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15 Sep 08

We have switched all new content to the new Proficiency Post site: including Latest News, Frost Bites, the BIG Issues, GoEco, Proficiency Profiles and FAME Index. Proficiency Post now has faster access… quicker search of past articles… easier downloads of individual articles for print purposes, and generally speaking a more enjoyable and entertaining read.

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ODgate Scandal news

Georgia revisited

Where is ATKearney now? Dealers confidence renewed by NC audit

15 Sep 08

The dealers in Georgia fighting to oust Office Depot from supplying the State of Georgia departments, including local government, schools and universities have had a roller coaster ride over past year. Events in the State of North Carolina contract and the comprehensive and scathing report from the savvy state auditor Leslie Merritt have inspired them to revisit the Georgia contract purchasing team again.

In January, Rick Marlette from GOPD reported a full analysis of 2007's state spend of $33m. He highlighted $1.2m in overcharges, a full 3.6% of purchases. Depot's Business Solutions Division chief Steve Schmidt , immediately involved lawyers to defend its position. Can you imagine any other OP supplier involving lawyers to win an argument with a customer? It must have been a first?

Georgia were being advised by the respected procurement  consultants ATKearney at the time, for a fee reported as $12m over 3 years. $4m a year to supervise more effective purchasing controls is a huge amount of money to be paid and miss overcharges of $1.2m. The mystery is where are they now? Rumour has it they have been fired...obviously pushed out of a side-door?

The state administrators were obviously not happy to find that had overpaid $1.2m especially as they realised that Depot's 'bogus' systems were geared to overcharge; inflate list prices on private label products; discontinue and substitute higher priced items regularly and at random; and crookedly sell-in that discounts from web based pricing were more beneficial to users than list based prices.

Rightly, they moved to debar Depot from the State of Georgia contract for a period of 2 years. They succeeded at first, but cleverclogs Schmidt and his top team of lawyers protested and had the decision overturned on a technicality. Justice was not done, but in some kind of deal, Depot agreed to withdraw their bid for 2009 only. This was not before Depot alerted their cohorts in the US Communities who opened up supply lines into the universities and schools.

The problem in Georgia, It seems, is they are not used to vendors violating contracts like Depot. They have never debarred a supplier before in their long history. Still hitting Depot for $35m in 2009 is a good start.

The NC result, where Merritt's report summed up concisely how dirty Depot are with their systematic violations of supply contracts, has inspired new life into the movers and shakers in the georgia dealer community. Chip Jones (pic above) at Minton Jones, Mike Shah at Cajun and Juanita Strickland (pic right) at Malone Office will be renewing efforts to win their share of the Georgia contract.

The NC result, the refund of $2.5m in California…itself an admission of guilt, the criminal investigations and the SEC inquiry are just more nails in Depot's coffin. That is before the BIG one, the widely suspected conspiracy and fraud occurring in Depot's $700m US Communities contract.

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ODgate Scandal – Time for a Review

Office Depot's new strategy in action:

Faking Care of Business

15 Sep 08

It has been a very bad couple of weeks for Office Depot... a good one for anyone interested in the defeat of their fraudulent practices. Firstly, refunding the State of California (CA) $2.5m after being caught red handed for overcharging and supplying $14M off-contract and unauthorised high ticket items. Secondly, violating the State of North Carolina (NC) supplies contract by overcharging at the rate of 10% or $300,000 on a $2.7m contract sample. 

Read the full review of the frequent fraudster's behaviour in the BIG Issues.

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ODgate scandal Latest: US Press review
Dirty Depot
face criminal
investigation

Whistleblower Sherwin to assist SEC investigators

12 Sep 08
Here are the latest local press reports re Depot's latest example of frequent fraud infecting any large customer it deals with. We will do a full investigative review of the NC audit report over the weekend in the BIG Issues column.
Palm Beach Post
By ALLISON ROSS, One day after North Carolina auditors concluded Office Depot Inc. overcharged the state, its Department of Administration has asked the State Bureau of Investigation and the attorney general to look into pricing problems and help recoup state money.

All three North Carolina state agencies declined comment, saying only that no criminal investigation is under way. Office Depot is still reviewing the audit, said a spokesman for the Delray Beach-based office supply retailer.

In a report released Wednesday, North Carolina's state auditor concluded that Office Depot overcharged the state roughly $294,413 for office supplies between July and December 2007.

The Department of Administration, which handles contracts with the state, first notified Office Depot in March 2008 "demanding repayment of overcharges," according to the department.

Spokeswoman Jill Lucas said Depot acknowledged some overcharges. To date, the retailer has credited the state $208,233, she said.

However, Office Depot disputes the total amount owed, Lucas said. The administration department contacted the attorney general's office to help secure full repayment, she said, and "decided to seek SBI involvement based on assertions about pricing described in the auditor's report."

Among the key findings:

• State agencies purchased items through Office Depot that could have been purchased at a much greater discount from other state vendors. For example, standard alkaline batteries cost state agencies 411 percent more when ordered through Office Depot than another state-approved vendor.
•  Office Depot inflated retail prices on certain items so that they could offer a higher percentage discount to win the state contract.
• Office Depot added 24,284 unauthorized items to North Carolina's online purchasing system at lesser discounts or no discounts at all.
• Finally, the company sometimes substituted more expensive private-brand merchandise for the merchandise identified in its winning contract bid.

Office Depot's contract with North Carolina expires Dec. 7. However, Lucas said the state will rebid the contract within the next few weeks and plans to have a new contract in place before the current one expires.

Raleigh Associated Press/Charlotte Observer
Administration Secretary Britt Cobb said he has told the division to draft plans to deal with the problems cited in the audit and asked the State Bureau of Investigation to review whether Office Depot's pricing practices merit a criminal investigation.

Whistleblower action
Ex-Office Depot employee and whisle-blower David Sherwin (pic above) has confirmed that he has responded to a request from North Carolina officials for information concerning Office Depot over charging schemes on government contracts. Additionally, Sherwin confirmed that he has been interviewed by investigators from the Securities and Exchange Commission concerning Office Depot, but did not comment further.

Read Frost Bites comment on the latest example of frequent fraud from Office Depot over the weekend in the BIG Issues column

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Depot deceit damned

1. Depot inflated retail prices on 'Office Depot brand' items so that they could offer a higher discount to win the bid. Private individuals could pay less for merchandise purchased directly from Depot than state agencies paid through the P&C contract.
2. Depot added 24,284 unauthorized items to the state's Web purchasing system at lesser discounts or no discounts at all.
3. State agencies purchased items through Office Depot that could have been purchased at a much greater discount from other contracts and vendors. For example, standard alkaline batteries cost state agencies 411% more from Office Depot than purchasing like items through Batteries Plus, the state contract-holder.
4. Office Depot changed and reused style numbers, often substituting private brand merchandise for branded merchandise covered in the bid, causing the state to pay more than planned.

"The bottom line is that P&C has the responsibility to protect North Carolina taxpayers through effective monitoring of identified problem areas with the Office Depot contract. P&C dropped the ball, and the taxpayers picked-up the bill," Merritt wrote.

Office Depot spokesman Jason Shockley said the company is reviewing the audit but declined to comment on the findings.

Last year, the auditor criticized the division for inadequately monitoring its office supply vendors, including Office Depot. The auditor's May 2007 report said officials who oversee purchases were not taking permanent corrective action when they found pricing errors.

In a letter released with Wednesday's critical report, state purchasing officer James Staton said the division is working to finish implementing all of the auditor's recommendations to prevent such overcharging in the future. Staton also said the division is looking into taking bids for a new contract and ending the current one.

But Staton also said problems with an online "punch-out" catalog used to order items for the state was at the root of some of the auditor's findings and said the division already was aware of some of the pricing problems.

"The Auditor's Office lack of a complete understanding of the office supplies contract and its workings has led to several statements that are misleading," Staton wrote.

Staton also said that Office Depot is not trying to recoup $500,000 in products it undercharged for earlier.

Editor's Comment
We just arrived in Atlanta today to this news. We were expecting it, but the tone of the auditor is scathing of Depot. We'll update you with the full analysis later today. Here is our first take:

The overcharges  reported of $294,000 were based on a small sample of transactions and hardly rates on the Richter scale. Jason Shockley, unfortunately named for a Depot PR guy, almost brushed it off as though this would go away. If we add it all up, including what we are investigating in the $700m US Communities contract, we could be talking about an amount of $25m in annual overcharging . Yet Wall St. doesn't register these deep, deep discrepancies in a company riddled with fraudulent practices.

We understand that state and local government business is $1.2Bn in annual sales for Depot. If we take a systematic minimum of 1% in overcharging that is $12m. Our information puts the overcharges at least at 2% or $24m+ in the current year. Where is the contingent liability charge in the Depot's accounts?

What continues to amaze us, is the behaviour of Steve Schmidt, the president of the Business Solutions Division. He was only appointed a year ago after the Allied takeover debacle and the vanquishing of the Viking brand. He was immediately hit with overcharging allegations in NC, Georgia and California. Instead of stating that Depot would investigate thoroughly via an independent audit, he cosied up with ATKearney the procurement consultants and we feel, the state purchasing teams to defend and counter-attack using lawyers.

Schmidt's behaviour was that of a guilty man stricken with fear and starting to get aggressive with accusers. Now Schmidt's in too deep defending the indefensible and throwing around 'honest' propaganda that "Depot will be vindicated…you see"!

If you read the reaction of the California state CPO Jim Butler to their recent audit, and NC's James Staton, they both appear to defend Depot's extraordinarly dodgy and deceitful behaviour. Do they fear the administration hassle of moving from one single crooked supplier to a bunch of honest guys? Even the LA County CPO was quick to appoint auditors to check Depot's behaviour in California and no doubt will report a clean bill of health shortly. How independent are these audits?

The bold cry everytime Depot is accused of overcharging the state is that they have saved the states $M's. There must be  huge doubts about the credibility of this claims. Are they calculating 30%+ discount savings against inflated list prices on a small core value of products amounting to less than 20% of the contract?

Moreover, we don't think Odland, Schmidt, Shockley and Co have a clue about what's going on. As has been confirmed, Depot's pricing systems are universal, designed to complicate, confuse and con customers and users. We repeat findings to date are the tip of the iceberg.

How can Wall St., the shareholders, and the executive team continue to tolerate the Depot leadership team's denials and defence of declining sales and profits, widespread overcharging and wrongdoing  and a share price which effectively rates Depot as a 'junk stock'.

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Inc. Magazine honours 500 Fastest-Growing Private Companies

"If you want to find out which companies are going to change the world, look at the Inc. 500," said Inc. editor Jane Berentson.  "These are the most innovative, dynamic, fast-growing companies in the nation – the ones coming up with solutions to some of our knottiest problems, creating systems that let us conduct business faster and easier, and manufacturing products we soon discover we can't live without. The Inc. 500 list is Inc. magazine's tribute to American business ingenuity and ambition."

Complete Office is headquartered in Seattle, Washington with recently expanded sales and distribution centers throughout Southern California and Wisconsin.  Founded in 2003, the company's roots were first established in Seattle by office products industry veterans, Rick Israel, Ted Nark (pic below) and David Patterson.  Over the last five years the company has grown substantially through organic and acquisition efforts.

Ron Beam joined as a co-owner heading up the Wisconsin office of Complete Office in 2006.   Acquisitions of Grove Office Supply and Del Mar Office Products both from San Diego, offered the foundation for Complete Office of California.  Ted Walter, President of Complete Office of California joined in early 2008 also as a co-owner with Rick Israel and Ted Nark.

