Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Staples, Inc. (NASDAQ:SPLS)

F2Q08 Earnings Call

September 3, 2008 8:00 am ET

Executives

Laurel Lefebvre - Vice President of Investor Relations

Ron Sargent - Chairman and Chief Executive Officer

Mike Miles - President and Chief Operating Officer

John Mahoney - Vice Chairman and Chief Financial Officer

Demos Parneros - President of US Stores

Joe Doody - President of North American Delivery

Peter Ventress - President of International

Analysts

Oliver Wintermantel – Morgan Stanley

Kate Mcshane – Citigroup

Dan Binder – Jefferies

Brian Nagel – UBS

Anthony Chukumba – FTN Midwest

Colin McGranahan – Bernstein

Anna Stromberg – NAV Capital

Alan Rifkin – Merrill Lynch

Steve Chick – FBR

Operator

Welcome to the second quarter 2008 Staples, Inc. earnings conference call. (Operator Instructions) I’ll now turn the presentation over to your host for today’s conference Laurel Lefebvre, Vice President of Investor Relations.

Laurel Lefebvre

Thanks for joining us for our second quarter 2008 earnings announcement. During today’s call, we’ll discuss some non-GAAP metrics, such as return on net assets and results excluding Corporate Express, to provide investors with useful information about our financial performance. Please see the financial measures and other data section of the investor information portion of Staples.com for an explanation and reconciliation of such measures and other calculations of financial measures that we use to analyze our business.

I would also like to remind you that certain information in this call constitute 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 important factors, including those discussed or referenced under the heading risk factors and elsewhere in Staples' latest 10-Q filed today.

Please note that our second quarter GAAP results include the results of Corporate Express for the month of July 2008. Please note that during this call we will refer to Staples pre-acquisition performance and expected future performance excluding the impact of Corporate Express as Staples core business.

Here to discuss Staples Q2 performance and business outlook are Ron Sargent, Chairman and Chief Executive Officer, Mike Miles, President and Chief Operating Officer, and John Mahoney, Vice Chairman and Chief Financial Officer. Also joining us are Demos Parneros, President of US Stores, and Joe Doody, President of North American Delivery, and Peter Ventress, President of International.

Ron Sargent

Two weeks ago we shared our integration plans for Corporate Express with you and we also already pre-announced our results for the second quarter. Today we’d like to add just a bit more color to those Q2 results.

Sales for the second quarter up 18% versus last year to $5.1 billion, if you exclude the approximately $700 million of Corporate Express sales during the month of July our top line grew 3% to $4.4 billion. Corporate Express added about $13.5 million in operating income and was not material to our earnings per share. EPS fell 16% to $0.21 compared to $0.25 last year.

Our North American Retail business faced tough headwinds during the quarter with sales down 1%, comps declining 7% and operating margin decreasing 213 basis points. Our core North American Delivery business while slowing continued to gain share with top line growth of 2% and maintained strong operating margins of 10.5%. Including the impact of Corporate Express, North American Delivery’s top line grew 25% while operating margins declined 183 basis points.

Our core International business grew sales 6% in local currency and 17% in US Dollars with second quarter operating margins remaining flat at 0.7% of sales. Including Corporate Express results for the month of July sales for the International segment grew 59% in local currency and 69% in US Dollars with operating margin up 73 basis points to 1.5%.

Those are the headlines and while we’re certainly not happy with our earnings decline during the second quarter we know that we’re doing the right thing for our customers and for our long term success. We continue investing in customer service and long term growth ideas and am pleased to report this focus on customer service drove record satisfaction scores across all of our segments during the second quarter.

I’m also encouraged with the team’s ability to manage working capital. In a pretty challenging sales environment we continue to drive our inventory per store lower while maintaining strong performance in obsolescence and shrink which remain at all time low levels. Free cash flow was also strong driven by the good inventory performance as well as disciplined capital spending.

We’re working hard to make sure we keep our eye on the ball to continue to drive performance in all of our businesses and managed through a choppy demand environment, all while taking on the challenge of integrating and $8 billion acquisition. The Corporate Express integration has now been underway for a couple months and we are making good and steady progress. As we discussed during the integration conference call two weeks ago we expect the total annual synergies to build a range of approximately $200 to $300 million over the three year integration period.

