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Staples (SPLS)

Q4 2011 Earnings Call

February 29, 2012 9:00 am ET


Chris Powers -

Ronald L. Sargent - Chairman, Chief Executive Officer and Chairman of Executive Committee

Michael A. Miles - President, Chief Operating Officer and President of Staples International

John J. Mahoney - Vice Chairman

Demos Parneros - President of US Retail Stores

Joseph G. Doody - President of North American Delivery


Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Michael Lasser - UBS Investment Bank, Research Division

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Gregory S. Melich - ISI Group Inc., Research Division

Christopher Horvers - JP Morgan Chase & Co, Research Division

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2011 Staples. Inc. Earnings Conference Call. My name is Jeff, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Chris Powers (sic) [Chris Powers] , Director of Investor Relations. You have the floor, sir.

Chris Powers

Thanks, Jeff. Good morning, everyone, and thank you for joining us for our fourth quarter 2011 earnings announcement.

During today's call, we will discuss certain non-GAAP metrics to provide investors with useful information about our financial performance. Please see the Financial Measures/Other Data section of the Investor Information portion of 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' 10-K filed this morning.

Here to discuss Staples' Q4 and full year performance and business outlook are Ron Sargent, Chairman and Chief Executive Officer; Mike Miles, President and Chief Operating Officer; and John Mahoney, Vice Chairman. Also joining us are Demos Parneros, President of U.S. Stores; and Joe Doody, President of North American Delivery; as well as Christine Komola, Chief Financial Officer. Ron?

Ronald L. Sargent

Thanks, Chris, and good morning, everybody. Thanks for joining us today. I'm pleased to announce Staples' fourth quarter and year-end results. Let me start with the headlines. Total company sales for the fourth quarter were $6.5 billion, that's an increase of 1%. Operating margin expanded to 7.3%, and we grew adjusted earnings per share was 5% to $0.41 during the quarter. For the full year, sales were up 2% to $25 billion, and adjusted earnings per share increased 8% to $1.37.

During 2011, we made good progress on several key initiatives in North America, and we grew the top line and expanded our operating margin in both North American Delivery and North American Retail. Our international performance was weak, and we faced a number of challenges particularly in our Australian and European Retail businesses.

Our cash flow for the year was very strong. We generated $1.2 billion of free cash flow after investing $384 million in capital expenditures. Additionally, we repurchased over $600 million of stock during the year, and we paid about $280 million in dividends. We also paid down a $500 million bond that matured early in the year. Our solid cash flow reflects the strength of our business, and we remain committed to returning excess cash to our shareholders.

Before we get into our segment performance, I wanted to just take a minute to discuss how we're positioning Staples for the future in the context of our 2011 results. First of all, as it always has, everything starts with the customer. And for 25 years, we responded to the needs with an assortment of products and services, great customer service and a strong multichannel offering. We've been successful of that, and that won't change. But to accelerate growth, we have to continue to evolve, as the needs of our customers change, and we have to take full advantage of our world-class supply chain, our strong store network and our $11 billion e-commerce business.

Our plan for 2012 is built on 5 key objectives: first, we'll continue to invest in our business to drive growth for the future; second, we'll improve store productivity by generating higher sales per store and by continuing to rationalize our real estate portfolio; third, we'll build on our momentum in categories beyond office supplies and areas like services, facilities and several others; fourth, we'll focus intensely on improving profitability in our International business. This is a very high priority for the company. And finally, we'll take advantage of the leadership changes we've made around the world. In short, we'll continue to win by focusing on the changing needs of our customers. These concepts of change in the product lifecycle aren't new to us. The needs of our customers have been evolving since we opened our first store back in 1986, and we continue to actively manage our business to address these changes.

Over the past few years, we've invested heavily to drive growth in products and services in addition to traditional supplies, and I'm happy to report that we're gaining momentum and building critical mass in a number of areas beyond the core. Today, we have worldwide facilities and breakroom business of over $1.5 billion. We sell another $1.5 billion of computers and tablets and e-readers, and we generate more than $1 billion of sales from our cross-channel, Copy & Print offering.

Within North American Delivery, our promotional products business exceeds $300 million, and in North American Retail, our technology services business is now over $200 million. We also now have a new mobile phone offering in 500 stores across the United States to address an essential need for our small business customers, and we're off to a great start in that area as well.

To put this in perspective, these adjacent businesses combined are now about as big as our global ink and toner business and much larger than our cut-sheet copy paper business. And with very low market share across each of these categories, we're increasingly confident that they will help fuel our top line growth for many years to come.

Throughout 2011, we continue to do a nice job carefully managing our destination categories like ink and toner, which was flat for the year; paper, which was up in the low single digits versus 2010. And as always, there are certain categories like computer media, copy and fax machine supplies and digital cameras, which are in decline. While these categories only make up about 2% of total company sales during 2011, they were down more than $100 million in sales combined. So as we look ahead, our strategy to accelerate growth in our adjacent businesses and continue to gain share in core office supplies, while at the same time, making steady progress in improving profits.

Now let's take a look at our Q4 results for each of our business units in a little more detail. And I'm going to start this morning with North American Delivery. Sales for the fourth quarter were $2.5 billion, and they were up 2%. Q4 was our eighth consecutive quarter of top line growth in NAD. Our sales increased in each of our delivery businesses with particular strength in Sales of core office supplies were flat in North American Delivery, and we continue to drive solid top line growth in adjacent categories. The facilities and breakroom category was our biggest success during 2011. We continue to gain momentum during the fourth quarter, with sales growth in the mid- to high-teens. We're building critical mass in this category, and it now makes up more than 8% of total North American Delivery sales.

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