Complete Office is a customer service focused distribution business that provides office products, paper, office furniture & design, technology products, breakroom supplies, print and ad specialty items to businesses throughout the United States. 

Read more about Complete Office's success in the Gazelles outpace dinosaurs article on 10 Sep 08. More 'Inc.5000' leading office supply companies will be featured too including MyOfficeProducts, BuyOnlineNow, Garveys, and OfficePro.

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Big boost for
US economy
Fannie and Freddie intervention
assures US economic recovery

In terms of scale, there can be no question. The rescue of Fannie Mae and Freddie Mac, America's two dominant mortgage providers, announced yesterday by Henry Paulson, the US Treasury Secretary, is bigger by at least a factor of ten than any previous government intervention undertaken in any financial market anywhere in the world.

In terms of size, these two government-sponsored enterprises (GSEs), whose legal status and ownership has always drifted ambiguously between the private and public sectors, have $5.2 trillion (£2,940 billion) of debt between them, making them bigger than the top ten private banks put together. Indeed, from the standpoint of the world's financial markets, the GSEs are comparable in significance to the US Treasury itself, which has $5.49 trillion of publicly held debt.

Unqualified good news for US economy
And on this point the answer is clear-cut. Last night's announcement was unqualified good news for the US economy. It will eliminate a large source of financial uncertainty, reduce US mortgage rates, boost the availability of housing finance and strengthen the dollar by making absolutely explicit government guarantees on GSE debt.

 "This commitment," in the words of Paulson, "will ensure that the conserved entities have the ability to fulfil their financial obligations" regardless of whatever losses or writedowns they might suffer from the housing crisis.

In exchange for this support, existing shareholders in Fannie and Freddie will immediately hand to the federal government a 79.9% stake in their companies and will suffer further dilution if the Treasury ever has to make good on its guarantees.

Even more importantly for the US housing market, yesterday's package included an announcement that Fannie and Freddie will "moderately increase" lending. The Treasury itself will start to buy mortgage-backed securities, increasing the availability and affordability of mortgage finance.

Reading this announcement, British housebuilders and mortgage lenders may be turning green with envy. Before they get too jealous, however, British bankers should note the pounds of flesh that Paulson extracted from Fannie and Freddie shareholders in exchange for this support.

All this really does add up to the biggest government intervention in any market economy since the Second World War. If this programme is not sufficient to put the US economy and financial system back on its feet, it is hard to imagine anything else that could.

Anyone betting against this package is, therefore, betting that the US economy is doomed to irreversible and inevitable decline. Such a bet has always been wrong in the past and is likely to be wrong again this time. So Sunday's probably was the Big One - and a US economic recovery is now assured.
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FAME Index

Where are
the benefits?

International Paper Colorlok trade ad an oasis in a desert of mediocrity. Manufacturers' user ad campaigns carry stronger impact.

5 Sep 08

We reviewed 27 trade ads in September's edition of OPI and only 2 in our view made a strong impression. Both ads were from International Paper featuring the Colorlok technology papers. They impacted straight away with bold and vivid colours and hammered home the faster drying qualities, leaving readers in no doubt about the benefits. What we admire most is the message is user benefit oriented which is what the trade needs anyway. If it resonates with users it will resonate and sell through the resellers. We rated IP's ad 7.5/10, not higher as it lacked a little engaging personality. Click on Fame Index to see the full review of trade ads.

If we look at the other 25, there is not a lot of credit we can give. Some are too gash and loud…some are too posey…some too anaemic…and some like the HP 'success suits you' fail to engage at all. Fellowes commitment to marketing is admirable…strong user campaigns in airports, business magazines with their '100% jam-proof' shredders and laminators ads are strong but lack appeal to women. They are too macho and carry little appeal to women, ultimately the primary buyers of security type products in the office.

The OPI 'Green Thinking' publication was nicely put together, but why do most ads have to have prominent green coloured images of frogs, trees, leaves, parrots, grass and earth symbols stuck all over them? We get the message, but surely it is the sustainable effect on people that needs to be rammed home more. The office productivity benefits should be emphasised more, because that effectively cuts cost, waste and carbon footprint.

We liked too, the Really Useful Box ad message about 'Black is the new Green' but again it lacked personality which would provide immediate impact, and fell into the same old 'green grass' trap. Similarly, 3M 'focused on sustainability' ad message and imagery was a nice treatment, but wasted the opportunity push the Post-It brand with personality.

If we turn to the current user ad campaigns these are refreshing treatments. HP has chosen the #1 women's weekly glossy mag to feature its sleek Liquid Chrome laptop. Nice message too 'Style isn't always hanging on a rail'. Obviously, the terrific Sony ads over the past 2 years have influenced HP and Dell with their ad treatments.

Sanford's investment in David Beckham  to promote the Sharpie brand of markers has made a positive impact in US and UK. Stabilo has launched a nice TV campaign aimed at the back-to-school market with the 'move easy' refillable roller ball pen (see pic right). Promoted as the world's first left handed and right handed pen we can see this being successful in the wider market too.

Konica Minolta the image and printing giant has launched a viral marketing campaign on a microsite called Masters of Colour. The site features their annual graphic design competition 'Get Yourself Noticed', whereby Konica Minolta are giving graphic designers the chance to change their future and become the rising star of graphic design in the UK. What is unique about this competition is that all entries will be seen by the top people in the industry who are media partners and will be on the judging panel. This includes Marketing Week, Computer Arts & Computer Arts projects. We know that HP tried this interactive and innovative approach to engage with users on digital cameras a couple of years back and we can see this approach becoming a powerful medium.

Finally, Staples have partnered with Toshiba in a UK TV campaign to promote the their latest L300 laptop. After the Toshiba ad, Staples concludes with a snappy close and their powerful 'that was easy' punch line. We feel this is exactly the way to go for original brand makers to partner with resellers in all medium.

Practically, in everyday terms original brand makers should market brand campaigns directly to Lucy, the typical user chooser using personalised emarketing campaigns in cooperation with the local resellers to maximum effect.

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Consumer Electronics giant DSGi -
Half Year results

PC World plummets
Pessimistic chief sees no recovery until 2010. "Switched off" retailer fast becoming a Best Buy option

John Browett (pic right), who joined nine months ago, said that demand had "switched off" and there was little sign of a revival until 2010. Like-for-like sales across the group fell 7% in the 16 weeks to August 23, while margins were 0.75% points/sales lower. DSG expects to make a loss of more than £10m in the first half of its financial year, compared with a £52.4m pre-tax profit in the same period last year.

The trading statement revealed that like-for-like sales at Currys had fallen by 7% in Q1 of DSG's financial year. Sales at PC World tumbled 12%  below the same period a year ago, when the chain cut prices to sell off laptops. DSG added that, despite signs of progress in Italy, sales in Southern Europe had fallen by 12%

Browett said that demand for white goods, such as refrigerators, had slumped by almost a quarter over the summer amid the gloom about the housing market. "Clearly, the economic backdrop is challenging. What I'm seeing is a lack of confidence, a crisis of confidence, really, and, more than energy bills, I think it's down to fears about increases in unemployment," he said. "It's very difficult to predict how Christmas will be, but I expect it will be very tough.

"We are planning very cautiously. I've been very cautious on the economy for a while. I didn't think we'd see a recovery until 2010 and I still don't."

Shares rallied 4p to 57p, an increase of more than 8 per cent, after news that DSG expects to generate a further £25 million of cost savings from its recovery programme, partly through hiring fewer staff in the run-up to Christmas. However, analysts said that they were likely to cut full-year profit forecasts for the group in the coming days.

Phil Dorgan, retail analyst at Panmure Gordon, said: "The business review at DSG has got off to a good start in terms of cost-savings delivery, but we think the hard yards in terms of successful format change and turning round sales lies ahead."

Electrical retailers such as DSG have been among those on the high street hit hardest by the fallout from the credit crunch as fierce competition from supermarkets and lower demand hit profit margins.

Browett, a former Tesco executive, was forced to issue a profit warning within days of taking over in December last year. He introduced a programme to "transform the DNA" of the business in May, basing his plans on improving stores and customer service, improving its website and cutting costs.

Browett insisted yesterday that DSG was making headway towards achieving these goals. The group's biggest Currys Digital outlet, a megastore near Birmingham, would open in the coming weeks offering 200 satellite-navigation systems and 250 televisions. "You will not need to go anywhere else to buy electricals," Browett said.

Editor's comment
We nicknamed the new CEO "Browbeater Browett" after he made his critical and noisy entrance into the ex-Dixons powerhouse less than a year ago. Obviously it must be in his DNA or just an acquired arrogance having worked at the super successful Tesco (UK's leading supermarket with 30%+ market share…the UK's equivalent to Wal-Mart).

It is never a good idea to trash the efforts of previous management or employees, no matter how well deserved. His much publicised long winded '5 Point Plan' to "transform the DNA" of DSGi could have been copied from any 1980's management text book.

Cutting costs may be popular with the City, but what the employees and customers need is inspiration not pessimistic utterances about the economy not recovering until 2010. Anymore negative utterances from Browett and DSG really will become the 'Downward Spiral Group'

We still feel the BIG issue, which he has not mentioned is the Dixons v Curry's brand dilemma. He has decided to replace washing machines with laptops and gaming at Curry's Digital further confusing market perceptions.

If 40% of Curry's stores are to be closed what value has the Curry's brand anymore? Dixon's was perceived as the consumer technology brand on the high street and the home/internet. Hiding it from the high street and making it internet only was a crazy decision. Why try and change consumer perceptions, Dixons has the respect…Currys does not. Change the high street, out-of-town shopping and internet brand to Dixons.

We agree with the PC World focus on value added services to smaller businesses. However being down 12% when brand leaders HP and Dell report booming sales of laptops, indicates a store marketing problem not a crisis of confidence with consumers.

We look forward to Browbeater Browett's reaction when Best Buy snaps up DSGi in the next 12 months and merges it in with Car Phone Warehouse. The Currys store plans look like a copycat of the impressive retail experience at Best Buy stores in the US. Browett has much to learn from their CEO Brad Anderson (pic left) who publishes a short and inspiring webcast on their site. It is well worth a listen. It is inspirational to employees and customers and urges employees to "seize the day" and "help customers enter the digital age".

Now that's leadership…something for DSGi to look forward to?

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Market share gains from improving rates of customer retention, satisfaction and acquistion.

International sales grew 6% in local currency to $700m. Comparable store sales in Europe were impacted by weakness in customer traffic and average order size, decreasing 7%. Total sales Including $318 million of Corporate Express sales for July 2008 reached $1Bn.

CEO's Review

"I am proud of our team for continuing to manage our business carefully during challenging economic times," said Ron Sargent, Staples' CEO. "We are optimistic about the future for each of our three businesses. We're excited about the opportunity to drive immediate shareholder value by integrating theCXP acquisition into our NAD business, we're working hard to improve store productivity in NAR, and we're taking the right steps to build on our foundation for long term growth in International markets."

