Staple Facing Tough Sales Environment; Increasing Overseas Presence

We recently talked about the Gap Stores (NYSE: GPS) efforts to cut costs and maintain profitability in the face of declining sales. We argued that this is a short term fix and profitability can't be sustained for long this way. Now we have a good example of that fact.

Staples (Nasdaq: SPLS), the office supply store, is cutting spending too. However, they have had five quarters in a row of declining same store sales. You'll recall that same store sales are the comparison of sales in stores that have been open at least a year. This removes new stores from the mix and provides an apples-to-apples comparison of how a retail business is doing.

For the just ended second quarter, Staples on Wednesday reported that US same store sales were down 7% (see conference call transcript). Despite the company's best cost-cutting efforts, the company's net fell by 16%. Staples did, however, say that it expects income to remain in the black for the remainder of the year. Overall, sales in North America fell by 1%. Staples cited "weak sales of furniture, desktop computers, printers and digital cameras" as the reason for the poor showing.

Staples' business is down because the cycle of cost-cutting is not only affecting retailers. Companies, large and small, from nearly all sectors are trying to restrict spending as the economy struggles. One of the ways they do this is to reduce spending on office supplies. Staples competitors, OfficeMax (NYSE: OMX) and Office Depot (NYSE: ODP), faced the same pressures and also reported a drop in sales. There isn't a lot any of these stores can do about the situation in this economic environment except hold on to the purse strings and hope it hurts your competitors more than it hurts you.

Meanwhile, Staples is making strong inroads into overseas markets. They have purchased a Netherlands-based distributor called Corporate Express, NV which added approximately $660 million in sales for the quarter. This fueled essentially all of the sales growth the company reported. Corporate Express was purchased in July for $2.44 billion. Without the figures from Corporate Express added in, Staples saw overseas revenue rise by 17% although same store sales matched the North American decline with a 7% fall. Staples is seeing good growth in China with 31 stores in that market at the close of the quarter.

Going forward, the overseas business, however, may be slowed by a strong US dollar effectively lowering the number of dollars Staples makes on each sale, unless they raise prices, which may have an even stronger effect on sales.

Staples estimated that $40 million in restructuring costs may be incurred for the remainder of 2008 as they continue to cut costs. By cutting costs, they most likely mean cutting jobs. Five quarters into declining profits, Staples should already be operating on a leaner inventory. Staples remains the largest office supplies retailer in the world, and is well-positioned to ride out the downturn.

After the announcement on Wednesday, Staples share price was up just a little under 2% in early morning trading. At $25.25 per share, Staples was just a $1.32 off its 52 week high. That high was reached just a couple weeks ago in August and reflects investor confidence in Staples strategy of increasing their overseas presence.

Disclosure: none