I’m confident that with the talent of our integration teams which are made up of both Staples and Corporate Express leaders will do a good job integrating these two companies and deliver tremendous shareholder value in the years to come.

While we’re excited about the value that combing Corporate Express and Staples we’re also encouraged about the outlook for our core businesses. In North American Retail we recognized and increasing store activity as one of the most important drivers of our success and we’ll be sharing more information on our plans in this area at our Analyst day in October.

In Europe our efforts to manage the business more efficiently across all countries continued to pay off and we’re also laying the foundation for success in Asia and South America. We’re now the clear global market leader in an industry with excellent long term growth prospects which means we’ve got incredible opportunities ahead of us.

I’ll now turn it over to Mike Miles to talk about second quarter results in North America.

Mike Miles

I’m going to start with the results of North American Retail. Sales for the quarter were $2.1 billion down 1% versus Q2 2007. Same store sales were down 7%, the comp decline reflects lower average order size and negative customer traffic. We saw growth in printer cartridges and cut sheet paper as well as laptops, wireless hardware and tech services. Sales of furniture and tech durables such as all in ones, printers, desktop computers and digital cameras continue to suffer in the current economic environment. They comped down in the mid teens and contributed over half of the decline in comps.

Because of seasonally low sales Q2 is a tough quarter to manage expense de-leverage when comps decline. This Q2 was especially difficult since we’re overlapping negative comps and expense reductions in 2007. As a result operating margin declined 213 basis points and operating income fell to $111 million. The team delivered improvements in product margins and distribution expenses which offset some of the de-leverage on the labor line but we could not overcome the impact of declining sales and escalating costs on the rent line and rent and labor de-leverage account for virtually the entire drop in our operating margin rate.

On the SG&A line we did a nice job controlling expenses. Some of the actions we took to cut costs include renegotiating store supply contracts with vendors and consolidating store maintenance and service providers. We continue to maintain store staffing knowing that focusing on the customer is the right thing to do despite the P&L impact. We’re managing labor tightly as we can really without jeopardizing customer service.

We’re also managing inventory closely and we reduced inventory by 9% compared to last year despite increases due to new stores, expanded categories and inflation. Inventory per store ended 14% below last year’s levels as we managed our inventory to the lower sales trend. Some of the steps we’ve taken to better manage inventory include SKU rationalization, more effective promotional goods allocation and tighter management of product life cycles. We also continue to work with our suppliers to reduce our lead times and improve overall reliability in the flow of goods.

I mentioned earlier that we saw comp sales growth in the printer cartridges this quarter and we continue to post strong share gains in this critical trick driving category. We’ve invested to have the best assortment available at retail with an extensive lineup of HP products as well as an exclusive full line offering of Dell Ink. Later this year we’ll become the exclusive office superstore outlet for Kodak Ink. As always our broad assortment is backed up by guaranteed in stock.

Even though we officially kicked off back to school in early July we’re now in the height of the season. We’ve done a lot to drive customers into our stores during back to school as we’ve got tough comparisons with last years solid performance. This year we focused our message even more on price and value more important than ever to our customers who are navigating a challenging economy.

We’ve increased our focus on technology in our circulars. This year we’ve placed greater emphasis on computers and computing solutions which has helped drive sales of laptops. We also tried a new joint marketing campaign with Bed Bath & Beyond which includes co-branded direct mail reaching eight million college student households and many of our stores feature a special section for outfitting dorm rooms.

As always the pricing environment has been pretty promotional during the past few weeks but we’re confident in our value message, assortment and merchandising.

Turning to store growth we maintained our steady pace of new store openings during the second quarter as we opened 28 stores in North America and closed one and ended the quarter with a total of 1,802 stores. Included in this count are an additional two stand alone copy and print shops that we opened in New York City during the quarter bringing our total to nine in the US and four in Canada. Our first few stand alone copy and prints shops in the US are performing well with strong comps. In Q2 we also opened our first store in San Antonio which along with Houston, Omaha, Kansas City and Minneapolis brings our new market entries year to date to five. We remain on track to open approximately 100 stores in North America for the full year including a handful of those copy and print shops.

