Staples, Inc. (NASDAQ:SPLS)
Q3 2016 Earnings Conference Call
November 17, 2016 09:00 AM ET
Chris Powers - VP, IR
Shira Goodman - CEO
Christine Komola - CFO
Joe Doody - Vice Chairman, North American Operations
Michael Lasser - UBS
Matt Fassler - Goldman Sachs
Oliver Wintermantel - Evercore ISI
Simeon Gutman - Morgan Stanley
Brian Nagel - Oppenheimer
Denise Chai - Bank of America
Brad Thomas - KeyBanc
Good day, ladies and gentlemen, and welcome to the Staples’ Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session, and instruction will be given at that time. As a remainder, this conference is being record.
I would now like to hand the floor over to Chris Powers, Vice President Investor Relations. Please go ahead, sir.
Thanks, Karen. Good morning, everyone, and thanks for joining us for our third quarter 2016 earnings call. Our third quarter results, the live webcast of this call, and the slides that we will reference this morning to provide increased clarity and transparency, are all available on the Investor information page on staples.com.
During today's call, we will discuss certain non-GAAP metrics. Please see the financial measures and other data section of the investor information page on staples.com for a reconciliation of these measures.
Certain information we will discuss 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 factors, including those discussed or referenced in Staples' 10-Q filed this morning.
Here to discuss Staples’ Q3 performance and outlook are Shira Goodman, Chief Executive Officer and Christine Komola, Chief Financial Officer. Also joining us is Joe Doody, Vice Chairman, North American Operations. Shira?
Thanks, Chris, and good morning everyone. This morning we announced third quarter results that were right in line with our expectations. Starting on slide three, let's take a quick look at the headlines.
Total Company sales were down 2%, excluding the impact of store closures, changes in foreign exchange rates, and the divestiture of Staples Print Solutions during Q2 of this year. We continue to drive steady growth in Staples' Business Advantage, our North American contract business, with Q3 sales up 2% in local currency after excluding the headwinds from Staples' Print Solution. This was led by growth in our mid-market and categories beyond office supplies.
Non-GAAP operating income rate improved 22 basis-points, and we drove improved operating income rate across all of our business units versus last year. We achieved non-GAAP earnings per share of $0.34 versus $0.35 during Q3 of last year. We ended Q3 with $2.2 billion of liquidity, including $1.1 billion of cash and cash equivalents. We've increased our full-year free cash flow guidance from $600 million to $700 million. Our Board of Directors concluded their CEO search process, and appointed me as Staples' Chief Executive Officer and the member of the Board. And in Q4, we've already been busy.
We completed three transactions that taken together are a snapshot of where we're going as a Company. We're shedding underperforming assets with the sale of our UK retail business. We're building out our strength in mid-market contracts, with the acquisition of Capital Office Products, one of the largest independent office product dealers in the U.S. And we're providing our mid-market customers with an expanded offering of services through our partnership with Managed by Q.
Turning now to slide four, as I officially step into the role of CEO, let me walk you through why I believe we have the right plan in place to transform Staples, and get our Company back to sustainable sales and earnings growth. And why I'm so pleased with our progress to-date. We're executing our plan from a position of strength. We're building scale and credibility in categories beyond office supplies. We have a world-class supply chain. Our cash flow and liquidity are strong. We have a diverse team of talented associates. At the same time, we also understand the magnitude of the headwinds we face from secular pressure in our core categories and ongoing channel shift.
And so, Staples 2020 is a transformational change of our strategy, of our mindset and of our operating model that is designed to leverage our strengths and address our challenges head-on. We're driving extreme focus by allocating more resources to the businesses where we have our strongest competitive advantages, and deemphasizing our underperforming businesses. We’re increasing ownership and accountability across the organization. We’re moving with greater speed, and we’re prioritizing innovation as a catalyst to further differentiate us.