Q2 Highlights

Total Company

• Achieved sales of $5.1Bn, including $673m of CXP sales for July 2008.
• Operating income rate declined 1.7%/points to 4.84%
• Excluding the impact of CXP, operating income rate declined 1.27%/points to 5.27%/sales, primarily reflecting margin pressure in NAR
• Opened 35 stores, closed five stores, and acquired 65 stores worldwide as a result of the CXP acquisition, ending Q2 operating 2,171 stores

North American Retail

• Achieved sales of $2.1Bn.
• Reported a 2.13%/sales decline in operating income rate to 5.29%, primarily reflecting deleverage in rent and labor expense.
• Achieved all-time high customer satisfaction scores.
• Opened 28 stores, closed one store, and acquired two Canadian stores as a result of the CXP acquisition, ending the second quarter with 1,802 stores
• Reduced average inventory per store by 14%.

North American Delivery

• Achieved sales of $2.0BN, including $355m of CXP sales for July 2008.
• Reported a 1.835/sales decline in operating income rate to 8.83%/sales
• Excluding CXP, reported an 0.11%/sales in operating income rate to 10.55%/sales.
• Contract and Staples Business Delivery call centers recognized by J.D. Power for customer service excellence.

International

• Achieved second quarter sales of $1.0Bn, including $318m of CXP sales for July 2008.
• Reported a 0.73%/sales improvement in operating income rate to 1.46%
• Excluding CXP, reported a 1% decline in operating income rate to 0.72%/sales
• Opened three stores in Portugal, and acquired 63 European stores as a result of the CXP acquisition, ending the second quarter with 337 stores in Europe and 31 stores in China.
• Sustained top line momentum in China, with sales nearly doubling versus the prior year's second quarter.

Outlook

As a result of the Corporate Express acquisition, the company anticipates total annual synergies to build, over a three year period, to a range of $200 to $300m. The company's estimated incremental interest expense is more than $100 million in the back half of 2008. Staples anticipates integration and restructuring expense to range from $30-$40 million in the back half of 2008, and to range from $50-$70 million in 2009.

Dell pays price of market share gains

Michael Dell pledges new and better designs

 
3 Sep 08

Has Dell's turnaround plan veered off course during the summer?

The PC maker reported that its Q2'08 profits slumped 17% on aggressive price cuts, and the company warned of up-and-down profit margins for the next several quarters. The disappointing results came during a strong earnings season for other tech firms, and investors pushed down Dell's share price 10% in extended trading.

CEO Michael Dell called the tepid earnings "self-inflicted" during a conference call with analysts and vowed to improve the situation. "Whenever you're restarting growth, it's an imprecise process," said Dell, who returned as CEO at the beginning of 2007 to try to reverse nearly two years of declining market share and slower growth. "There were certainly parts of our business where we were too aggressive."

Now investors have to wonder whether a four-month runup in the price of Dell's shares may be coming to an end. Since May 1, Dell's share price had shot up 33%. They closed on Aug. 28, before the earnings announcement, at 25.21, or 1.6%. That compares with a flat share performances  for rivals Hewlett-Packard's  and Apple's  share price.

Competitive retail market
Since returning, Michael Dell has pushed for better product designs and expanded overseas operations in an attempt to win back customers for consumer notebook and desktop PCs. Nonetheless, Dell is still slugging it out with competitors on price. That's draining operating profit margins, which fell to 5.3% on an adjusted basis during the quarter that ended Aug. 1, compared with 6.1% a year ago, according to Shaw Wu, a senior analyst at American Technology Research.

"Price is really their only effective weapon," says Wu, who has a neutral rating on Dell shares. "Their products aren't that differentiated. They can paint their products in different colors or sell them in different geographies, but a lot of the other players do the same thing."

The second-quarter earnings fell short of Wall Street's expectations. Dell's net income fell to $616m, compared with earnings a year earlier of $746m. Wall Street analysts had expected Dell revenues of $16Bn. Sales actually did better than expected, rising 11% to $16.4Bn, from $14.8Bn a year ago.

Margins were squeezed by promotional spending that was needed to compete for space on retail shelves. Store sales is a relatively new area for Dell, which expanded rapidly in the 1990s and earlier this decade by selling directly to businesses and customizing computers to order. But industry growth is now coming from the consumer market. Dell, which lost its position as the No. 1 PC supplier to HP, has had to adapt. Dell's consumer business grew 28% in the quarter, to $2.7Bn; consumer sales now account for 17% of its overall revenues.

New notebooks for business.
Aggressive price cuts on notebook computers in Europe contributed to the decline in profits. "Conservative" IT spending by U.S. companies has now spread to Europe and parts of Asia, said Dell Chief Financial Officer Brian Gladden, who arrived in May from General Electric. Investors should expect profit margins to be "nonlinear" for the next several quarters, he added.

Exacerbating the pressure on Dell, the results come amid a generally strong earnings season for computer makers. HP on Aug. 19 reported quarterly profits that beat analysts' expectations, and issued an upbeat next quarter forecast, boosting its stock. On July 22, Apple beat earnings and sales expectations, but forecast thinner profit margins for the rest of the year and into 2009.

It wasn't all bad news for Dell. The company brought operating expenses down to 12.2% of revenues during the second quarter, from 13.9% a year ago. That was part of a cost-cutting goal of eliminating $3 billion in spending each year by fiscal 2009. Dell shed 1,500 jobs during the quarter and has cut its workforce by 8,500 since the beginning of fiscal 2007.

Dell is also expanding its product line with more machines designed to serve niche market segments. "They're trying to go after finer market opportunities in hopes of wringing out more market share," says Richard Shim, a research manager at IDC. In mid-August, Dell released a lineup of new notebooks for business customers, and its CEO said a fresh batch of business desktops is on the way.

The company is outgrowing the overall market. Dell's worldwide PC shipments rose 21.4% during the April-through-June period, compared with 15.3% growth industrywide, according to IDC. Dell now holds a 16.4% share of the worldwide PC market, compared with 18.9% for HP.

But Wall Street is starting to wonder if market share gains are coming at the expense of profits. Its competitors' must-have products and services—Apple's Macs, iPods, and iPhones; HP's printers; and IBM's software and consulting services—make them less susceptible to the vicissitudes of retail price wars, says Wu. _____________________________________

DS Smith interim management statement

Spicers stalled?
IT supplies sales drive fails to lift gloom

3 Sep 08

DS Smith's lack of enthusiasm for OP wholesaling shone through brilliantly in the following interim statement in preparation for today's AGM.

"Against a backdrop of slowing demand for office products, Spicers has experienced a decline in volumes of traditional office products. Sales of electronic office supplies have grown strongly as Spicers has increased its participation in this important, although lower margin, sector of the market. We maintain our drive to rebuild profits in the UK and continue the progress of our continental European businesses."

They describe the EOS products as though they were an optional extra…an area to dip in and out of, to suit the management's mood. We know this was a priority for CEO Rob Vale (pic above) a couple of years back to reinforce the single source service for dealers and their customers.

EOS or IT supplies represent 40% of the expanded basket of OP demand (inc. FM supplies too) and an important destination category for customers. But, EOS is not a sector of the market, it is just the largest driver of OP demand and not taking it seriously as before is not an option. All or nothing?

It seems the 'pure wholesale' advantage that Spicers held over Kingfield after their merger with ISA back in June 2007 has not been carried through with effect. To our knowledge only one large dealer, Martin Luck has switched its wholesale business to Spicers from Kingfield. Whereas, the defectors from Spicers wholesale service to Kingfield in the last year have been significant e.g. Anglo, Total Office and Fenn.

The drive to rebuild profits in the UK is a familiar, but empty goal. Surely the drive should be to win back major dealers' wholesale business and work with them to drive demand through to users.

We believe Spicers will not meet its full potential until it changes ownership to an understanding parent like US #1 United Stationers or US#2 SPRichards. Unless of course rumours are confirmed and VOW (ex-Kingfield) intercept?

.

____________________________

Doomsayer
Darling denied

Cheerless Chancellor crisis call
in UK economy…what crisis?

Edited extracts from Anatole Kaletsky, The Times economic correspondent

2 Sep 08
When Chancellor, Alistair Darling said that UK's economic conditions were "arguably the worst they have been for 60 years", the reaction from the media was either to compliment him for his  "frankness" or to gloat about the way he had "embarrassed" PM Gordon Brown.

This was understandable, because Darling is indeed an unusually straightforward politician, respected and liked by journalists and politicians across the political spectrum. On closer inspection, the Chancellor's reputation for frankness makes his political blunder worse, since it reveals a flaw more serious than deviousness: basic ignorance of economic facts and figures. This is a failing that the minister responsible for national finances can never live down.

Were there any interpretation of Darling's comments that tallied with either economic statistics or the realities of British life – or if the Treasury had rushed out a correction, explaining that he had been misquoted or hadn't meant what he said – this episode might have been forgotten as just another stumble by an accident-prone Government. But sadly for Darling, though luckily for the British economy, there is no way of massaging the facts and figures to make his statement even half-right.

The most obvious contrasts – today's 5% inflation and 5.4% unemployment may feel uncomfortable, but these are just tiny ripples compared with the tidal waves of economic hardship – the 27 % inflation and 12% unemployment – that hit Britain in the 1970s and 1980s.

A similar conclusion comes from almost any other economic indicator: gross domestic product, personal incomes, government finances, employment growth, repossessions. Only house prices are falling faster than ever before – because they were far higher when this downturn began.

And despite all the headlines about a credit crunch, financial conditions are also relatively benign. Homeowners and estate agents may complain about a "mortgage crisis", because banks charge over 6% for a mortgage and require a 10% deposit from first-time buyers, but in the 1970s and 1980s, mortgage rates repeatedly reached 15% and borrowers typically had to save up deposits of 25 per cent or more.

Social and political conditions are now incomparably better than they were 30 years ago. This can be attested by anyone who recalls the three-day weeks and winters of discontent, the petrol rationing and power cuts, the dole queues and miners' strikes, the credit squeezes and currency restrictions of those days. And other social indicators – child poverty, life expectancy, housing conditions, educational qualifications, pension levels, living standards relative to other countries – are almost all far better today than they were in the 1970s and 1980s, despite the understandable feeling that many of these conditions should be much better, considering the huge tax burdens successive governments have imposed.

What on earth, then, was Darling talking about when he described the present economic crisis as the worst since 1948? The Treasury lamely suggested over the weekend that the Chancellor was not really referring to Britain, but to the world economy as a whole. This "clarification", however, does not get Mr Darling off the hook. The US has not yet suffered a recession – much less the once in a lifetime depression predicted widely a few months ago – and only last Friday announced a stark upgrade in its GDP figures.

The European economy is slowing and it may well sink into a mild recession – but, this has not happened yet. Developing countries are still growing strongly and even the global banking system, despite all the hysteria, has so far suffered smaller losses in relation to its total capital than it did in the Third World debt crisis of the 1980s.

In short, it is literally impossible to tally Darling's comments with anything that has happened to the British and international economies so far. Could it be, however, that he meant to offer a forecast? Predictions are, by their nature, a matter of opinion, which means that Darling's comments, if they refer to the future, cannot be refuted by objective statistical evidence even though there is now no respectable economic model pointing to anything like the apocalyptic conditions Darling described.

Suppose, then, that the Treasury decides to spin his comments not as a description of what has already happened but as a prediction that Britain will suffer its worst economic crisis since 1948 in the year or two ahead. If this was what  Darling meant, will anybody believe any economic forecast he presents in his next Budget if this is less than catastrophic? And if Darling does present a catastrophic forecast in a preelection Budget, what will this do to Brown's chances of survival? These questions can yield only one answer: the next Budget will be presented by a new chancellor.

