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Staples sees recession, wields knife

As economy wavers, stores trim costs wherever they can

Email|Print| Text size + By Jenn Abelson
Globe Staff / February 10, 2008

From the looks of things at Staples, the recession is upon us.

Customers are visiting stores less frequently and buying fewer items at the office supply chain's 1,430 shops. In recent months, businesses have cut back delivery orders, especially for high-priced merchandise like office furniture and computers. And last summer and fall, Staples Inc. saw sales drop for two straight quarters at stores open at least a year for the first time since 2000.

So, the Framingham retailer is trimming costs everywhere it can, reducing advertising, delaying new hires and renovations, curtailing employee travel, and saving gas with devices that limit the maximum speed of its delivery trucks.

Staples's aggressive moves to rein in expenses exemplify the tactics major retailers have adopted as the US economy teeters, amid a prolonged housing slump, tight credit markets, meltdowns at financial institutions, and Wall Street's pounding on retail stock prices. On Wednesday, Macy's Inc. announced plans to slash 2,300 jobs and consolidate its divisions to lower expenses by $100 million after reporting weaker than expected sales for January. Later that day, Talbots Inc., the Hingham apparel chain, said it would shutter 100 stores, pare down inventory, and eliminate national print and television advertising.

Industry analysts say merchants such as Staples, which has enjoyed quarterly profits for more than six years, have to make cost-cutting decisions now to cope with the deepening economic turmoil. In January, business activity unexpectedly shrunk in the service sector, which includes everything from retail to technology, and accounts for about 85 percent of payroll employment in the United States. At the same time, economic confidence among chief financial officers at US companies plunged more than 10 percent in the fourth quarter to its lowest level in three years, according to a report released last week by Financial Executives International. The increasing anxiety followed government figures showing that the nation's employers eliminated 17,000 jobs last month.

Although economists are still debating whether the United States is in a recession, most merchants say they are seeing signs of a slowdown in consumer spending.

"Retailers are feeling the pressure, and most feel as though we are already in a recession," said Madison Riley, a retail analyst with consultancy Kurt Salmon Associates. "Merchants are focusing on product improvement, operations improvement, cost cutting, and strict inventory management."

These days, everything Staples is doing is getting a second and third look by John Mahoney, the company's chief financial officer. He has scoured the budget for savings after it became clear last fall that the company's revenue growth would fall below the double-digit growth Staples had projected. The North American retail division, in particular, has suffered from slow customer traffic. Sales at stores open at least a year dropped 2 percent in the second quarter and 3 percent in the third quarter, which ended in November, reflecting lower sales in business machines, furniture, and computers.

For 2007, the Framingham headquarters created fewer new jobs - 150 instead of the 200 initially planned. Staples is approaching 2008 with even more caution, holding off most of its new corporate hires until the second half of the year. In stores across the country, Staples also is reducing staff to adjust to slower customer traffic.

Additionally, executives have sliced the capital improvements budget by 10 percent - about $50 million - postponing store renovations and some technology projects. And Staples also has trimmed millions from its advertising and marketing budget, reducing television commercials and the number of mass circulars it sends to customers across the country.

On the road, Staples has equipped trucks with new devices that limit their maximum speed to 55 miles per hour for an estimated savings of $1.7 million. And rather than institute a fuel surcharge for business deliveries as the price of oil has soared, the chain worked on getting clients to order more efficiently - placing bigger, less frequent orders - to offset about 80 percent of the cost of fuel increases.

"Our customers and small businesses are certainly behaving as if we're in a recession," Mahoney said. "The decisions we make now are how much to press our advantage versus how much to back off to protect the bottom line."

In the stores, Staples is scaling back the number of new lines it puts on the shelves. Most shops now carry about 35 items from its "M" brand of stationery, which features such merchandise as a $20 black leather journal with gilded pages. In a robust economy, Mahoney said the chain would typically carry about 150 items from the M line.

And finance executives are closely scrutinizing employee expenses - even the public relations team is being asked to use second-day mail instead of the more expensive overnight delivery. Staples workers will also feel the cuts: Bonuses will be about half of what they were in 2006 for almost everyone, from store managers to corporate executives.

But retail analysts caution that merchants like Staples have to do more than just cut expenses to survive tough economic times. They say retailers have to continue to spend on innovation and future growth.

"Merchants can stay lean on inventory, but they can't miss out on opportunities. They should be thinking right now how they will get consumers to spend their $600 rebate checks from the government at their stores versus the competitors," said Marshal Cohen, chief retail analyst at NPD Group, a market research firm in Port Washington, N.Y. "They can reach out to consumers and educate them on what the products can do to help them through tough times."

Staples is doing just that. The merchant plans to offer deals to customers timed for when the rebates are likely to be distributed in May. And Staples is spending money in areas where it expects to grow, even in a down market.

For instance, the company is continuing to expand its sales force between 5 and 10 percent for its North American division that delivers supplies to offices. The delivery business accounts for one-third of Staples's sales and is its fastest-growing division. Staples wants to continue to add customers and take market share from rivals Office Depot, OfficeMax, and Corporate Express.

Some analysts say Staples is better positioned than other retailers to ride out a recession because it can offset weak store sales with strong revenues from its copy and print centers and core office supplies with its delivery business. After all, even when times are tough, companies still need pens and paper. Moreover, Staples has proven adept at reining in expenses and being smart with promotional dollars, said Michael Baker, a retail analyst with Deutsche Bank Securities.

The cost-cutting moves by Staples have been less drastic than cutbacks by other big merchants. Charming Shoppes Inc., which runs the Lane Bryant and Fashion Bug clothing chains, said on Tuesday it would shutter 150 stores, eliminate 200 jobs, including 13 percent of management, and end its new Petite Sophisticate chain. And Home Depot Inc. announced plans to slash 500 jobs, or about 10 percent of the staff at its Atlanta headquarters by April.

"You can get away doing things not perfectly when you have robust revenue growth," Mahoney said. "But when you're having a bad time, it's necessary to take a hard look at everything."

Jenn Abelson can be reached at abelson@globe.com.


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