In summary, the North American Retail team managed their business very well in a difficult environment while working to find new ways to drive store productivity. We’re executing well, protecting our service levels and store standards and investing for growth. We’re confident that we’ll emerge from this downturn in an even stronger position.

Moving on to North American Delivery, NAD continued to gain share but top line growth slowed to sales per count to existing customers remained weak offsetting strong customer acquisition. Many of our customers including Fortune 1,000 firms are looking to reduce their spend in office supplies and have curtailed purchased with us on a temporary basis to cut costs.

For example, one large contract customer who was averaging $700,000 in monthly purchases this year only spent $60,000 with us in the last two months. Core NAD sales grew 2% year over year to $1.6 billion in Q2 and including the $355 million in sales from Corporate Express during the month of July our top line grew 24.7%. Within North American Delivery our contract business had the strongest growth although certain sectors like financial services had a tough quarter down about 7%.

Top line performance for Staples Business Delivery and Quill slowed with particular weakness in furniture. The customer acquisition and retention remain very strong. Operating margin excluding the impact of Corporate Express came in at 10.5% of sales down 11 basis points from 2007. Including the results of the lower margin Corporate Express business in the mix for the month of July operating margin de-leveraged by 183 basis points.

Despite the softening demand yielded a significant shortfall to our budgeted sales NAD team did a good job managing expenses across the entire P&L particularly in distribution and delivery. Despite higher fuel costs we leveraged delivery expense through higher service levels and fewer trips per order. We’re also getting nice productivity gains from engineered standards and the process improvement project that we’ve been working on all year.

Operations remain very sound, we continue to drive strong logistics, operating and service metrics and our investments in supply chain and customer service set us apart from the competition. Our contract call centers were recently recognized by JD Power & Associates for customer service excellence for the fifth consecutive year and our Staples Business Delivery call centers have just received this distinction for the fourth consecutive year.

Joe Doody and his team are not only working hard to maintain the industry leading customer service and market share gains we have achieved in NAD over the past few years but they are also making great progress in integrating Corporate Express’ North American operations. During the first few weeks the team has begun to retrain the sales force and made some key organizational decisions. We’re very pleased to add talent from Corporate Express to the team and we’re confident in our ability to continue building on our foundation for the long term growth in NAD.

With that I’ll turn it back over to Ron to talk about International.

Ron Sargent

Sales for the second quarter from our core business in International were $703 million that’s up 17% in US Dollars and 6% in local currency versus Q2 last year. If you include the impact of Corporate Express July results Q2 sales were $1 billion which is an increase of 69.5% in US Dollars and 58.7% in local currencies. Operating margin excluding the impact of Corporate Express was flat versus last year at 0.7% of sales and again if you include Corporate Express for the month of July operating margin increased 73 basis points to 1.5%.

In retail the top line softened this quarter with European retail comps down 7% versus a tough comparison of plus 7% for Q2 of last year. Decreases in both customer traffic and average ticket drove the weakness with particular softness in furniture and desktop computers. The last few months we’ve seen stiff economic headwinds affecting all countries to varying but significant degrees.

In the UK and Germany we saw softening in traffic that was partially offset by an increase in average order size. In Portugal and Netherlands average order size declined due to slowing technology sales. Overall the retail team did a good job managing expenses in a tough sales environment. We added three new stores in Portugal ending the quarter with a total of 337 stores in Europe.

On the Delivery side sales were strong and operating margins improved but the macro environment was tough especially in France. Operating income was driven by strong product margin management across the board. Customer satisfaction scores are at an all time high and we’re continuing to see excellent trends in inventory management.

Turning to markets outside of Europe our sales growth in India is well ahead of the aggressive targets we set. In China sales continued to grow very rapidly. Our status as the official furniture supplier of the Olympics helped deliver results above our expectations in terms of furniture and service sales. We opened our first store in Argentina and it is off to a great start. At the end of the second quarter we had a total of 369 stores outside of North America.