Now just to remind you, Staples 2020 has four strategic priorities that are really driving the transformation; one, accelerate growth in North America mid-market; two, preserve profitability in our North American stores; three, aggressive actions to drive profit improvement and reduce cost of class to the Company; and fourth, narrowing our geographic focus on North America. As I mentioned just a minute ago, we’ve sold our UK retail business for nominal proceeds. And we continue to explore strategic alternatives for the rest of our business in Europe, and this process remained right on track.
Turning to slide five, we’ve pivoted from planning to execution of Staples 2020 during the third quarter. Now, our success with Staples 2020 is all about alignment and execution, and there we made some really tangible steps. Let’s start with alignment. In September, we held our Annual Supplier Summit, which brought together our merchandizing leadership and vendor partners. Our vendors understand the critical role they play in our transformation and how they need to transform with us.
In October, we held our U.S. Retail Leadership conference. At the conference, our store teams rallied around its role in Staples 2020, and they have confidence that there is tremendous opportunity to stabilize the bottom-line through better execution and selling. And earlier this month, we held our Annual Staples Business Advantage Leadership Summit where our SBA and Staples.com teams aligned around accelerating growth in the mid-market via our unique combination of sales force and digital expertise.
In addition to aligning our around Staples 2020, we’re also extremely focused on the operational metrics that are the leading indicators of our transformation. So, let me take a few minutes to discuss these metrics in more detail.
Moving to slide six, we are positioning Staples Business Advantage as the growth engine of our Company with the primary focus being mid market. We define mid-market as business customers with 10 to 200 employees. And as I mentioned, we have a differentiated approach to serving these customers, where technology and innovation come together. This approach combines the personal touch of our sales force with digital selling tools, robust data and customer behavior and preferences, and of course, is backed by our robust Web sites and supply chains.
We estimate that the mid market is an $80 billion opportunity in the U.S., and today our market share is only 2%. We’ve been consistently growing our mid-market contract business in the low to mid single-digits this year, but our goal is to do much better. So, as we accelerate mid-market, we’re focused on two key metrics. The first one is membership customers.
Our membership programs are the basis for building stronger relationships with our mid-market customer, and they drive a higher share of wallet and customer retention. At the end of the third quarter, we had more than 25,000 mid-market customers signed-up, and our momentum is strong with two-thirds of our new customers we acquire signing up from the outset.
Now historically, our regeneration was primarily driven by our sales force interacting with perspective customers. But today, we’re widening the funnel by leveraging our digital capabilities to enhance the quality of our leads and accelerate customer adoption of our membership programs. The second key metric for mid-market is sales beyond office supplies. These categories make up about 40% of our mid-market contract sales mix. And during Q3, we drove double-digits growth for the third consecutive quarter, with sales up 11% year-over-year. And we have aggressive plans to grow even faster in these categories.
Now turning to slide seven, what’s also exciting for us is that it's what good mid-market, it's often good for small and large businesses. Whether it's our broad business focused assortment, a world-class supply chain, customized analytics, expertise. Our mid-market strategy provides a halo effect to all of our business customers, whether they shop on Staples.com, Quill.com, or through Staples Business Advantage. Today, half of our sales are in categories beyond office supplies, and we expect the mid-market halo to be a key driver of sustainable growth beyond office supplies for our business customers of all sizes.
Moving to slide eight, our North American stores play a different role in our portfolio. Here, our top priority is to preserve profitability. And to achieve this, we’re focused on three key metrics. First, customer conversion; today, more than one-third of the customers who visit our retail stores walk-out empty handed. So, we've dramatically increased our focus on this metrics, and we're seeing good improvement. Customer conversion in U.S. stores increased 175 basis-points in Q3.
Second, services growth; we continue to drive positive same store sales in our print and marketing business, which was up in the low single-digits in stores during Q3. And over the past few months, we’ve done a terrific upgrade to our self service equipment, and the customer response has been strong. And just as a reminder, gross margin in this category runs about twice the house. And third, store count; we've closed 345 stores of 18% of our chain since 2011. We closed 16 stores in Q3, and remain on-track to close at least 50 stores this year.
