I’m going to keep this article relatively brief, because the office supply retailers (the line of business they are most well-known for, anyways) will be reporting earnings in the coming weeks, which should leave us with plenty to discuss. However, Staples (
SPLS,
Financial) recently made a few moves well worth discussing before that time rolls around.
Let’s start by taking a look at the company’s 10-K for the year ending Jan. 28, 2012 (fiscal year 2011); in that year, we see $173.8 million in interest expense, broken down (roughly) as follows:
| Debt | Rate | Expense |
| $325M of October 2012 Notes | 7.375% | $24M |
| $1.5 B of January 2014 Notes | 9.75% | $146M |
| TOTAL | $170M |
The October 2012 notes were paid off in full upon maturity, in addition to $500 million of 7.75% notes that matured in April 2011 (no additional notes issued on either occasion); as such, the interest expense year to date (through the end of October 2012) has decreased slightly:
| Interest Expense | Through Q3 | Full Year |
| FY 2011 | $131.1M | $173.8M |
| FY2012 | $124.2M | $161M (Estimate) |
Where this starts to get interesting is when we look at recent activity. In the past week, Staples has made two material announcements: The first is early redemption on half ($1.5 billion) of the January 2014 notes; the second is new issuance of $1 billion (collectively) in 5 and10 year notes (split evenly between the two issues), at a rate of 2.75% and 4.375%, respectively. Modeling this for fiscal year 2013 and fiscal year 2014 (as compared to fiscal year 2012) shows why this matters to SPLS investors:
| FY 2013 Interest Expense | Annual Expense | FY2013 Savings |
| $325M of October 2012 Notes | 7.375% | + $18M (9 Months) |
| $750M of January 2014 Notes | 9.75% | + $73M |
| $500M of January 2018 Notes | 2.75% | - $13.75M |
| $500M of January 2023 Notes | 4.375% | - $21.875M |
| TOTAL | + $55.4M |
That brings our fiscal year 2013 interest expense to about $100 million, down significantly from fiscal year 2012; here’s our data for fiscal 2014 (again, comparable to our expected figures for fiscal 2012):
| FY 2013 Interest Expense | Annual Expense | FY2013 Savings |
| $325M of October 2012 Notes | 7.375% | + $18M (9 Months) |
| $1.5B of January 2014 Notes | 9.75% | + $146M |
| $500M of January 2018 Notes | 2.75% | - $13.75M |
| $500M of January 2023 Notes | 4.375% | - $21.875M |
| TOTAL | + $128.4M |
By my back of the envelope calculations, fiscal year 2014 interest expense should be around $35 million to $40 million – about $120 million to $125 million less than what will be paid in fiscal 2012 (this is oversimplified due to the impact of the company’s revolving credit facility and various other lines of credit, but the numbers are approximately correct). Assuming that the net number for Staples results in an additional $100 million flowing through to the bottom of the P&L (to adjust for tax savings, interest expenses related to credit lines, etc), the result will be material to the company’s reported earnings; with 667 million shares outstanding as of the most recently quarterly report, these savings could reasonably be expected to increase full year earnings per share by $0.15 – on FY2011 results, that would be a boost of more than 10%.
It looks like the market appreciated this move, with shares jumping 9% over the past five days (compared to slightly higher – a half a percent or so – for the S&P 500). With industry store closures and downsizings starting to ramp up (and expected to continue for the next 36 months), I continue to believe that SPLS will be the ultimate beneficiary of consolidation in office supply retailing.