While the top line growth slowed during the second quarter our margin improvement plans remain on track and we see great opportunity in our overall European business with our existing initiatives. This margin story is only enhanced with the addition of Corporate Express. With this deal we have a much stronger competitive position. We’ve increased our scale and we’ve added a talented leader in Peter Ventress who is now the President of International responsible for all of our operations outside of the United States and Canada.

As we said at the outset of the call Peter is available today to help answer any questions that you may have and starting next quarter I’ll be handing off the International section of the earnings call to Peter Ventress.

Now I’ll turn it over to John Mahoney to review the finances.

John Mahoney

I’ll go through the financials and provide some color on what’s driving our results, before wrapping up with some guidance for the back half of the year. Excluding Corporate Express total company sales of $4.4 billion were up 2.6% versus last years second quarter. Excluding the foreign currency benefit sales were flat. With the addition of Corporate Express sales for the quarter were $5.1 billion. Excluding Corporate Express gross profit margin decreased by 55 basis points to 27.66% during the quarter.

While our teams are doing a nice job controlling expenses we don’t have the sales productivity to leverage fixed expenses like rent which really weighed on the P&L as we enter year two of negative same stores sales. Gross profit margins were flat in North American Delivery and up in International but we leveraged rent and distribution expenses. Including Corporate Express gross profit margin was 26.63%.

You may have noticed in the P&L included with our press release that we no longer break out G&A expenses from operating and selling expenses. Because Corporate Express classifies its G&A expenses differently than Staples for simplicity sake we’re combining these two expense lines.

Core Staples operating and selling expenses for Q2 de-leveraged 54 basis points versus last years second quarter to 17.4% of sales. G&A expenses de-leveraged 18 basis points to 4.9% of sales. The primary driver was de-leveraging labor in North American Retail as Ron and Mike mentioned.

We provide good service to customers and slash payroll to make our numbers both NAD and International experienced more moderate SG&A deterioration. Operating, selling and G&A expenses for Q2 including the impact of Corporate Express were 21.51% of sales. At the end of the second quarter Staples had $957 million in liquidity including cash and cash equivalents of $258 million and available lines of credit of about $699 million.

As we said during our Corporate Express call a couple weeks ago we expect to refinance our $3 billion bridge loan through a public bond issuance when the market conditions are right. We’ll aggressively pay down debt with our free cash flows and don’t expect to buy back any shares until we return to credit metrics closer to where we were before the deal.

Excluding Corporate Express return on net assets for the year decreased to 13.2% down 110 basis points compared to the end of the second quarter a year ago. Our diluted weighted average shares outstanding of 711 million decreased by 15 million shares year over year for the quarter as a result of our repurchase activity during the past year offset by stock option exercised.

Year to date CapEx came in at $169 million down from the $206 million we spent for the same period in 2007 largely due to more disciplined spending in the face of a tougher economy. With operating cash flow of $188 million we generated $19.3 million in free cash flow year to date versus free cash flow of $650,000 in the same period last year. For the year we expect approximately $500 to $550 million in capital expenditures including Corporate Express and we should approach $1 billion in free cash flow.

We just updated our guidance for you on August 19th and our expectations have not changed since then. We expect our core business sales to grow in the low single digits and earning per share to be about flat this year compared to last years adjusted EPS of $1.42 for an increase in the low single digits compared to our 2007 GAAP results.

The addition of Corporate Express will be slightly accretive to our core results after all the additional interest expense, amortization of intangibles and merger related costs. As we mentioned on our August 19th call our long term plan is to evolve to the Staples brand worldwide with a few exceptions such as Quill here in the US.

We’re currently using many of the brand names from past acquisitions and are in the process of evaluating them to determine their roll in our branding strategy for the foreseeable future. Any changes in our plans for these brands may result in a non-cash write down that we would classify as integration and restructuring costs.

I’ll now turn the call back over for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Oliver Wintermantel – Morgan Stanley.

Oliver Wintermantel – Morgan Stanley

Your gross margin declined in the second quarter more than in the previous quarters can you give us some color on the gross margin impact from Corporate Express and what drove the decline in gross margin.