If a store does not meet our financial requirements, we will not keep it open. Our average remaining lease life per store in the U.S. is now less than three year, and in Canada, it's about four years. And over the next three years, in the average of 225 store leases will expires annually. So all this provides tremendous flexibility to continue rightsizing our store network.
Turning to slide nine, we are prioritizing innovation as a key catalyst to further differentiate Staples from the competition. There is so much going on in Staples, but let me just give you a few example. Today, we announced the strategic partnership with Managed by Q, and that’s a great example of using innovation to bring a differentiated service offering to our growing base of mid-market customers. Managed by Q is the smart office cleaning management and maintenance platform created to save businesses and employee's valuable time, allowing them to focus their energy and resources on their work, not their work space. We’re going to be offering our mid-market customer access to Managed by Q suite of more than 100 different office services from cleaners to handyman, IT support, and even work place yoga.
Our co-working offering with Workbar is another example of innovation, this time to drive customer traffic and utilize excess space in our retail stores. During the third quarter, we opened collaborative working spaces in three of our stores in the Boston area, including store number one in Brighton. Each location provides small companies and entrepreneurs with the creative space, offices centrals, nourishments, and support to run their business or launch new ideas. These locations are beautiful. I encourage you to check them out.
Staples’ Easy System is an example of applying technology to drive innovation for a truly easy customer experience. Our new voice-enabled Easy Button reordering system integrates IBM Watson’s cognitive platform to simplify office product management for our SBA customers. The Easy Button will enable customers to quickly reorder supplies, track shipments or chat about their needs, SBS system’s assistance. We were the only retailer to key-note at the recent World of Watson conference. We began alpha testing of the Easy System during Q3 with a handful of our contract customers. And we plan to do a broader beta test to more than a 100 customers by year-end.
Turning to slide 10, when we launched Staples 2020, we initiated a new cost savings plan, which is expected to generate $300 million of annualized pre-tax savings by 2018. These savings will help us fund some of our key investments to accelerate growth in the mid-market. We made good progress here during the third quarter. We reduced product cost, evolved our promotional strategies, drove efficiencies in supply chain and increased our mix of Staples’ brand products. We remained on track to achieve approximately $70 million of annualized pre-tax cost savings during 2016.
Moving to slide 11, this pulls it together. As we execute Staples 2020, we will become a radically different company with fundamentally improved growth prospects. More than 60% of our sales will come from categories beyond office supplies. More than 80% of our sales will be delivered, and more than 95% of our sales will come from North America.
Now let's take a quick look at Q3 results for each of our business units, starting with North America Commercial on slide 12. Sales were up 1% per year, year over year, excluding the sale of Staples' Print Solutions. On a GAAP basis, sales in North America Commercial declined 3% versus Q3 of last year to $2.1 billion.
In Staples Business Advantage, Q3 sales grew 2% after excluding the headwinds from the Staples Print Solutions sale. We once again drove growth in all of our categories beyond office supplies. Sales were up in the double-digits in facilities and break room supplies, mid-single digits in technology products, and low single-digits in furniture and promotional products. Staples Business Advantage sales in core categories, like ink and toner, were down in the mid-single digits, and sales of paper and office supplies once again declined in the low single digits.
During Q3, North American Commercial operating income rate increased 18 basis-points to 8.1%. Operating income declined by $1 million or less than 1% compared to last year, but this includes a $5 million headwind related to the sale of Staples Print Solutions. The improvement in operating income rates primarily reflects lower compensation expense, partially offset by increased supply chain costs and lower product margin rates.
Turning to North America stores and online on slide 13, on a GAAP basis, sales declined 4% to $2.5 billion versus Q3 of last year. During Q3, combined North American stores and online comparable sales declined by 3%. This reflects a 1% decline in Staples.com and a 4% decline in same store sales, primarily driven by lower traffic.
