Staples Inc. (

SPLS

)

Q3 2010 Earnings Call Transcript

November 18, 2010 8:00 am ET

Executives

Laurel Lefebvre - VP, IR

Ron Sargent - Chairman and CEO

Mike Miles - President and COO

John Mahoney - Vice Chairman and CFO

Demos Parneros - President of U.S. Stores

Joe Doody - President of North American Delivery

Analysts

Mathew Fassler - Goldman Sachs

Brad Thomas - KeyBanc Capital Markets

Kate McShane - Citi Investment Research

Chris Horvers - JPMorgan

Michael Lasser - Barclays Capital

Mike Baker - Deutsche Bank

Colin McGranahan - Sanford Bernstein

Stephen Chick - FBR

Oliver Wintermantel - ISI

Joscelyn MacKay - Morningstar

Mitch Kaiser - Piper Jaffray

Joe Feldman - Telsey Advisory Group

Brian Nagel - Oppenheimer

Anthony Chukumba - BB&T Capital Markets

Dan Binder - Jefferies

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the third quarter 2010 Staples Incorporated earnings conference call. (Operator Instructions) I would now like to turn the presentation over to Laurel Lefebvre, Vice President Investor Relations.

Laurel Lefebvre

Good morning and thanks for joining us for our third quarter 2010 earnings announcement. During today's call, we'll discuss some non-GAAP metrics 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'd also like to remind you that certain information discussed on this call 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 important factors, including those discussed or referenced under the heading Risk Factors and elsewhere in Staples' latest 10-Q filed today.

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 with us are Demos Parneros, President of U.S. Stores; and Joe Doody, President of North American Delivery.

During today's Q&A session to allow everyone to participate on the call, we ask that you please limit your questions to one per caller. If there's time remaining before we end the call at 9:00, we'll take additional question before us. Thanks. Ron?

Ron Sargent

Thanks, Laurel, and good morning, everybody. Thanks for joining us today. This morning I'm pleased to announce Staples third quarter results and I'll start with the headlines. Total company sales were $6.5 billion for the quarter, up slightly compared to Q3 of last year. And we adjusted earnings per share of $0.41 at the high-end of our guidance, and cash flows were very strong.

Last month at our investor conference we outlined our strategies to drive grown in North America and also our plans to profitably grow our international business. And during the third quarter, we made good progress against those plans. Gaining traction in our growth initiatives, growing core office supplies and significantly improving our international profitability.

In North American Retail we achieved strong comps in copy and print and double-digit growth in our EasyTech business. In North American delivery, we continue to see momentum on the top-line with 3% growth. And in our international segment, we drove solid profit growth with operating margins up 150 basis points, compared to last year's third quarter.

With all the work that we've done in 2009 and 2010, we're poised for better top-line trends going forward. For 2011, we're planning for sales growth in the low-to-mid-single digits and strong double-digit earnings growth. Although, we're not expecting a rapid improvement in the economic environment, we do assume a slow steady recovery throughout the year. We'll hit our sales targets by focusing on the four parts of our profitable growth strategy that we discussed at our Investor Day.

We'll continue to grow our share of core office supplies, including growth in Staples brand products. We'll take a big step forward in categories beyond office supplies like facilities and breakroom products. We'll increase our mix in services like copy and print and EasyTech. And we'll continue to make progress to a certain goal of 7.5% operating margin in international. Doing all this, we'll generate a lot of cash that we will use to invest in our business and return to shareholders through dividends and share buybacks.

Turning to our business units, and I'll start with the North American Delivery. Sales for the third quarter were $2.5 billion an increase of 3% in U.S. dollars or 2% in local currency compared to Q3 of 2009. We grew the top-line in the low-single digits in both Contract and Staples with Business Delivery. And Quill's top-line trend continued to improve as we got back to flat sales after nine quarters of declines.

Core office supplies and computers and accessories were strong during the third quarter. Office Paper grew faster than the House, while Ink was about flat for the quarter. Our facilities in breakroom initiative gained traction as we won several new multi-million dollar contracts during the third quarter. This year we put a lot of effort into building a foundation to accelerate growth and facility supplies.

We've expanded our assortment; we're offering sharper prices and improved our systems to handle the unique requirements of this business. We have high expectations for growth in this category going forward.

NAD operating margin was flat, compared to Q3 of 2009 at 8.9% with nice leverage in Contract. Our contract business continues to benefit from Property Express synergies, while also investing in our growth initiatives. Strong margins in Contract were offset by lower margins in Staples Business Delivery and Quill, as we invested in marketing and pricing to drive traffic and key categories like paper and facility supplies.

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