John Mahoney

The primary driver was in the core business where Q2 being our smallest revenue quarter has the least opportunity to leverage our fixed rent expenses. That was really the major driver of gross margin deterioration. In the gross margin area overall we saw that gross margin including Corporate Express was 26.63% which was a little bit lower overall so they impacted our overall gross margin by 97 basis points.

Oliver Wintermantel – Morgan Stanley

With the Corporate Express acquisition you acquired their printing systems business what are your plans for that business? Are you going to hold on to that or is that one business that you would sell off in the future?

Ron Sargent

It’s a pretty good business, it’s a profitable business and it grows with the economy. It’s a little outside our core so we certainly take a look at it. I don’t think we’ve made any decisions at all up to this point.

Peter Ventress

It’s an interesting business for us and while it has been exposed to the cyclicality of the economic cycle before we’ve done a great job in building the service side of the business, service and supplies which somehow has offset that cyclicality. It’s a good business delivering good cash for the overall company.

Operator

Your next question comes from Kate Mcshane – Citigroup.

Kate Mcshane – Citigroup

You had mentioned that you had gained share in the North American Delivery business and I was wondering if you could quantify how much that contributed to your sales growth during the quarter and were you able to gain share in the North American Retail business during the quarter?

Joe Doody

Can you clarify on your question gain share for what?

Kate Mcshane – Citigroup

You had mentioned in the comments that you’re gaining share in North American Delivery I’m wondering if you could quantify that in terms of how much contributed to growth during the quarter and then also if you were able to gain share in North American Retail.

Joe Doody

In terms of the North American Delivery business as you know our organic growth was 2% in the quarter and although it has slowed it still is significantly greater growth than the overall industry. The best indication we have of that is our two major competitors who were both declining in their sales growth during the quarter. Although our growth did slow quarter over quarter we continued to distance ourselves from our major competitors out there in terms of overall sales growth.

Ron Sargent

When you look at the two components of NAD sales growth one is acquisition and that continued to be very strong and then the other ones are sales to existing customers and I don’t know if that was positive or slightly negative.

Joe Doody

It’s down. Look at the slowing of the growth it’s primarily due to fewer purchases from our existing customers. Our acquisition activity as Ron said continues to be very strong. The only thing that disappoints us a little bit in our new account acquisition is that those customers that are new to us are buying less than they normally have been when we’ve brought them on as new customers. With the number of new customers that we gain has continued to remain very strong.

Our retention levels among our existing customers remains very strong. Our satisfaction levels are very high and it’s really buying less products from us. The biggest single decliner in terms of categories during the quarter was furniture. Furniture business slowed quite significantly from Q1 to Q2 and that contributed quite a bit to our slowing growth in NAD during the quarter.

Ron Sargent

You also asked about Retail. You’ve got to think with a minus 7% same store sales you’re not gaining share but everything we look at from our vendor community we look at categories and we use a lot of NPD data would indicate that in fact we’re either maintaining or gaining share in most of the categories that we track. Certainly we’re growing faster than the office superstore competitors but we’re also no losing share to discounters or clubs either. I think it’s a very tough time to be in the office products business but despite that as I’ve said in the past we’re kind of the tallest pigmy.

Operator

Your next question comes from Dan Binder – Jefferies.

Dan Binder – Jefferies

On the North American Delivery business as you look at the existing customers that are spending less it sounds like some of that is furniture. Is there a point at which they draw down their office product stock in the office and then come back to you with stronger reorder volume have you seen that in prior down turns. Any thoughts on magnitude.

Ron Sargent

We certainly hope so.

Joe Doody

A big part of our model is next day delivery so there’s not huge storage supplies that many and most of our customers keep. It’s more they continue to look at their labor levels really that is most important, are they hiring or not, are they in some cases some of their people are leaving the organization and they’re living off of some of those spare supplies that are left behind. I wouldn’t say that there’s a pent up demand there given that most of our customers are running stockless operations.

Dan Binder – Jefferies

On the back to school business it sounded like your competitive, you’re emphasizing value, you’re at the height of it now, how would you describe it overall thus far is it in line with your expectations?