Results in Canada were stronger than in the U.S., and results during the back-to-school season were in line with our overall Q3 performance. From a category perspective, the 3% decline in comparable sales during Q3 was almost entirely driven by weakness in ink and toner, business machines, and mobility. These headwinds were somewhat offset by growth in computers and facility supplies.
North America stores and online operating income rate increased 7 basis-points to 7.8% during the third quarter. This primarily reflects improved product margin rates in stores and online, partially offset by the negative impact of lower sales on fixed expenses.
And finally turning to international operations on slide 14. Sales decreased 5% excluding the negative impact of changes in foreign exchange rates. On a GAAP basis sales in U.S. dollars were down 7% year-over-year to $749 million. In Europe, sales were down in the low double-digits in local currency. Outside of Europe, our strongest results were in China again, where the sales were up in strong double-digits year-over-year. On the bottom-line, operating income rate for international operations increased 76 basis-points to 0.7%. This primarily reflects improved profitability in Europe.
And with that, I’ll turn it over to Christine to review our Q3 financial results and outlook in more detail.
Great. Thank you, Shira. Let me start on slide 15 with some additional color on our Q3 financial results. Total Company sales for the third quarter was $5.4 billion, on a non-GAAP basis total Company sales declined less than 2% versus Q3 of last year. This exclude headwinds of about 150 basis-points from the sale of Staples Print Solutions, 60 basis-points from store closures, and 30 basis-points from the stronger U.S. dollar. On a GAAP basis, sales declined 4% versus Q3 of last year.
During Q3, non-GAAP gross profit dollars decreased $81 million versus Q3 of last year. Non-GAAP gross profit rate for the third quarter decreased 30 basis-points year-over-year to 26.9%. This decline primarily reflects increased supply chain cost and unfavorable impact of lower sales on fixed expenses. On a GAAP basis, gross profit rate decreased 28 basis-points to 26.9% versus last year.
Turning to selling, general and administrative expenses. During Q3, total Company SG&A decreased $74 million year-over-year after excluding $5 million of charges this year, primarily related to exploring strategic alternatives in Europe, as well as $15 million of charges primarily related to the proposed acquisition of Office Depot during Q3 of last year. Non-GAAP SG&A rate declined 48 basis-points year-over-year to 20.1%. This primarily reflects lower compensation expense and lower marketing expense. On a GAAP basis, SG&A rate decreased 65 basis-points to 20.1% versus Q3 of last year. Excluding the impact of charges, non-GAAP total Company operating income declined $3 million year-over-year to $355 million, and non-GAAP operating margin rate increased 22 basis-points year-over-year to 6.6%.
Turning to our Q3 tax rate, excluding the impact of charges, our non-GAAP effective tax rate was 35.5% versus our non-GAAP effective tax rate of 33.5% in Q3 of 2015. The year-over-year increase in our effective tax rate was primarily driven by changes in our geographic mix of earnings versus 2015. During the third quarter, we achieved non-GAAP diluted earnings per share of $0.34, a decline of $0.01 versus Q3 of last year, primarily due to the higher tax rate and share count year-over-year. Our Q3, 2016 non-GAAP diluted earnings per share excludes pre-tax charges of $57 million primarily related to impairment of intangible assets in international operations. On a GAAP basis, we reported diluted earnings per share of $0.27.
Turning to cash flow, on slide 16, year-to-date capital expenditures came in at $158 million, which is a decrease of $57 million or 27% versus the prior year. With operating cash flow of $630 million, our year-to-date cash flow was $472 million as of the end of the quarter. Keep in mind that the $250 million break-up fee repaid to Office Depot and cash payments of about $90 million related to the Office Depot acquisition financing, are included as year-to-date operating cash outflows. These payments are tax deductable and we expect to realize the majority of the associated tax benefits by the end of 2016.
Our liquidity remained very strong at $2.2 billion at the end of Q3. This includes cash and cash equivalents of about $1.1 billion, as well as available lines of credit of about $1.1 billion. At the end of Q3, $636 million of our cash was held outside of the United States.
