Office superstores refute need for organic growth - Brief Article - Statistical Data Included

DSN Retailing Today, Sept 23, 2002

NEW YORK -- Office superstore retailing is not dead.

It may seem that way considering store expansion is at a virtual standstill relative to a few years ago and an uncooperative economy has led to regular reports of negative same store sales. However, the industry's three major players are actively positioning themselves to capitalize on improved consumer spending levels by focusing on the efficiency of existing operations, while resisting the temptation to hastily plant flags in new markets.

Two of the industry's lenders, Office Depot chairman and ceo Bruce Nelson and Staples president and ceo Ron Sargent, detailed their initiatives to improve retail operations during presentations earlier this month at Goldman Sachs' ninth annual Global Retail Conference.

According to Nelson, Office Depot's North American retail stores generate 52% of the company's $11.2 billion in annual sales, but only 38% of the profits.

"That is the segment of our business we are challenged with growing," Nelson said. "There is growth left in North American retail. It is not a bad business, but it is not a high-double-digit business."

Even without much growth from retail operations, Nelson assured investors the company is capable of delivering 10% to 15% annual earnings per share growth because of the strength of its international operations and domestic business services group. Even so, Nelson highlighted a few initiatives the company is pursuing to rev up retail sales.

For starters, he said the company has been working on its corporate culture to make Office Depot a more compelling place to work, with the rationale being that if employees are satisfied, they will take better care of customers, who, in turn, will spend more. Service levels are being improved in 105 stores through the use of hand-held devices that are designed to allow employees to access information via the Internet for customers who have questions about technology products.

In another 135 stores, Office Depot has created "quick shop" departments stocked with 235 frequently purchased items as a way to increase customer convenience. Experiments also are under way with smaller-format stores. Nelson mentioned 5,000-square-foot and 13,000-square-foot prototypes, but didn't disclose their location or elaborate on the role they may play in future expansion.

Despite the challenges of its retail operations, Office Depot's operations are profitable and the company has generated a sizeable war chest it must now determine how to use. According to Nelson, it is a nice problem to have.

"Eighteen months ago the question was 'When are you going to get some?' And now it is 'What are you going to do with it?'" Nelson said.

Office Depot had nearly $1 billion in cash on its balance sheet at the end of its second quarter ended June 29, compared with $151.5 million at the end of its fiscal year ended Dec. 30, 2000.

Although Nelson noted that Office Depot was "the first of the office superstore retailers to recognize that growth in North America has some limitations," Staples continues to dispute that assertion.

"We still believe there a lot of opportunities to open new stores in North America for at least the next several years," president and ceo Ron Sargent said.

Staples opened 22 stores and closed 31 stores during the first quarter and planned to open 93 units during the remainder of the year. During the second quarter Staples opened 19 stores and revised its total openings for the year down to 75 stores. Sargent said that figure has been reduced to 60 units.

With fewer new store openings, Staples is concentrating on converting its existing stores to a new prototype called the "Dover" format.

"Our new Dover store is a significant competitive advantage," Sargent said.

The Dover store reduces Staples' prototype size from 24,000 square feet to 20,000 square feet, eliminates the warehouse feel of older stores and makes it easier for customers to find merchandise.

By the end of the third quarter, Sargent said 125 stores will be in the Dover format and by year's end, one-fourth of the chain will be converted. Interviews with customers indicate they like the design, appearance, service levels and improved in-stock position at the stores, according to Sargent.

Although OfficeMax executives did not present at the Goldman Sachs meeting, the company's recent improvements are an interesting story. OfficeMax reported a 3.4% same store sales increase during its second quarter ended July 27 and, more recently, announced it has bucked industry trends during the back-to-school season, reporting a mid-single-digit same store sales increase during the first six weeks of the quarter.

OfficeMax chairman and ceo Michael Feuer said, "The company was particularly pleased with this meaningful sales increase in light of the very difficult economic environment during the back-to-school period, which appears to have caused a number of other retailers to perform below expectations."

Although OfficeMax reported a $33.4 million loss during its second quarter, the company's profitability is contingent on increasing its top- line growth and better supply chain management. Both areas are expected to benefit from the recent addition of three new distribution centers that allow the company to transition away from the direct store delivery model it relied upon to replenish stores.