Demos Parneros

The way you described it is right on. The message for us has been all about price, value. The big thing for us which is I think a strong advantage over the competition is the fact that we’re in stock at the store and we’re in stock throughout the season always to the end. Other discounters for example really wrap it up pretty quickly as you know and they move on to the next business that would be Halloween and they focus their energies there.

For us it’s been consistent with past quarters and pretty choppy environment but a lot of emphasis on price, price, and price. Our stores are ready, we’re in very good shape, and we’re in stock both on the supplies as well as the technology business. We’ll ride it out for the next few weeks.

Dan Binder – Jefferies

I’m curious how you’re working with the folks at Staples to maintain the sales force, the culture, the momentum of your sales force in the Corporate Express organization and how you think your early part of the integration there has gone.

Peter Ventress

The early part things have gone quite well. I think its worth pointing out there wasn’t an enormous cross over in terms of the two businesses. In North America where Corporate Express was very, very strong in the very large customer market and Staples perhaps probably much stronger in what we would have called the mid market so the SME market. That’s a good fit and we’ve been able very quickly to transfer over a substantial amount of business from our mid market into the Staples model.

Generally or sales people are excited to take on the Staples brand and to enjoy the benefits of the multi-channel approach in the States. Elsewhere in the world in Europe particularly there’s even less cross over between our businesses and to be quite honest we’re embarking on the integration efforts largely on the back office on the product purchasing and indirect sourcing and those things have kicked off very well.

Dan Binder – Jefferies

It sounds like morale is reasonably good.

Peter Ventress

We’ve had a roller coaster ride for the last few months in Corporate Express as you can imagine. The economy isn’t helping us, isn’t helping anybody but in the circumstances I think morale is very high.

Operator

Your next question comes from Brian Nagel – UBS.

Brian Nagel – UBS

One follow up on the back to school to the previous question then also you made some comments in your prepared remarks. Did you say that it’s more promotional this year than in past years?

Demos Parneros

It’s actually as promotional as it’s been the last couple years. To go back two or three years there’s a lot of activity with very low price product to drive traffic in the stores. It seems like a lot of other folks have picked up on that trend. I think the customer is really the driver this year. There are a lot of choices for them with respect to back to school. What you want for us to continue to ride through the season, it’s a very long season, and it begins in late July down in the southern states of the US and does not end until the third week of September.

While it’s been promotional in different parts I think we focus on giving really good service to customers, in stock, I think we’re right there with the product at the right price. It’s always been competitive and I think our team is ready for it and it doesn’t feel that much different than last year other than the tougher economic times.

Brian Nagel – UBS

Taking a step back looking at the Delivery business and maybe the trend throughout the second quarter would you say most of your customers are they still tightening up on their purchases or are you starting to see bottoming in some of their purchasing habits even as you look particularly toward some of the bigger ticket items?

Ron Sargent

It’s so choppy it’s a little hard to know. It seems like we have good weeks, we have soft weeks, we have good weeks, and we have soft weeks.

Joe Doody

The only thing that we’ve seen more consistently lately is the weakness in the furniture over the past several months but appears to be bottoming out there at the current time.

Operator

Your next question comes from Anthony Chukumba – FTN Midwest.

Anthony Chukumba – FTN Midwest

You mentioned that financial services was somewhat weak in terms of purchases in the Delivery business I was just wondering if there were any other industries where you saw particular softness or maybe even a little bit of strength relative to your overall business. My second question was if you saw any market difference in North American Retail costs as you went through the different months of the second quarter.

Joe Doody

Regarding North American Delivery in sectors all financial services mortgage companies etc. legal has gotten weaker for us most recently. Real estate, construction and retail, those are the industry sectors that are the weakest for us. Ones that are more positive have been health, education, government both state, local and federal government as well as all parts of education market.

Ron Sargent

In terms of your other question about sales trends or comp trends for our North American Retail business through the quarter I think May was a little better month. I think June and July were not as good and as I said a couple weeks ago we were starting to see some early indication that August was going to be a better month. It’s not clear that there’s a direction. I don’t think it’s down from here, if anything its up from here because I think the economy is up from here. It’s a little early to be saying we’ve got a trend going here.