________________________________________

US retailer review
Back to
school boost
Positive expectations
for Wal-Mart and Best Buy

1 Sep 08

Despite a recent 22% ($32) drop in the price of oil to $113 per barrel since its July high, it remains a whopping 58% above the year-ago level and has cut into discretionary spending, most explicitly due to the average price of gas hovering at $3.81 per gallon, up 37% year-over-year. Higher energy costs have also led most consumer products companies to raise prices due to cost pressure on raw materials or distribution.

Although 2008 is working out to be a year of necessities, not frivolities, we believe there's a silver lining: Most back-to-school purchases are necessities. This year we expect to see more trading down and a focus on value as consumers come to terms with reduced spending power. The implications for holiday spending are not good, by our analysis, and in fact, we see domestic per capita spending declining during 2008's holiday season (November to January), offset in part by international shoppers at flagship locations boosting the aggregate spending.

Stockmarket analysts expect  strong consumer electronics demand to underpin a strong performance for consumer electronics kings Best Buy and resurgent giant  Wal-Mart.

Retail analysts and investors watch the BTS selling season closely to gauge consumers' willingness and ability to spend. The strength of the season's sales has historically been a good leading indicator for the biggest spending holidays, Christmas and Hanukkah, when approximately 25% of retail sales occur.

Approximately 75% of BTS/BTC spending occurs in the four weeks leading up to the first day of school, or during August, though advertising campaigns start as early as the Fourth of July and many high school and college students wait until school is under way before making apparel purchases (to determine the cool silhouette/denim wash/graphic tee).

With consumers looking to stretch their disposable income, we believe Wal-Mart is poised to take market share across its major product categories with its everyday low pricing strategy and strong convenience factor. Moreover, despite our estimate of cost inflation in food and general merchandise, Wal-Mart has strategically lagged competitors in passing along cost increases, allowing for greater value to the consumer.

Wal-Mart's new marketing slogan—"Save Money, Live Better"— should further enforce its low-priced image with consumers, in our opinion.

We believe Wal-Mart is well positioned to pick up a larger share of current customers' wallets while attracting new customers in the current economic environment. We see the company benefiting from a back-to-basics approach in apparel and increased branded product offerings in home and electronics.

Traffic trends to Wal-Mart turned positive this year as consumers opted for its low food and grocery prices (at least 15% below traditional food retailer competitors). Once in the store, customers tend to shop a wider variety of general merchandise categories to take advantage of the company's one-stop shopping convenience, to save on gas costs, and to benefit from Wal-Mart's value pricing.

Wal-Mart's Refocused Efforts
Wal-Mart is poised to gain market share in apparel in 2008, by our analysis. Average transaction growth is benefiting due in part to the company's refocused efforts on basics and away from its more fashion-forward offerings in late 2006. Having moved lower-priced (under $10) offerings back to aisle displays, we look for more consumers to be drawn into this category, reinvigorating sales.

In the home and electronics categories, Wal-Mart hopes to woo customers with an increased offering of national brands, such as Apple, Sony, Garmin and Dell in electronics and Better Homes & Gardens, Dyson, Oneida, and Canopy in the home category. Wal-Mart has addressed the shopping experience as well, with improved displays and better lighting, while technology initiatives have led to shorter wait times during checkout.

As the leading consumer-electronics retailer in the world, Best Buy stands to benefit, in our view, from increasing demand, including significant strength in notebook computers; timely rebate checks; solid execution and differentiation leading to market share gains; and an advertising campaign geared to capture incremental spending.

Notebook Computer Boost
Consumer electronics is one of the few areas in retail that has been growing rapidly this year. In late July, the Consumer Electronics Association (CEA) increased its 2008 forecast for industry revenues to growth in excess of 7% from an earlier projection of 6.1%. In addition, while average selling prices (ASPs) continue to decline (as is the norm in electronics), unit sales growth for all major products is expected to increase. The CEA projects that notebook computers, the predominant electronics purchase for college students, will post unit growth of 28% in 2008. Other product categories that we expect to be strong during the BTS/BTC season include mobile phones, MP3 players, and video-game equipment.

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Make roll-ups
real not random

Consolidators fewer
and more critical

31 Aug 08

In the US, MyOfficeProducts of Nashville, has amassed a $100m in sales from recent acquistions; and ex-CXP Australia chief Ted Nark's Complete Office in Seattle has reached $50m with similar moves.

In the UK, Winstonmead has been busy in the SouthEast/London area with a number of deals including Acorn based in Aylesford bringing aggregated sales to £20m ($40m).  This year, GB Office in Stoke has merged with Axworthys'  of Paignton to form a £16m ($32m) combo. More recently 3 members of the United dealer group have formed a new company consolidating 3 dealers sales (OneStop, HGS and Origin nee Boyd & Lloyd) under the United name with an £12m ($24m) sales aggregation..    

Of course, whilst the independent dealer community has been active, so too have the larger nationals. In addition to Staples/CXP, Oyez Straker (CEO Jeff Whiteway, pic right) have added another bunch including Dialstat and PADS to reach £210m ($420m); and office2office have added Accord and Access Plus to reach $205m ($410m) annual sales.

Not that this would demotivate a bunch of independent dealers whose sole intent was to create a roll-up quickly, be acquired by a rich big-box player, play out the buy out period, vamoosh and then return as an independent dealer within 5 years. As we all know, nobody decent leaves the intoxicating OP industry.

There is no doubt in this observer's mind that win-win situations can happen. The key is to make the roll-ups genuinely committed to organic growth and construct an integrated leadership team with a structure for talent to emerge and develop the succession plan.

If this is not evident then the rich consolidator will not be interested. In any case, rich consolidators are fewer than at any time for 10 years.

In the US at the moment, there is probably only one credible consolidator…Staples. And Staples will for at least 3 years be preoccupied with the integration of CXP. Office Depot and OfficeMax do not have the financial resources nor the capable management to even consider acquisitions until new management regimes are in place.

In the UK, apart from Staples, credible consolidators include Lyreco, Oyez Straker and office2office. All of these are savvy players and can distinguish a genuine roll-up from a hollow roll-up. They will be more choosy and critical.

These consolidators love and understand the business. They won't be fooled having witnessed the USOP and CXP debacles. The message to roll-up aspirants is: make it real.

To read the full story on the background, the flaws and how to get it right, click on Proficiency Index.

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Doomsayers denied again…
US GDP up 3.3%
 The Times leader headline:
'US GDP rise gives false recovery hope'

30 Aug 08

However, analysts cautioned that much of the GDP growth was driven by the weak dollar, which boosted exports by making America's goods and services cheaper for foreign buyers. The impact of more than $100 billion (£54.7 billion) worth of tax rebates, made by the US Government to its citizens, also helped to offset the impact of the US housing slump and high energy costs, analysts said.

The US will benefit less in the second half of the year from exports, as the economies of Europe and Japan slow and the dollar continues to gain value. In addition, as many of the tax rebates have been spent, the economy will not continue to benefit from the fiscal stimulus in the second half.

Lou Crandall, chief economist at Wrightson Icap, said: "The revised GDP figure is certainly not a bad thing, but it is an imprecise estimate of the true health of the economy. It is still the case that GDP could turn negative in the second half."

Brian Fabbri, chief US economist at BNP Paribas, added: "The GDP figure may not say it but this country is still in trouble. Corporate profits have fallen for four consecutive quarters, companies have fired 60,000 workers a month in the past seven months and the outlook for the economy is pretty grim."

Separately, the Labour Department released new figures showing that the number of initial unemployment benefit claims fell by 10,000 to 425,000 in the week ended August 23, marking its third successive weekly decline. (Even more good news! Ed.)

But the jobless figures were in line with expectations and did not reflect a significant change in the underlying economy, analysts said.

Editor's Comment
Doomsayers and sceptics were denied once again. Even when they get positive news on GDP growth and a strong 2.8% productivity improvement (see Latest News 26 Aug) in Q2, the critics try and undermine the facts with negative opinion. As one reader commented, this good news was hidden away in a sidebar column whereas all the doomsaying is headlined on The Times front pages.

They should give more space to the realists and reasoned analysts like their leading columnists Anatole Kaletsky and Irwin Seltzer. It will be interesting to get their perspective on the resilient economies of the US and UK next week.
____________________________________

ODgate scandal – Depot's double deceit

Office Depot
to repay $2.5M overcharges…again

California state contract audit exposes systematic cheating
…state plans to solicit new bids.

By Fredric N. Tulsky, San Jose Mercury News.( rtulsky@mercurynews.com)

29 Aug 08
Office Depot has agreed to repay the State of California $2.5 million for overpayments, state officials said Thursday, as they released a state audit concluding that state workers routinely failed to get the best value when buying office supplies the past two years.

The findings renewed concerns about a state contracting initiative that was supposed to save millions of dollars while steering taxpayer dollars to California small businesses. The initiative was the subject of a Mercury News investigation (following Rick Marlette's alert) earlier this year.

The audit concluded that state workers ordered $14 million in office supplies — nearly 25% of the total purchases — that were not subject to special pricing the state had negotiated. The audit further found that state officials had failed to monitor the purchasing to guard against overcharges.

"I understand things weren't perfect," said state purchasing director Jim Butler, in a telephone interview Thursday. Butler said he had tightened procedures in the purchases of supplies, and in reviewing the purchases, in the wake of the concerns. But, Butler said, he is pleased the audit confirmed that the contract — which has drawn criticism from many small-office-supply-business owners — has provided millions of dollars in savings through special pricing as the state bought $57m in office supplies over the past two years.

Assemblyman Ruskin not satisfied audit was comprehensive

Butler said the state is beginning the process of soliciting new bids for its office supply business, raising the possibility that Office Depot will lose the contract.

But state Assemblyman Ira Ruskin (pic below), D-Los Altos, said he was "not satisfied" with the report, noting that state officials had not bothered to review the spending until he had requested copies of the purchase orders earlier this year. "What is the total amount of overcharges? I'm not certain the audit came up with an answer."

The contract was awarded jointly to Office Depot and nine small businesses, which are responsible for taking orders and acting as sales representatives to agencies throughout the state.

Under the contract, state employees could get special prices on thousands of items Office Depot had agreed to supply.

In April, the Mercury News reported problems with the two primary aspects of the contracting initiative, when it came to office supplies: The newspaper documented tens of thousands of dollars in overcharges, and also reported concerns as to whether small businesses were truly benefiting. Most of the nine businesses had not listed themselves as primarily in the office supply business before entering into the partnership with Office Depot.

The audit found that the small-business partners of Office Depot "were performing the distinct work" called for in the contract, and said their role satisfied state law and policies. But Ruskin on Thursday said, "Even if the contract carried out the letter of the law" on the role of small businesses, "it is obvious it did not carry out the spirit."

He said he did not believe the audit fully answered questions he raised in legislative hearings this spring, and he said he would seek a meeting with state officials.

He said that the Web site and catalogs from which workers ordered were "so confusing that an average person, even a genius, would not be able to easily find" which items represented the best deal for the state. "It makes you ask why it was designed that way," he said.

Editor's comment
Caught red handed…again! Depot must hate California. Not only has the state's real estate crisis bombed their retail and mail order business, 3 years ago they were forced to repay superstore customers  $2.5m for overcharging, now they have agreed to repay another $2.5m for systematic overcharging. Get this…Depot has admitted to overcharging!!

