office supplies retailer, Staples Inc. (SPLS), released its second-quarter earnings on August 20, and though the numbers took a downturn it matched analysts’ expectations. While there was a continuous weakness in demand for Staple’s core product range, the online business was the major driver for overall sales in the second quarter.
Let’s get into the finer details to gain a better insight on the second quarter’s report card.
North American store sales dip, but online sales improve
Staples has been struggling hard to improve its sales that showed a decline of 2% this quarter to $5.2 billion, compared with the second quarter of 2013. This is primarily attributable to the fluctuation in foreign exchange rates and the 40 stores that were closed in North America last year. Total revenue exceeds Bloomberg analysts’ expectations of $5.17 billion.
North American store sales decreased 5% (excluding sales in Staples.com) reflecting a 4% drop in store traffic and 1% decline in average order size vis-à-vis the previous year. Retail stores saw a steep decline in sales of computers and core office supplies, ink and toner, and technology accessories. This was partially offset by growth in copy and print services.
However, North American online sales grew 8% in the quarter amid intense competition from Amazon (AMZN) and other online retailers. The online growth was primarily driven by increased business customer acquisition, improvement in rate of customer conversion, and an expanded assortment of products sold virtually beyond the normal office supplies. Also to further drive online sales, Staples has taken the “omnichannel retailing” approach with the launch of "Buy Online, Pick Up in Store," and this is like a transformation from exclusively brick and mortar to a combination of virtual sales and brick and mortar for the retailer.
Cost cutting a vital tool, but earnings slide
As brick and mortar sales continue to remain weak and online purchase picks pace, management has adopted a restructuring plan that involves closing of 225 underperforming stores in North America by the middle of next year. The company aims to save around $500 million annually through implementing such cost-cutting measures. It has successfully secured $150 million of annualized cost savings year to date.
During the second quarter, Staples closed down 80 stores and aims to downsize the store count by 140 through the year. CEO Ron Sargent had quoted earlier in March
“A year ago, we announced a plan to fundamentally reinvent our company. We’re meeting the changing needs of business customers and taking aggressive action to reduce costs and improve efficiency.”
The company has incurred $101 million pre-tax restructuring and other charges associated with the closure of 80 stores in the quarter. Also, there was a quarterly tax benefit of $67 million that was primarily related to resolution of certain tax audits. These factors have reduced the net income to $82 million or $0.13 per share from last year’s $103 million or $0.16 per share. Barring the impact of these items, the company recorded net income of $75 million, or $0.12 per share that matched analysts’ predictions.
Cash flow remains solid
The company was able to generate free cash flow of $194 million in the first half of the fiscal year. It repurchased 3.5 million shares for $40 million during the second quarter – giving investors some good reason to smile. Implementation of brisk cost-cutting measures has made the company operationally more efficient and has helped to keep the cash flow intact.
Company’s outlook is promising
The company expects the pre-tax charges to be in the range of $40 million to $75 million in the third quarter. This is in relation to the restructuring of about 40 stores in the second half of the year. For the entire year, Staples estimates the restructuring charges to be in the range of $230 million – $310 million.
However, these cost improvement measures could have a positive effect on the free cash flow that is expected to be more than $600 million for the entire fiscal year.
Staples is on a transformation mode as it’s shifting its focus from core retail to online selling for increasing customer base. Also, it’s ventured to shut the non-performing stores and keep operational costs under tight rein. The company also hopes to keep its investors delighted in the long run. Let’s stay tuned and keep a close watch on the company’s moves.