Operator

Your next question comes from Colin McGranahan – Bernstein.

Colin McGranahan – Bernstein

It’s been about two weeks since we last heard from you in regards to Corporate Express and I would imagine that you’ve met with a few additional vendors since then and wanted to just get a quick update in the last few weeks and to date how those discussions with vendors have gone and what you’ve learned on the purchasing side any data you can share with us on who is buying better and how that’s shaping out as you go through those discussions.

Ron Sargent

In general we’re still in the data collection mode and there’s a lot of data to sort through because PO costs tend to look similarly everywhere as you would expect and you really have to dig in to the back end programs so really understand the differences as well as volumes. We’re still in data gathering mode. I can tell you that in general as you would think the $20 billion company buys better than the $8 billion company. Although particularly in other parts of the world I think Europe it might be more of a mixed bag. Canada it might be more of a mixed bag certainly we don’t buy anything in Australia.

I think it’s too early to know how we stack up versus the synergy target although we fully expect to achieve that $200 to $300 million that we’ve outlined there. The in depth discussions and negotiations with the vendors haven’t really occurred yet and I think first of all you want to equalize and then second of all you want to go back and say now we’re buying for a $28 billion company not a $20 billion company. I think there are probably two opportunities to improve our competitive positioning in terms of the cost of product.

Operator

Your next question comes from Anna Stromberg – NAV Capital.

Anna Stromberg – NAV Capital

I wanted to follow up on your point that you’re not going to be initiating any stock buy backs and what are your plans for short term debt, are you going to come to the market any time soon to try to term that out or what are your plans?

John Mahoney

As you probably are aware we have a bridge loan with our key financial banks and sources that we’ve used to finance the transaction, it’s about $3 billion of short term financing. We clearly would plan to go to market with a public bond deal that will fund that out. As we mentioned we would like to be able to get our credit metrics back in line with where we were before the deal as a result we would expect our permanent financing would be some mix of different durations to balance the maturities of that debt.

As we said, we would expect to use some of our cash flow in the next year or two to pay down some of the shorter term debt, the commercial paper, etc.

Anna Stromberg – NAV Capital

The long term goal is to return back to the metrics prior to the acquisition?

John Mahoney

This is a significant amount of debt to take on at one point in time who would want to have it all mature at once. We had almost no debt before the deal. I’d expect that we’ll have some debt of longer duration and I think what we’ve said is that we’ll begin to use our share buy back program when we get our credit metrics back to where they were before. We’ll start to buy back shares to offset that and we’ll have some longer term debt that will be on the balance sheet for the next 10 years or so.

Operator

Your next question comes from Alan Rifkin – Merrill Lynch.

Alan Rifkin – Merrill Lynch

Looking at your reconciliation statement is appears that Corporate Express was just a one month period ‘x’ adjustments was accretive by $0.02 for just the one month. Would it be unfair to possibly extrapolate that one month to the rest of the year which would maybe suggest Corporate Express could be even more than just slightly accretive for ’08?

John Mahoney

Because it’s just one month it’s really not indicative of what you expect to see throughout the rest of the year. Our best estimates as we described them thinking that it will be slightly accretive for the year. There’s a lot of integration going on, we’ve yet to settle the entire customer base down, it’s possible we could lose some customers as we’ve described to you before. All in, our view is that Corporate Express will be slightly accretive the rest of the year and anything that’s beyond that would be a happy surprise.

Alan Rifkin – Merrill Lynch

Looking at the SG&A line you saw only modest de-leverage despite a low revenue quarter and despite your poorest comp. Even if we assume no improvement in comps for the back half of the year would it be unreasonable to expect that just due to the greater revenue quarters in Q3 and Q4 that possible there’s an opportunity for SG&A leverage in the back half?

John Mahoney

We focus year over year most of the time on that. There’s no question about the fact that compared to the first and second quarter G&A will be a much smaller percentage of sales as sales are so much greater in those quarters. When it comes to how we’ll do year over year I think that that will depend on what we achieve for our comparable store sales where we gave you guidance on what our operating margin is expected to be and the SG&A line is one factor in there along with gross margin.