Depot is just incapable of telling the truth, they are riddled with deceit and conspiracy. The chiefs of their cohorts US Communities have been travelling the US selling in the huge savings provided by Depot via the US Communities, and spreading 'price integrity' propaganda  to prospects

As Assemblyman Ruskin suggests above, we are confident that Depot has designed the complicated contracts to cause chaos and confusion. They then drive a coach and horses through the void in the form of massive overcharges.

When caught overcharging, they smile sweetly then hide behind this façade of saving the state $Millions by comparing list prices v actual prices. Local dealers can match these savings easily and make the inflated profits without resorting to the dishonesty and deceit of Depot.

We've said it before and we'll say it again. This is the tip of the iceberg. Depot have designed global systems which carry the same degree of systematic consistency…the kind of consistency that is designed to overcharge. Watch out for more investigative exposures in California, Florida and the US Communities.

The point should be made by dealers to Depot customers, all over the world. Depot has admitted twice to overcharging customers in California and repaid $5m, but only after investigatory exposure. How much are they overcharging you? Then offer to do an independent audit!

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How to beat the big box's
Make a Positive move

Learn how to go to market with EcoSYNOPSIS …the personalized
single source system

28 Aug 08

The first series of US regional launch meetings to introduce Positive Marketing Partners, the program especially designed for progressive independent dealers, have been announced.

See list of dates on Home Page.

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Dell bleeding
from price cuts
Michael Dell's upbeat mood disguises disappointing results 

Slashing prices to compete with HP
Just look at the numbers. Dell stock tumbled as much as 10% after hours on yesterday, as investors chewed on the news that the company's net income dropped 17% from a year ago. One big reason: Dell is slashing prices to compete with HP in the hearts and minds of consumers, and in overseas markets like EMEA (shorthand for Europe, the Middle East and Africa.) HP, meanwhile, looks fine. A week ago it too reported shrinking profits in its PC business, but investors shrugged off the bad news because of strong growth in other areas. In a call with analysts, HP CEO Mark Hurd declared himself "pleased with the continued execution" in the PC group. HP's stock has been up slightly since.

The tough truth here for Dell investors: Swings in the volatile PC market now hurt Dell more than its chief rival, HP. And because of that, it still could be quite a while before Dell's stock price marches higher. Dell may need to continue sacrificing profits as it learns to abandon its direct-only model and work with retailers and resellers around the world. If so, there will be more quarters like this one.

For Wall Street, the profit miss is hard to swallow. After all, Michael Dell has been so upbeat lately. He bought $100 million worth of the company's stock last quarter, and last month, he pointed to Dell's unit growth in PCs as evidence that a turnaround is taking hold. "We're kind of back to our old normal Dell, where for 21 years in a row we outgrew the industry – we're feeling the love come back," he told me.  "This is what we like. This is what we're used to."

Analysts embraced the vibe, and the stock had been trading at its highest levels of the year. Industry watchers I talk to have been pointing out that as Dell ships PCs into retail stores around the world for the first time, the company is bound to see a bump. Dell is practically guaranteed to pick up market share, noted IDC analyst Richard Shim in a recent chat, if only because it will be in front of buyers in places like Staples and Best Buy where it never competed before.

But as last quarter's numbers show, market share isn't everything. Sure, Dell grew faster than the overall market (and faster than HP), partly because of its new focus on the consumer business. But while HP's consumer-heavy PC group recorded operating profits of $587 million, Dell said its consumer PC operations basically broke even. Yes, Dell's business would have been more profitable if not for an $18 million legal bill – but consumers are fueling much of the world's PC buying these days, and Dell clearly has work to do if it's going to profit from the trend.

What's next for Dell?
Expect investors to retreat into a bunker mentality for the rest of the year. Michael Dell has been positive about the company's growth outlook for the second half of 2008, but Wall Street will want some assurance that the growth includes profits, not just PC shipments.

Complicating matters, Dell no longer offers detailed financial guidance – Michael Dell calls the earnings promises a trap that "caused us to, every turn of the crank, think a little bit more short-term until ultimately we sort drove ourselves off the cliff." That approach might help him plot the company's future, but don't expect it to do much for the stock.

_______________________________

By Steven Syre, Boston Globe

27 Aug 08

All three ran into trouble before the current retail funk, and their sad stories are different in the details. But they are all struggling desperately to stay alive in this market, never mind catching up to the leaders in their fields -- Barnes & Noble Inc., Bed Bath & Beyond Inc., and Best Buy Inc.

Borders is selling off pieces of its business around the world to keep paying the bills. Linens 'n Things is cutting stores, but probably not enough of them, to climb out of bankruptcy, and Circuit City stock is trading like the lights will go out before long. "To me, Circuit City is a dead man walking," says Britt Beemer, chairman of America's Research Group.

All three of those companies are extreme examples, but they illustrate the serious problem of number two retailers in many fields today. "If you're number two or number three, watch out," says Howard Davidowitz, a national retail consultant and investment banking firm in New York. "You need a lot of critical mass to survive," he says. "It's going to be very tough, and those people who can deliver value will win."

The core problems: buying power and the ability to support big overhead when customer traffic slows down. It becomes harder to pay the rent and carry inventory. A big retail company can no longer support as many underperforming stores as it once did. The leader in any retail segment holds the advantage in conditions like these.

The OP market view
So what about Staples Inc. and its two office superstore competitors, Office Depot and OfficeMax? Will one of those companies finally have to face the music? That's hardly a new question. People have been suggesting for years there wasn't enough room for three companies in the office superstore category.

Staples, the market leader, said this week that same-store sales in its latest quarter were down about 7%. Depot, second in market share, reported a decline of 10% in same-store sales during its most recent quarter and appeared to be losing market share to Staples. OfficeMax has laid off thousands and last month wrote down goodwill and other intangibles on its balance sheet by $1Bn, a big number for a company with a stock market value of $888m.

Those kinds of numbers suggest three may finally turn out to be a crowd in the office superstore business. "To me, there never should have been more than two," says Beemer. "One of them is going to be a casualty."

Stock market investors are trading the stocks like they agree. Staples shares are up 3.6% so far this year. Depot shares have been cut in half this year, losing 71% of their value over the past 12 months. OfficeMax stock is down and has lost two thirds of its value over the past year.

Editor's Comment
These comments are a bit superficial and no reasons are given apart from the standard consulting view that 2 players are better than 3. The reasons why Depot, and Max are struggling is incompetence, nothing to do with 2 or 3 operators. There are many examples in retail of 4-5 operators doing well e.g. grocery superstores in US and UK.

Whilst all the office superstores are suffering at the moment, Depot and Max are performing even worse in their majority delivery businesses which have none of the fixed overhead burdens of retail locations.

_________________________________________________

Productivity
fuels growth momentum
US resilient response means healthier profits, fewer job losses than previous downturns

26 Aug 08
The productivity revolution of the late 1990s changed forever the way U.S. businesses operate. Driven by technology and overseas competition, companies radically altered how they manage purchasing policies, inventories, production processes, and, perhaps most important, labor.

The U.S. workforce has become much more flexible, allowing businesses to respond faster to changes in demand, to the benefit of businesses and workers. Even now, surprisingly strong gains in efficiency are playing a key role in helping the economy bear up under great stress.

Productivity, measured as output per hour worked in private nonfarm businesses, increased 2.8% through the second quarter from a year earlier. That's unusual on two counts. Efficiency typically slows when the economy weakens, but this time it has sped up, from 1.1% annually over the previous two years. Plus, given that hours worked have declined 1% over the past year, productivity gains have accounted for all of the 1.8% advance in economic growth.

Temps cushion the blow
Greater use of part-time workers, especially in manufacturing and retailing, is a big part of the job market's new flexibility and recent gains in productivity. From 1990 to 2000, the share of temporary workers on payrolls doubled, to about 2%. During the 2001 recession, temps accounted for 20% of payroll losses. So far this year, temp jobs have accounted for 40% of all losses. Also, businesses are showing a greater tendency to cut hours rather than lay off workers. So far this year, employees working part-time have jumped by nearly a million, and the number saying they are doing so because of slack business conditions has soared to a record level.

What does all this mean for the current business cycle? Prior to the 1990s, businesses could not adjust to a drop-off in demand as quickly as they can now. That delay resulted in lost productivity, as output fell but hours worked did not, which jacked up the labor cost of each unit of production. Higher unit costs dug deeply into profit margins, causing large-scale layoffs.

Painless productivity
A vivid example today is the U.S. auto industry, which never fully caught the productivity wave. Demand has crashed, but stiff labor contracts prevent companies from cutting workers or reducing work hours fast enough. Unit costs are soaring, and investors are hammering the companies' stocks.

Now, with many businesses able to adapt to weakness more flexibly, profit margins of nonfinancial companies—though well below their record levels of 2006—remain relatively high. Profits in this sector have not dropped as sharply as in past downturns, thanks in large part to booming export businesses, which tend to be very efficient.

Plus, faster workforce adjustments have helped keep payroll losses at less than half those in the early stages of the prior two recessions. Modest declines also reflect cautious hiring: Job growth since late 2001 has been the slowest in any business expansion since World War II. Conversely, payroll losses could end up the mildest of any postwar recession.

Productivity is also playing a role in holding down inflation and lifting the buying power of workers' pay. Despite a weak job market, labor compensation has grown 4.3% over the past year, slightly faster than during the two previous years. Greater efficiency has allowed businesses to grant steady pay gains without adding significantly to costs. Unit labor cost, which is wages and benefits adjusted for productivity, has risen only 1.5% over the year, since pay growth has been offset by the solid 2.8% increase in output per hour.

In fact, the biggest drain on real wages right now is not a weak job market but rising energy costs. With oil prices coming down and unit labor costs under control, the inflation outlook should remain tame. That means the Federal Reserve will feel less pressure to lift interest rates before the economy is healthy enough to handle them.

Productivity is no magic wand that can make today's economic weakness go away. But it is providing a key support that is lessening the pain.

______________________________________

TechData grows 2.3%

Americas down 3.3%...Europe solid up 7%... profit recovery.

23 Aug 08
TechData the global #2 distributor of IT products, yesterday announced results for the second quarter ended July 31, 2008. Sales reached a Q2 record of $6.2Bn, a 9.8% increase on 2007. Operating profits improved from 0.7% from 0.5%/sales.

The company recorded net income of $23.7m, compared to $7.2m, Results for the second quarter 
of fiscal 2008 included a $4.3m charge for the loss on disposal of subsidiaries related to the exit of 
our operations in Israel and the United Arab Emirates (UAE) and $16.6m in restructuring 
charges primarily related to the closure of a European logistics center. 

"Tech Data performed well in the second quarter considering the challenges of the global macro-economic environment," said Robert Dutkowsky, CEO. "In the Americas, softer IT demand and increasingly competitive market conditions challenged our performance in the United States, while our Canadian and Latin American operations had a solid second-quarter performance.

In Europe, we gained a stronger foothold in many regions and better leveraged our infrastructure. We are taking measured steps to address our margin performance worldwide, while also maintaining certain strategic investments. In addition to adjusting our planned SG&A spending where appropriate, in the third quarter we are implementing new freight and handling fee policies across the entire organization to help mitigate higher transportation costs. We remain committed to growing our business responsibly and improving our overall operating performance."