As I mentioned on our last call, we remain committed to returning excess cash to shareholders. We currently returned more than $300 million to shareholders annually through our cash dividends. We are also balancing cash deployment through share repurchases with our solid pipeline of attractive tuck-in acquisition opportunities. We did not repurchase any shares during the third quarter, and in early Q4, we completed the acquisition of Capital Office Product, an independent office product dealer that generates more than $100 million of annual revenue. This acquisition strengthens our competitive position in the all important mid-market. And we will soon provide capital customers access to our world class e-commerce solutions, expenses assortment, and expertise in categories beyond office supplies.
Turning to our outlook on slide 17, during the fourth quarter of 2016, we expect total Company sales to decline versus Q4 of last year. We expect to drive growth in categories beyond office supplies, and in our contract business in North America. This will be offset by headwinds related to the divestiture of non-core businesses, as well as ongoing weaknesses in Europe, continued ink and toners and technology headwinds in our retail stores, and store closures.
On the bottom line, we expect fourth quarter fully diluted non-GAAP earnings per share in the range of $0.23 to $0.26. This reflects continued progress on our cost saving initiatives offset by increased investments to accelerate growth in the mid-market. Our earnings guidance excludes potential charges related to the Company's strategic plans, including restructuring and related initiatives, as well as the ongoing strategic alternatives for the Company's European operations.
Our team continues to do a nice job managing working capital and reducing capital spend. As a result, we have increased our free cash flow guidance for 2016. We now expect to generate approximately $700 million of free cash flow this year versus our previous guidance of approximately $600 million. Our free cash flow guidance excludes the after-tax impact to operating cash flow of approximately $340 million of charges associated with the financing for the proposed acquisition of Office Depot, and cost associated with the termination of the Office Depot merger agreement.
I’ll now turn it back over to Karen, our conference call moderator, for Q&A.
Thank you [Operator Instruction]. Our first question comes from the line of Michael Lasser from UBS.
Shira, I want to dig into the retail strategy, which is the preserved profitability. Presumably, the biggest cost you have in retail is going to be the labor. So how do you preserve the labor -- the profitability of your retail with the goal of improving conversion? Presumably, you now have to pull-back on store hours as trends decline, and that could impact your ability to convert customers unless the traffic coming in is just more likely to convert because they have a higher per shipment day?
Great question Michael, and good morning. That is really insight driven by Steve Matyas, our new Head of North American Retail. And when he came with a fresh set of eyes and looked at how we were spending our hours in the stores, we were spending probably too many hours on a lot of the operating tasks that were flowing down from the home office. And so we have very aggressively reduced some of the operating tasks that are lower value, and re-shuffled that time into sales driving activities. That is really the prime driver of sustained time as augmented obviously with the promotion, the programs, the training, to really drive the selling culture. But I was personally down at the retail conference, as I said last month, and that team is on fire to use the hours they have to drive conversion and really rebuild the selling culture in the stores.
And my follow up question is on the mid-market business. What percentages of your sales come from your member customers?
So that’s not at number that we’re disclosing at this point. I think the key for us is the growth in our membership programs. This was our strongest quarter ever in terms of sign-ups, and the fact that two out of three new customers are signing up for the $299 membership program, bodes well for the future of mid-market.
Thank you. And our next question comes from the line of Matt Fassler from Goldman Sachs.
I have two questions about the commercial business, the first relates to the underlying demand tone, and competitive tone in that market versus what you saw earlier in the year, just a blanket question on that topic?
I am going to ask Joe to answer that.
The marketplace continues to be aggressive. And I think you'll find that the aggressiveness from Office Depot has always been there and continues. It's primarily geared to the commercial and enterprise customers, not so much into the mid-market. There it's both local dealers and Amazon for business. And it's aggressive, it always has been aggressive, and we continue to compete effectively against it.
And more a macro perspective there, Joe, just to sort of an underlying demand, less about the biz just more about the cadence of same-store sales, if you will, like categories?
Are you talking about now the contract business, I did not understand...