I think that it all depends on whether we were able to generate gross margin dollars at rates higher than we have been in the first half of the year.

Alan Rifkin – Merrill Lynch

Can you expand a little bit on what type of retention rates you’re seeing specifically on the contract side of your business?

Peter Ventress

Are you talking in Europe or in North America?

Alan Rifkin – Merrill Lynch

In Europe.

Peter Ventress

In Europe at the moment I think the big issue in Europe is the same one facing North America the actual reduction in spend among our customers. We’re not noticing any appreciable loss of business or indeed market share but people are buying less, they are economizing. That’s hitting us across most countries. Probably has kicked into Europe slightly later than it did in the US.

Operator

Your next question comes from Steve Chick – FBR.

Steve Chick – FBR

The Corporate Express results for the month can you tell us what the year over year trends look like of the sales and the operating profit numbers that you gave us and is the month of July is it safe to use that as representative of what the whole quarter trend would have looked like for the Corporate Express business?

John Mahoney

Broadly Corporate Express announced their earnings for their first quarter and the trends in the business were essentially comparable to what we saw in the first quarter and the second quarter. They saw slight increase in sales, some deterioration in operating margin rate but given last year was a little bit of a weak year in terms of earnings they saw some earnings growth in spite of the fact that their operating margin rate declined a little bit.

Steve Chick – FBR

The $21.9 million that would be for the Corporate Express that would be up year over year relative to the July of a year ago?

John Mahoney

Yes.

Steve Chick – FBR

The incremental amortization and the qualitative comments that you gave us for US and International the split of Corporate Express is that $8.6 million being allocated to the two segments?

John Mahoney

Yes, we’re not completely settled down yet with all of the valuation work for all of the intangibles that will go along with the business but the intangibles are roughly split based on the size of the business and therefore the intangibles and the amortization will go along with the business segments on that basis.

Steve Chick – FBR

The 11 basis point contraction in North American Delivery can you repeat again what that was related to if it’s mix of business or if it’s more a little bit of de-leverage. What can we expect your organic growth rate for NAD to look like ‘xx’ Corporate Express going forward from here?

John Mahoney

As we said, they continue to assess customer service in general and are continuing effort to acquire new customers in NAD have been the main drivers. We mentioned that distribution and deliver did leverage so from an operating perspective the team is doing a great job of controlling expenses. I think our view on the NAD business is that as Ron said we seem to be at the point where we’re seeing the core customers, the existing customers are buying a little bit less but they’re buying a little bit less at the same rate they were.

We continue to get reasonably good customer acquisition and our expenses have been very well managed but there are areas like fuel where we’ve seen significant impacts and we don’t know what the impact of that is going to be during the rest of the year obviously fuel prices have come down a little bit recently although diesel prices have been stickier on the high side than what you see every day for a barrel of oil or at the pump for gasoline for your car.

Ron Sargent

The other question about the projection of what we NAD sales going forward.

John Mahoney

NAD sales we expect based on what we’ve seen with existing customers and customer acquisition trends to remain about the same in terms of growth rate as we look at the rest of the year.

Steve Chick – FBR

It should be able to sustain the 2% organic rate of sales growth?

Ron Sargent

We certainly hope so.

Operator

There are no further questions in queue at this time.

Ron Sargent

I’d like to thank the Staples team and as well as our new colleagues at Corporate Express for their hard work this quarter. Despite some tough market conditions we have a strong business that I think becomes even stronger with this acquisition. We understand we’ve got a lot of work to do to ensure a successful integration of Corporate Express as well as become truly global multi-channel leader.

At the same time we’re challenging or retail business model to pursue a few key initiatives that we believe will drive store productivity. Underlying everything we do is our belief that investing in our business and executing well to create a great customer experience will continue to drive market share gains. We couldn’t accomplish these goals without a lot of hard work, a lot of dedication and a lot of leadership on behalf of our team.

Thanks for your time this morning and we look forward to seeing you at our analyst day next month.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Staples, Inc. F2Q08 (Qtr End 08/02/08) Earnings Call Transcript
This Transcript
All Transcripts