Q2'08 v Q2'07 Financial Summary

• Sales in the Americas (including North America and Latin America) were $2.8Bn (45% of worldwide net sales), representing a decrease of 3.3% Sales in Europe totaled $3.4Bn (55% of worldwide sales), representing an increase of 23.9% (7.4% increase on a euro basis) over the second quarter of fiscal 2008.
• Gross margin for the second quarter of fiscal 2009 was 4.85% compared to 4.89% in the prior-year second quarter and 4.86% in the first quarter of fiscal 2009. The company's disciplined pricing, inventory management and sales practices have been contributing factors in sustaining a relatively stable gross margin performance.

• Selling, general and administrative expenses (SG&A) were $257m, or 4.17%/sales compared to 4.03%/sales. The year-over-year increase in SG&A expenses was attributable to stronger foreign currencies and the related translation impact, continued investments in certain strategic initiatives, as well as the company's acquisition of certain assets of Nordic-based Scribona AB and the related consulting and integration costs.
• Operating income was $42.2m, or 0.68%/sales, This compared with $26.7m or 0.48%/sales.
• On a regional basis, operating income in the Americas was $39.5m, or 1.41%/sales compared to 1.56%/sales. In Europe, operating income of $5.7m, or 0.17% sales including $3.0m (approx. 0.09%/sales) in consulting and integration costs related to the May 2008 acquisition of certain assets of Nordic-based Scribona AB. This compared to an operating loss of $16m, or 0.59%/ sales.

Business Outlook
For Q3 ending October 31, 2008, the company anticipates net sales to be in the range of $6.3-6.5Bn. This assumes a low single-digit decline year-over-year in the Americas and mid-to-high single-digit growth in Europe on a euro basis.

Editor's Comment
An unremarkable set of results apart from the recovery in profitability (0.68%/sales) back towards toward former levels. Ingram Micro, its #1 rival achieved 1.06%/sales.

Regional comparisons with IM were in the Americas a decline of 3.3% where IM achieved a growth of 4%. In Europe, TD's impressive 7% sales ngrowth contrasted with IM's disappointment decline of 7%.
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Preliminary Q2 review plus CXP plans

Staples slip shows

NA Retail sales down 1%...NA Delivery
sales up 2%...International strong, up 6%

22 Aug 08

Staples announced earlier this week details related to the integration of Corporate Express (CXP), the anticipated impact of the acquisition on future results, as well as preliminary results for Q2 ended 2 Aug 08. Overall sales have slowed down to a 1% organic growth rate.

Key additions to the management team include Peter Ventress (pic right), who has been named President, Staples International, a new position reporting to Ron Sargent, and will oversee business outside of the US and Canada. Jay Mutschler will be responsible for major contract sales reporting to Jay Baitler, EVP Contract division. Other key leaders joining Staples' team include Michael Zahra, head of the Canadian Contract business, Peter Damman, head of the Contract business in Europe, and Grant Harrod, CEO of CXP Australia. Shira Goodman, EVP Marketing, and Tim Beauchamp, SVP, Customer Care and Distribution Operations, are leading the integration planning process.

The company's second quarter results also reflect strong performance in the areas of customer service, new merchandising initiatives, variable expense management, inventory control, and free cash flow.

Outlook

For its pre-acquisition business, Staples expects low single-digit sales growth and for 2008. As a result of the Corporate Express acquisition, the company's estimated incremental interest expense is more than $100m in the back half of 2008. Additionally, Staples anticipates integration and restructuring expense to range from $30-40m in the back half of 2008, and to range from $50-70m in 2009.

Editor's Comment

Staples North American businesses growth rates are slowing under the weight of  recessionary fears in the market. NA Retail comparative store sales were down 7% compared with Office Depot and OfficeMax down 10%+.

We look forward to listening to Ron Sargent's podcast on Wed 3 Sept. He will certainly have his hands full over the next year at least. Slowing growth reates plus the distraction of absorbing the $5Bn CXP US business will be a huge challenge. Fortunately, that is where their management is strongest.

CXP Australia is strong and self contained business, but there could be some surprises and political battles  to sort in Europe, which may distract progress. CXP's culture there is a million miles from Staples soulful approach and the sooner it is integrated the better. It could be a painful process.

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Half Year Results Review

office2office resurgent

and restructured

Sales were £84M ($168m) down by 3% on 2007. But, they lost the Ministry of Defence contract worth some £25m to Lyreco in Q4'07 so after making this adjustment sales have recovered by 26% in their Banner contract business. I queried this with the company and they confirmed that strong progress had been achieved across their customer base with greater penetration and selling in new categories. Moreover they have scored some significant new account wins, but nothing worthy of note.We call that exemplary organic growth and we're surprised they don't talk about it more. The share price needs it!

Apart from the Banner contract division now with a fancy title 'Corporate Procurement' (80% sales), the new Mid-Market division lost probably 30% of its sales in the half before adding Accord Office Supplies of Swindon , who they acquired in the may. Accord is expected to add £12m in sales in a full year to bring the annual sales rate to £30m.

The new Business Services division acquired Access Plus in march as its new base with around £50m in annual sales in print management services.

Profitability overall was maintained at £30.6m or 5.6%/sales. Overall then a more than satisfactory result, given the MoD loss and the acquisition activity. The Chairman, David Callear (pic right) said little, simply commenting that the results were expected. They did mention that 'Project Streamline' continued to yield results…presumably a cost reduction campaign which probably reflects their priorities in the current economic slowdown.

As you'd expect, we feel that they should be more proud and reinforce their sales progress with their obviously successful single source systems.

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HP powers ahead
with sales up 5%

Notebooks and Enterprise storage fuel growth

Hewlett Packard today announced financial results for its Q3 ended July 31, 2008, with sales $28Bn, up 10% from a year earlier and up 5% when adjusted for the effects of currency.

"By accelerating our enterprise growth and executing well across the portfolio, HP delivered a strong third quarter performance," said Mark Hurd, CEO. "Our global position, broad product and services offerings and incremental cost saving opportunities make us confident that we'll continue to meaningfully expand earnings."

Organic sales in the Americas grew 3% on a year-over-year basis to $11.6 billion. Sales grew 5% in Europe, the Middle East and Africa to $11.2 billion. Revenue grew 8% in Asia Pacific to $5.2 billion. Revenue from outside the United States in the third quarter was 68% of the total, with revenue in the BRIC countries (Brazil, Russia, India and China) growing 24% over the prior-year period and accounting for 10% of total revenue.

Personal Systems Group (PSG - 37%/sales)
PSG sales grew 15% year over year to $10.3Bn, with unit shipments up 20% on a year-over-year basis. Notebook sales for the quarter grew 26% over the prior-year period, while Desktop revenue increased 6%. Commercial client sales grew 15% year over year, while Consumer client revenue increased 17%. Operating profit was $587 million, or 5.7%/sales, up from $519m, or 5.8%/sales, in the prior-year period.

Imaging and Printing Group(IPG - 25%/sales)
ISG sales grew 3% year over year to $7.0 billion. On a year-over-year basis, supplies revenue grew 11%, Commercial hardware revenue declined 5% and Consumer hardware revenue declined 14%. Printer unit shipments declined 2% year over year, with Consumer printer hardware units flat and Commercial printer hardware units down 9%. Operating profit was $1.0 billion, or 15.0% of revenue, versus $981 million, or 14.5% of revenue, in the prior-year period.

Enterprise Storage and Servers (ESS - 17%/sales)
ESS reported sales of $4.7 billion, up 5% over the prior-year period fueled by ESS blades, which grew 66%, and Storage, which grew 16%. Storage revenue growth was fueled by the midrange EVA line and the low-end MSA line, which each grew 19%. On a year-over-year basis, Industry Standard Server sales grew 2%. Business Critical Systems sales increased 2%. Operating profit was $544 million, or 11.5%/sales, up from 11.2%/sales, in the prior-year period.

HP Services (17%/sales)

Outlook
HP estimates fourth quarter FY08 revenue will be approximately $30.2 billion to $30.3 billion.

These estimates do not reflect the anticipated financial impact of HP's acquisition of Electronic Data Systems Corporation, which is expected to be completed in the fourth quarter of FY08.

Editor's Comment
As usual there is little to add to another powerful sales and profit performance by HP. They are showing all round strength, but were particularly strong in PC laptops , enterprise storage and IT consumables…up a remarkable 11%. HP's profitability again showed improvement and now approaches the 10% milestone.

HP's analysis and reporting is exemplary and talks clearly to customers, employees and shareholders in a simple 'you need to know why' basis.

OfficeMax failed to report
data theft to customers

Editor's Comment

While the government is prosecuting the hackers, some questions remain to be answered. What action is the government planning to take against the companies who failed to disclose the theft to their customers?

Aren't the customers entitled to such disclosures? Don't the companies have an obligation to provide sufficient security for the credit card date of their customers?

Will the companies compensate the customers for the losses they may have suffered because of this theft especially if the losses could have been prevented by a timely communication.

This is a serious breach of customer confidence. Why hasn't Max notified customers since the 2006 breach? OfficeMax has already signaled its intent to withdraw from unprofitable contract business to boost gross profitability, now it's taking a clumsy misstep to effectively withdraw from retail business by not coming clean with credit card customers. How can customers, retail or contract trust the current management when they resort to such expediency aimed at boosting short term profits?

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Retail sales up 2.6% on 2007, yet negative press reports irrelevant July v. June comps.

16 Aug 08
Retail sales dropped slightly in July compared with June, meeting economists' expectations that spending would decline following the end of government stimulus payments. Retail sales were $384.6 billion in July, matching the forecast of a 0.1% drop from economists surveyed by Briefing.com. Sales growth numbers for June were upwardly revised to 0.3%, for total sales of $385.1 million.

Sales excluding autos rose 0.4%, slightly below the 0.5% economists' consensus, and down from an upwardly revised 0.9% gain in June. Of all the major retail categories, auto sales saw the biggest decline, dropping 2.4% in July. That comes after a 2.1% dip in June, and decreases of 10.5% over the past year.

Stimulus checks have been used to pay for more expensive gas and food, and now consumers are changing spending habits to cope with a weak job market and declining home values, according to Michael Strauss, chief economist of Common fund Asset Management Company.

"You'll see more 'bargain-shopping' at the warehouse stores. You'll see shopping downstream from where people would have shopped otherwise," Strauss said.

General merchandise retailers - who consider the back-to-school shopping season second only to winter holidays - saw a 0.3% growth in sales. But that's half of the 0.6% increase in sales from June.

Furniture, electronics and appliance stores and non-store operators, such as e-retailers, vending machines and store catalogs, made gains in July. Non-store retailers posted the fastest growth in sales at 1.1%. The growth in non-store retailers may be due to higher gas prices, according to Strauss.

"We are seeing the effects of higher energy costs in retail data through more buying via the Internet," Strauss said.

The point is that productivity is up 2%, economic growth is up 2.5% (GDP), retail sales are up 2.6%, exports are up, oil prices coming down. The actual signs are positive, yet the doomsday press ignores this to focus on negatives and try and talk this resilient nation into recession. It won't happen.
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Logitech is best known for computer mice, keyboards and web cams (although it too offers some nice, higher-priced mice). But Logitech has also been expanding its audio line of speakers and headphones and earphones.

"The acquisition of Ultimate Ears allows Logitech to expand its portfolio of digital audio products, providing more options for portable music listening. The company already offers a line of digital music speaker systems for in the home and on the go. Logitech is also a leading worldwide provider of speakers and headphones for PCs. And the company recently introduced a portable wireless speaker product for listening to music stored on Bluetooth mobile phones.

The 40 people at Ultimate Ears will remain intact in Irvine with Bob Allison still in charge.