Yes, in contract please. So, large corporate customer purchases, flat-up, slower et cetera.
Yes, our C&E customers business overall is down slightly. Our growth is from the mid-market customers. So that continues to be driven by a BOSS, which is really driving the growth throughout both the midmarket as well as the C&E customers. So as we said, the mid-market is double-digit growth in BOSS. But we have very strong growth in BOSS driving the C&E business as well.
And just a quick follow-up. If you take a deal like Capital Office Products, which I think had sales about $100 million or more in revenue. If you pro-forma that for layering on the additional categories that you sell that are not in their repertoire, where you think you can reasonably, do you think you can reasonably move them onto your platform. What is the multi-year realistic revenue opportunity for an acquisition like that, just simply based on category expansion?
So, that's an interesting question, Matt. And we don't assume any of the revenue upside when we do these deals. We base them on operating income leverage. But I think the relevant data is that capital was about 80% Office Products, 20% BOSS, and our SBA portfolio overall is 50-50. So, clearly, that's a big driver of the opportunity. But we don't base the deal on it, that's all the upside.
Thank you. And our next question comes from the line of Greg Melich from Evercore ISI.
Good morning, Greg.
This is actually Oliver Wintermantel. So hi good morning.
Hey guys, I had a question regarding the, also profitability in retail. You said that traffic was basically the driver of the comp decline. Just going forward, how do you plan to turn that around? And if you -- I think, comp is on 4%, traffic was probably down, you said majorities of down 3%. And how does that compare to the last two quarters?
Well, speaking of the plan, we are very focused on the traffic number. And it's a very careful balance of marketing and promotional strategies, and getting that right. And clearly we don't want to be driving promotions that lead to profit with transactions, so it's getting the right traffic in the stores who will be profitable. Now, with our increase in conversion and our focus there that gives a lot more upside or gives more upside to when we bring the traffic into the store.
But the changes yesterday we had a deep review on this for Q4 and going forward, and it's all about the mix of the marketing and the promotional activity on it. And within that, I think the Doubleclick is the marketing we put behind our services businesses, which as we’ve said is both a growth of sales driver and the profit driver.
Just a follow-up question on slide 11, if you look at the longer-term, what you outlined in slide 11 there. Can you maybe give us an outlook of how that would impact gross margin and the cost of your business going forward? Thank you.
So, I mean I wouldn’t look at any one metric. So overall delivered sales are asset like and therefore higher role in business for us, return on net assets, and that’s one of the key drivers of the strategy. Gross margin rate often the BOSS categories have a slightly lower gross margin rate. But as you know in the delivery business, we really look at net contribution. And so we manage our business with our cost to serve tools, because much more of the cost is variable. So, I think going forward its really thinking through gross margin dollars and then what is the bottom-line after we’ve managed all the different levers of delivering the products.
Thank you. And our next question comes from the line of Simeon Gutman from Morgan Stanley.
Follow-up on mid markets, I mean you made a big emphasis on winning there. Can you talk about investments required, and any change in your thought process thinking through next year. And you may have said it, could you show the opportunity of about $8 billion. But did you say your market share within that world was just about 2%?
Yes, we did say that the market share was about 2%. And in investment, I’ll start and then either Joe or Christine you can add on is. But the two major packets of investment are obviously are increasing the sales force, which we’ve already done this year. It’s up about 200 people and we would continue that going into next year and beyond. But at the same time, investing on the digital side, which is both digital marketing but also digital capability. Those are the two major tranches of investment going forward.
And it's Joe, just to comment on that, the digital investments are both in terms of helping to lower our costs in terms of demand generation, making our sales force more efficient, in terms of regeneration. And then also tools that we provide to the sales force to make them more productive in the job that they do. So, one example of that is a capability and app that we recently put forth that allows our facilities sales people to go in and survey a customer and be able to come back with a needs-analysis done in terms of where they can say in terms of productivity and cost. And it’s the only one like, it’s a mobile app and it’s the only one like it in the facility space. So, bringing the capability like that to make them more productive in their sales process is another big element.