Editor's Comment
Local Californian press were surprised that Logitech had moved into higher ticket items, but this has been a long and steady drive by Logitech to add value and margins to its high class line up of IT peripherals. We see this as an exciting move because headsets/earpieces look ugly and obtrusive. Not for much longer we suspect.

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Wal-Mart   sales surge
Sales climb 10% with same store volume up 4.5%

14 Aug 08
The world's largest retailer said net income from continuing operations rose 9% to $3.39Bn in Q2'08, The Bentonville (AK) company said Q2 sales rose 10% to $101.6Bn.

"During a difficult economic time, Wal-Mart benefited from its ability to adapt and serve shoppers current needs," said Bernard Sosnick, an analyst with Gilford Securities. "The significant operating improvements that have taken place with regard to merchandising assortment, service and cleanliness of stores can't be underestimated."

Outlook mixed

But the retailer gave a mixed outlook. Scott said the company is raising its full-year earnings guidance because of the underlying strength of Wal-Mart's operations, though he said the company will continue to face economic headwinds.

"What we see, as do many around the world, is a global economy that is difficult," Scott said on a recorded call. "Our customers represent a broad income segment, and they are all challenged today." Scott said rising inflation, in particular, continues to put pressure on the company. "While commodity prices have decreased recently, food inflation continues to be a factor in our markets," he said. "Certainly, high energy prices are increasing the costs of raw materials and transportation."

Stimulus boost falls just short

Wal-Mart's international sales rose 16.5% in the quarter. U.S. sales, which have lagged significantly behind sales abroad in the past few quarters, rose 8.5%. The company's warehouse operator Sam's Club posted an 8% gain in sales.

The retailer said its campaign to cash stimulus checks for free paid off, leading millions into its store. Between May and July, Wal-Mart said it cashed 2.9 million stimulus checks.

Though Wal-Mart recently released a weaker-than-expected 3% gain in same-store sales for July, as the stimulus boost began to wear off, it still beat rival Target which posted a 1.2% decline in same-store sales for the month.

Read Frost Bites for comment on a tremendous performance and the stimulating marketing story.

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13 Aug 08
eMarketer, the digital marketing and media authority, predicts that advertisers in the US will spend $24.9Bn online this year. That estimate is slightly lower than the one released in March 2008, which said that US online advertising spending would reach $25.9Bn in 2008.

The lowered estimate still represents an increase of 17.4% over 2007.

"Even as the potent mix of a misfiring economy and consumers' changing media habits shave advertising dollars from traditional venues, such as newspapers and television, Internet ad spending will continue to grow rapidly," said David Hallerman, senior analyst at eMarketer.

Increased digital ad spending is coming out of traditional media budgets.

Although TV ad spending is set to increase by 7.1% in 2008 to $72.6Bn, eMarketer predicts such spending will actually shrink in 2009 by 2.6% before resuming 1% to 2% growth in 2010 and 1011.

Newspapers are taking an even harder hit. Borrell Associates predicted in March 2008 that newspaper ad spending in the US would fall from $50.8 billion in 2007 to $45 billion in 2012.

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California Communities Accounts Analysis

Nonprofit managers
HB Capital get $10m

Depot's US Communities contract partners involved in lucrative bond issues

12 Aug 08
HB Capital Resources (HB) is the mysterious management company that runs US Communities (USC) and California Communities (CAC). We think that HB is owned by 2 people Gerry Burke and Stephen Hamill and based in Walnut Creek, CA in an office of approx. 30 people.

Read the full story including summary accounts analysis in BIG Issues.

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Resilient US grows
productivity 2.2%
Solid output and lower labour costs boost performance

Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, rose 1.3% in Q2. That was well below the revised 2.5% increase registered during the first three months this year.

Compared with Q2'07, non-farm productivity was up 2.8%. That was down from 3.3% growth in the first quarter on a year-over-year basis.

In financial markets, the dollar was sharply higher against the euro on Friday as traders worried about prospects for weaker growth in Europe, while Treasury debt prices edged down. U.S. stock futures were little changed.

Analysts said the report suggested that labor costs remained well controlled despite rising prices in other areas of the economy. "It's not a bad report. The Fed has kept core inflation in check so we don't have a second round knock-on effect," said Robert Brusca, chief economist for Fact and Opinion Economics in New York. "We are seeing weakening unit labor cost; you have a weak labor market, a weakening economy and good Fed policy."

The department said that output grew in Q2 by 1.7 %, nearly double the 0.9% rise posted in the first quarter. But worker hours were cut back by 0.5 percent after being trimmed 1.6% in Q1 this year.
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Acco sales dive 9%...plans major 
cut backs

Document Finishing Group (30% sales) down 10%
Sales decreased 5% to $132m, Adjusting for favorable currency, comparable sales decreased 10%. The decline reflected continued soft demand in the US/UK, softening demand in mainland Europe and Canada, related customer inventory reductions, and previously reported lost product placements, partially offset by price increases. 

Adjusted operating income declined to $6.5m or 4.9%/sales from $8.5m or 6.1%/sales. The decrease resulted from lower sales volume, unfavorable product mix, higher raw material, freight, and distribution costs, and higher inventory reserves, partially offset by lower management incentive expense.

Computer Products Group (12.5% sales) down 2%
Sales increased 3% to $55m. Adjusting for currency and the exit of non-strategic business, comparable sales declined 2%. The decline was the result of lower consumer demand for iPod accessories. Excluding iPod accessories, constant-currency sales were up 3% year-over-year.

Adjusted operating income decreased 3% to $10.8m or 19.7%/sales from $11.1 million or 20.8%/sales.The margin decline was driven by lower sales volume and increased marketing expenses to support the launch of new products.

Commercial Laminating Solutions Group (10% sales) down 7%
Sales decreased 1% to $44m. On a constant currency basis, sales decreased 7%, driven by lower film sales in Europe, and economic softness, which caused weak demand for print finishing equipment in the U.S. and Europe.

Operating loss of $63m, compared to break-even operating results in the prior-year quarter. The impairment charge of $62.4 million was the main cause of the operating loss, and reduced demand and increased raw material costs caused the adjusted operating loss.

Business Outlook
"We now see our markets remaining difficult for the foreseeable future," said Campbell, "and we are making a number of tough decisions as a consequence. Consumer weakness has spread to more of our international markets, high raw material inflation continues, and we have additional near-term pressures from customer consolidation.

"For 2008, we have expanded our guidance range given the increased uncertainty," he added. "Our top line is now forecast to be down low- to mid-single digits, our adjusted EBITDA will likely fall within the range of $200 to $230 million,

Editor's Comment
We have made these observations many times before. Acco was a great house of classic brands. In recent years under the Campbell regime, they have gone through an "adjusting" consolidation phase which never seems to have ended. Now there is a marked downturn in the economy, not a recession, and Acco have jumped aboard the bandwagon to declare that this is going to last another 18 months and therefore "are taking aggressive cost reduction actions".

It seems that cost cutting has replaced the brand building and innovation programmes that were once the cornerstone of this once great company. The volume drop across all four product groups is 9%...the worst by far compared with other brand manufacturers this quarter. For example, the Kensington brand (pic left) is a $200m sales brand, down again by 2%, but should be doing a $1Bn+ in a strong IT accessories market, witness Logitech/Belkin products.

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4 Aug 08
Newell Rubbermaid, the Papermate, Parker, Sharpie and Dymo makers last week announced flat Q2'08 financial results.

The acquisition activity and foreign currency adjustments made it difficult to identify real trends, but the OP division which is approximately 23% of total sales recorded a similarly flat performance.

Q2'08 compared with Q2'07
Sales grew 7.8% to $1.83Bn. The acquisitions of Technical Concepts and Aprica contributed 4.6%. Organic sales growth was 0.3%, internal sales growth was 3.2%. less the impact of foreign currency of 2.9%.

Double-digit increases in the Rubbermaid Commercial, Rubbermaid Food and European and Asia Pacific Office Products businesses, as well as high single digit growth in the Baby & Parenting Essentials business, led the sales improvement, offsetting declines in the North American Office Products, Tools & Hardware and Decor businesses.

"We were pleased to deliver second quarter results in line with expectations despite significant cost inflation and a challenging U.S. economy," said Mark Ketchum (pic right), CEO. "Looking forward, we are taking decisive action to strengthen our portfolio and protect the company's margins and profitability. These previously announced initiatives include aggressive pricing increases and the restructuring of our product portfolio to reduce exposure to commodity-like product lines. In addition, we will continue our strategy of investing in innovation and brand building. We are confident that these actions will position Newell Rubbermaid as a stronger, less volatile and more profitable company and will enhance long-term shareholder value."

Gross margin during the second quarter was 34.1%, down 1.6% points/sales from last year, as higher productivity, savings from Project Acceleration and favorable pricing were more than offset by significant increases in cost inflation.

Excluding Project Acceleration restructuring costs and related impairment charges of $69.4 million in 2008 and $15.5m in 2007, operating income was $230.3 million, compared to $248.3 million in the prior year, reflecting the impact of higher cost inflation and the company's continued investment in strategic brand building activities and corporate initiatives.

Income from continuing operations, as reported, was $92.5m, compared to $143m, in the prior year.

Office Products division reported $422m in sales up 3.9%, therefore essentially flat compared with 2007 after adjusting for foreign currency impact.  There was a marked decline in sales in the US which can be attributed to Sanford's exposure to the retail divisions of Staples, Depot and Max, who all suffered double digit falls in Q2'08.

Editor's Comment
There is little to add, because there are fewer specifics than in previous reports. They focus on Project Accelerator rather than on marketing plans or performance. Nevertheless, actions speak louger than words and we liked the latest Sharpie ads featuring David Beckham. I'm sure was a big hit with exactly the right timing.

We are sure that the de-stocking and poor retail performance of all 3 of the US superstores hit them badly.

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Advantage SPR…sparking the spirit
Sensational 
Sun Diego
Independents partied like it was 1999

3 Aug 08

The party's over, but what a week in San Diego, courtesy of hosts SPRichards, America's $1.8Bn OP wholesaler. It was the 10^th Anniversary bash of the Advantage Business Conference (ABC), the largest gathering of independent dealers and their manufacturing partners since the NOPA show heydays back in the early 80's.

Over 3000 representatives of 1000 dealers and 500 representatives from 240 manufacturers attended the annual ABC in San Diego. As intended, It was a really family affair: 'Celebrating the Spirit of the Independents'  with the OP Expo the highlight of 4 days of seminars, keynote presentations and social networking.

I've been to many OP conferences, but in the last 10 years at least, this was the most positive and upbeat I have attended. "There has never been a better time to be an independent dealer" summed up CEO Wayne Beacham's (pic right)keynote message.

Tom Gallagher, Chairman of Genuine Parts Company, SPR's parent, had set the scene for dealers in his opening address, by emphasising the need to plan clearly and execute consistently and pledging SPR's total support.

Jim O'Brien, MC and marketing chief, who excels at this event, and Beacham, laid out clearly what SPR was doing to support the independents in service and IT programmes through to 2013.

Whilst acknowledging tougher market conditions and flat overall sales, Beacham highlighted progress with sales to independent dealers holding steady in Q2'08 and in the case of the larger more progressive dealers up 12%. Contrast this with the continued slowdown from the national accounts ('the mega/big boxes') who were down 5%.

Beacham challenged dealers to plan for their success over the next 5 years to 2013. He urged them to seize the opportunity, develop a talented team, choose the right supply partners and support their local community. He pledged SPR's support with a "bigger, better, broader and lower cost wholesaler model that embraces latest technology".