And to clarify, it's not about adding people sales force to drive the sales, you’re comfortable with the investment you have. It's just getting more out of the current sales force?
It’s a combination of both. It's, let say, we will add more people and sure said we’re up this year, so already. But it will also be making them more productive. So, it’s a combination of both.
And then two other top-line questions, first, I think computers were called out I think that's now the second quarter maybe the third in a row where they called out. Can you talk about to what degree is it that industry improving in its Staple execution? And then regarding the online business; so it looks like it moderated a little bit on a stack-basis, I am guessing you're being less aggressive on price. Curious if that's fair? Or is it just share losses, and how we should interpret it?
Yes, I think in the tech area, we’ve just -- it's better execution, both at the store level, as well as online, and actually also in our SA business. So, we've really become much more effective at in the sales process, providing tools to our sales people and also to customers in terms of how they should be looking at PC purchases by their needs. So, we've done a much more effective job at that throughout the organization. And that's why you've seen that modest but somewhat continuous improvement in tech sales.
And the nice point on it also is increasing profitability out at both in-stores and in contract, going with the stores really focusing on selling market basket that goes along with tech is up significantly year-over-year. And in our contract business, actually tech is nicely profitable category, we’re up. Turning to your second question, regarding online, the first thing is obviously to remind everyone that we've a very mature Staples.com business. It's nothing to do for us. We've been doing it since the early 1990s. So lot of our retail customers already use our online business.
And you were 100% right when you said it was really about the mix our promotions. This quarter we did a better balancing of sales and profitability, and in fact our profitability was up nicely in Staples.com. But we watched away from some profit losing transactions, particularly in areas by tablets and printers. If we were to exclude that, actually sales would be up slightly.
Thank you. And our next question comes from the line of Brian Nagel from Oppenheimer.
So my first question. You're looking at the purchase you’ve made of Capital Office Products. I guess, we’re here early in the fourth quarter, and then the commentary you made about there is this substantial size of that mid-market category, very low market share. As we -- looking forward, to what extent should we expect you're making further acquisitions like that, such as Capital Office Products? And how are you thinking about the ability for Staples to continue capture share organic versus purchases, such as this? And then I have a follow-up.
So, we believe our mid-market growth strategy will be driven, both by organic and by acquisitions. As we just talked about, we’re both increasing our sales force and investing in the digital tools to enable our sales force and to just drive our customer behaviors. Having said that, the acquisitions of independent dealers is another profitable way for us to grow this business. When we acquired those stationers; there are immediate operating synergies; cost of goods sold is a huge synergy; obviously, back-office and as well as other operations; so there is immediate operating synergies. And as I think Matt pointed out earlier, there is also huge BOSS revenue on upside. So that's a key part of our mid-market growth strategy as well, it's a one-two punch.
And then the second question, or the follow-up question I have, as we think about again that further push to the mid-market strategy, and you’re looking at the retail business and presumably continuing to close stores. To what extent do your retail stores and presence of your retail stores play into market share gains within the mid-market strategy?
So there is some overlap but nothing tremendous. We do print to store, that some of our mid-market customers like. We do have a convenience card that we give to Staples Business Advantage customers. And they, at times, use that for emergency needs. But the overlap between our SBA customer and our retail business to-date is fairly de minimis.
And this is Joe, just a quick comment on that. We are piloting a rush service to our customers, and testing that to see how valuable and immediate need of product is. So that’s in pilot in four major cities, and we will see how that goes if there is a demand for that. But that’s where the stores would come in handy as the immediacy of the need. And if it is so, could be met from a rush order from one of our closed storage nearby.
Thank you. And our next question comes from the line of Denise Chai from Bank of America.
Just want to go back to $300 million in cost savings. How much reinvestment do you foresee being needed for that? And also, will it be front-end loaded? And just related to that, what kind of net savings do you expect to see this year?
Denise, that sounds like a Christine question.
Hi, Denise. So our target is the $300 million, as you know, we’ve already achieved about a little over $700 million in the past few years. As we think about the amount, we’ve really separated out investment versus the target of the $300 million. Our $300 million target is cause; it is owned brand; it is supply chain related. I mean just general efficiency throughout the organization. So, as you can imagine, supply chain in cause are more back-loaded. To-date, we’ve achieved about $70 million annualized savings. And as I said earlier in the call, we are going to use some of that to reinvest back into the business.
Our target of reinvestment really varies quarter-by-quarter. And over the long term, we’ll just continue to evolve it as the business evolves and the initiatives -- as the initiative opportunities arise, so, no specific guidance on that. The other point that I would add is that if you think about these, as I said a lot of these things are in gross margin. So cause, the supply chain, so it's kind of gets sprinkled throughout the P&L as well. So you can’t pinpoint any one dollar any one quarter either.
Just couple of things on the mid-market. Who were the top-three in this space and how big are they? Because I am just trying to get a sense of how fast you can grow into share in that market?
I am sorry Denise, can you say that again?
Who were the top-three in the mid-market, if you only have a 2% share?
So, the 3% market share includes all of the BOSS categories, so that $80 billion that we put there, because obviously that’s the market we’re in. So it's fairly fragmented market, which is what makes it such a wonderful opportunity for us. If you look across all of the categories, it's probably thousands upon thousands of smaller companies. And that's why our combination of the personalized sales team but combined with the digital strength and the next day supply chain is such a powerful value proposition in this market.
And if I could sneak one more in. In the mid-market, can you please talk about the difference in spending between a customer that's enrolled in your membership program compared to other customers? Thank you.
I don't have those exact numbers with me. Joe?
Don't have the exact numbers, but I think the key thing there is that we -- and again we're early in it, so we continue to monitor the purchase behaviors of our mid-market customers over-time. One, we're certainly seeing a much higher retention level among those customers, so that's very key. The second is, we're seeing a much higher penetration into the BOSS categories among those customers, because they've invested and they’re looking for return on that investment of $300. And they do it through coming to shop for us more frequently for things, especially that we’ve got such a broad array of an assortment. So, it allows them to be -- us to become more of their single source supplier for their business needs.
Thank you [Operator Instructions]. Our next question comes from the line of Brad Thomas from KeyBanc.
Question on the retail side, you'll have obviously been proactive in closing stores. As you consider the pace of closures that are occurring at Staples and across the industry more broadly. What are you seeing in terms of a comp benefit from that today in terms of recapture rate? And how are you expecting that to trend going forward? Thank you.
So, historically, when we first started closing stores, we probably had about 20% sales transfer rate. But as we’ve closed more over-time, there is less overlap between our stores. And actually about 40% of the stores we closed don't have any overlap with our other stores. So our transfer rate now is probably closer to 10%. So the overall impact to comp about the closing stores is maybe 30 or 40 basis-points this quarter. And compare that, probably with Office Depot, where they're closing stores that are closer to each other and probably have a tailwind of closer to about 200 basis-points on closed stores.
And then just as the holiday season kicks-off, any thoughts on maybe opportunities and risks as we look ahead over the next two weeks here.
I think we definitely play in the holiday markets, not significantly. However, as you know, we are one of the first that has announced that we're closing on Thanksgiving Day. But I think one of the keys there is that our customers can still shop for us online, order online, and pick-up in store next day. So although we're not physically open, we are open for business online. And you'll see -- I think we expect to see a higher penetration of BOPUS, our buy online, pick-up in-store during the holiday season, especially the kick-off the holiday season.
The only thing I would add Brad is to us holiday season is January. That’s when folks come back to business and that’s a big season for us across the company.
Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Shira Goodman for any closing comments.
Thank you, Karen for moderating. Thanks to all of you for joining this morning. And a special thank you to our associates around the world for really driving this transformation through increased focus, accountability, speed, team work, and of course, positive energy. Have a great day.
Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone, have a great day.
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