Beacham had opened his address by thanking the suppliers. He made special reference to Domtar, Belkin, Iceberg, Reckitt and Benckiser and Safco category winners in 2008. OP suppliers are often criticised unfairly for lack of innovation. Not this year with Smead, Acco, Fellowes, Safco, Plantronics and Energizer again to the fore.

Editor's Comment
Times are tougher than they've been since the last recession in 1990. There have been increasing recessionary fears for over a year now, even though the economy grew again by 1.8% in Q2'08. But, as we have said repeatedly in our optimistic style, progressive dealers excel in tough times.

Advantage progressive local dealers who are aware and awakened to these challenges. As Wayne Beacham emphasised "seize the opportunity".

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*****If you want to know how to beat the big box players with a personalised single source system which enables your customer to cut costs and cut carbon emissions, sign up for the Postive Marketing Partners launch meeting at the Courtyard North Atlanta Airport on Thursday 11 September 2008. We will demonstrate the EcoSYNOPSIS system which will win you the business from the big box's and save each of your customers $12,000 in the first year. How irresistible is that?

Please email peter@positiveofficegroup.com and I will reply immediately with the day's agenda and outline programme

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United sales up 2.6%
Independents strong up 3.6%...big box's
down 1.4%...SAP RTS project update

1 Aug 08

Q2'08 Financial Highlights
comparisons with Q2'07
Sales grew by an organic rate of 2.6% to $1.25Bn. Overall, a 9.7% increase over the prior year, included 7%/points from ORS Nasco, which was acquired in December 2007. The latest quarter also benefited from the timing of the Easter holiday (1.5% sales increase), which fell in the first quarter versus the second quarter of last year. Sales were up nearly 14.4% in the janitorial/breakroom category, up modestly in office products and technology, and partially offset by an 8% decrease in furniture sales.

Gross margin in the second quarter of 2008 reached $182m or 14.5%/sales, down 0.33%/points. Gross margin faced downward pressure from a lower margin sales mix within categories, lower product cost inflation and higher fuel costs. Partially offsetting these unfavorable variances were increased supplier allowances, actions taken to offset fuel cost inflation, as well as an approximate 0.20%/sales benefit from higher margins at ORS Nasco.

Operating expenses for the latest quarter were $139m, or 11.1% of sales, compared with 10.7% of sales, in the same quarter last year.

The company recorded a pre-tax asset impairment charge of $6.7m related to the SAP hosted Reseller Technology Solution (RTS). ( See comment below)

Operating income for the latest quarter was $43m, or 3.5%/sales, compared with 4.1% of sales.

"Executing our sales and operational initiatives enabled us to make progress on many fronts during the quarter, despite continued soft economic conditions," said Dick Gochnauer (pic above), CEO. "Sales growth rates improved sequentially from the first quarter across most product categories, and were boosted by a strong contribution from the ORS Nasco acquisition.

Margins decreased, reflecting lower sales of high margin discretionary products within categories, reduced product cost inflation and significantly higher fuel costs. We have taken actions to offset the effects of the economic slowdown - including growth initiatives, margin improvement actions and further cost reductions - while continuing to invest in key strategic initiatives. Further gains in working capital efficiency contributed to strong cash flow results."

"We are committed to helping third party software companies provide our office products dealers with superior technology platforms which include e-commerce and backoffice solutions to help them meet their customers' needs," said Gochnauer. "To facilitate this, United has invested in electronic catalog technology, digital content, and third party software solutions - including RTS.

Due to delays in bringing RTS to market, and the acceleration of the development of other software solutions, we took a charge related to capitalized costs for our portion of RTS. Despite this charge, we are encouraged by the recent progress of RTS as well as other software solutions, which will utilize our new electronic catalog technology and superior digital content to provide end consumers with the excellent shopping experience they desire."

Outlook – "higher cost inflation"
"We are encouraged by our second quarter results and the positive impact of our internal initiatives. The July sales growth trend is in line with our year-to-date June growth rate," Gochnauer stated. COO Cody Phipps pic right.

"Our supplier and reseller partners continue to tell us that the marketing and distribution services we offer as a wholesaler are even more critical during times of slow growth, high fuel costs and tight credit markets. Given strong economic headwinds, we are focused on diligent cost controls and working capital management, while pursuing growth opportunities in targeted channels and categories. In addition, we expect higher product cost inflation in the second half of the year, based on announced supplier price increases," Gochnauer concluded.

Editor's Comment
It was great to learn that the independent dealers (84%/sales)were "holding their own" in a slower market, growing 3.6% on 2007. Moreover, that FM supplies (jansan and breakroom supplies) were up strongly with the independents and now represent 21%/sales.

The national accounts, or big box players, were down 1.4% (an improvement on Q1 when they were 11% down) reflecting their weaker sales, offset by increased purchases of jansan products where they have switched away from direct purchases.

The SAP situation is worthy of further mention. We estimate that including the depreciation over the last 3 years the write off related to the ill-fated SAP project amounted to $28m. This move has been costly for United and SAP's reputation and has attracted much industry criticism.

Whilst it is always dangerous for wholesalers to stray away from their core range logistics function, we have always admired United's innovative initiatives to support dealer development. The dominance of ECi2 systems house has restricted dealer development and choked sales and marketing ecommerce initiatives and needs to be tackled positively. United tried to do this in partnership with SAP and we believe was well intentioned, but they probably chose the wrong mega-partner?

It was difficult then to hear that United were "encouraged by the recent progress of RTS as well as other software solutions" when there are no showcase dealer applications after nearly 3 years of development?

Unfortunately, after an extenuated RTS trials with some leading independent dealers the initiative seems to have failed. Whilst we understand there are a few small independents using it, as a project it is probably now a dead duck. Maybe, United should review the enterprising initiatives of some of their larger dealers, take those proven solutions and help develop those?

We will do a comparative analysis with SPRichards in the next few days.

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Depot's desperate denials continue…described contract performance with USC as "stellar" !!??

Depot's double digit disaster

30 July 2008 - 0800 PCT

Office Depot, the #2 OP global reseller today announced disastrous results for Q2'08 ended June 28, 2008. Sales decreased globally by 5% to $3.6Bn. Operating profit was $21m or 0.6%/sales compared to $170m or 4.7%/sales for 2007.

No comment was made by their CEO Steve Odland in the press release. See below for our comments on todays podcast at 0600 PCT. Odland hardly said a word of significance and the investment analysts were timid and focused once again on the retail segment or international business and skirted around the core contingent liability issues and substantial market share losses to competitors in the delivery business. How he gets this free ride we'll never know?

Q2'08 Results compared with Q1'07

Sales increased 2% in real terms to $1.1Bn,after adjusting for favourable currency impact of 11%). The continued weakness in the U.K. compared to last year, together with a broadening decline in the macroeconomic environment across Europe, constrained sales growth.

Other Matters
The Company has received recently an unsolicited non-binding proposal from its partner in its Mexican joint venture in which its joint venture partner proposes to acquire the capital stock in the joint venture owned by the Company for approximately $430 million. The Company has not yet engaged in substantive discussions with its joint venture partner regarding this non-binding proposal and there can be no assurance that any agreement on financial or other terms satisfactory to the Company will result from such proposal or that any transaction involving the Company will be approved or completed.

Depot amended its Revolving Credit Facility. Based on current projected operating results, the Company anticipates remaining in compliance with all of the restrictive covenants. However, given the uncertain economic environment, the Company is seeking a new credit facility to replace its existing facility. Office Depot has obtained commitments for a fully underwritten facility in excess of $1 billion that will be in place by the end of the third quarter 2008. The Amended Credit Agreement will be collateralized by the Company's accounts receivable and inventory in the U.S. and significant international subsidiaries.

Subsequent to second quarter end, the Company acquired a controlling interest in AGE Kontor & Data AB, a contract and retail office supply company operating in Sweden

ANALYST TAKE:
Soleil Securities Group  analyst Scott Tilghman said the company will likely remain under pressure because of weaker traffic and a loss of market share.

"We believe expectations are low enough that the company is not likely to disappoint, although we also view upside as unlikely," Tilghman wrote in a note to investors. "In short, we believe that the company's turnaround efforts remain stymied by external challenges and internal integration issues."

Editor's Comment
We realise that we are in danger of becoming 'Depot's Daily Dirt', but that is exactly what is happening. Depot continued to be in desperate denial of its deficiencies. They talk smoothly about macro-economic factors…still winning market share by referencing some research company that its competitors don't mention.

Steve Schmidt (left), President BSD, particularly tries to disguise the reality of the Georgia State contract situation. They have lost the contract and actually admitted to a "$20m impact".

Instead, he rambled on about saving states $M's and minimising any admission of wrong doing by stating that Depot's  contract performance was "very good". No voluntary references were made to California, Florida, Nebraska or the massive $700m US Communities contract problems or probable contingent liabilities. Moreover, non of the timid analysts made reference to it either with the exception of two who were fobbed off with typical bland responses.

Only Dan Binder of Jefferies Group asked about US Communities bad trade press. Schmidt was incredible in his arrogant response. He said they had a great relationship with them (don't we know it! - see latest Frost Bites) and that the USC had recently conducted 3 internal audits on contracts and surprise, surprise USC declared Depot's performance was "stellar". Hardly the appropriate response to a seriously negative accusations. What is required here of course, is an independent audit.

Another analyst followed up with questions about why the Georgia contract was terminated and again got a smooth dismissive  'whitewash' response. They referred to our criticism and the negative publicity as "biased, inaccurate, disproved, not validated, out of context". Schmidt referred to the fact that Depot were still supplying Georgia after termination. This of course is via the US Communities contract back door route.

It's certainly a different and cosy corporate world up there. Getting away with murder in the interests of hiking a market capitalisation that deservedly reflects a desperate, double digit disaster.

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OfficeMax Q2'08 Financial Results
'Turnaround Sam' spiralling downward
Sales volume down 11.5% in the US, operating loss close to $1Bn…market value down to $1Bn

29 Jul 08
OfficeMax today announced the results for its Q2'08 ended June 28, 2008. Total sales decreased 9.2% in real terms (exc. positive currency impact) to $1.98Bn compared to Q2'07. Annual sales for 2008 may struggle to reach $8Bn at this rate. Including the goodwill write off to adjust for a devastated market capitalisation they will declare almost a $1Bn operating loss.

Operating loss was $902m compared with $55m profit in 2007. Again CEO Sam Duncan blames the economy rather than disastrous execution. Max really is spiraling out of control. Apart from its sideshow Australian operations, performance is quite simply…awful. Yet Sam seems satisfied, happy to see sales fall and maintain or increase gross margins.

Sam Duncan, CEO, said "In the second quarter, sales for both our Contract and Retail segments continued to reflect the weaker U.S. economic environment along with our more disciplined approach to customer acquisition and retention.

We were pleased with the performance of our Contract segment, as we improved gross margin rates and reduced expenses, other than those related to 'impairment'….an amount written off for loss of goodwill owing to the desperately low market capitalisation…approx. $1Bn or 12.5%/sales

"In our Retail segment, lower sales and gross margin rates, together with higher expenses, resulted in lower operating income margin for the quarter.

Across our company, we continue to address aspects of our business that are manageable as we navigate the difficult sales environment." Duncan continued

Contract Segment Results compared to Q2'07
Sales decreased 7.1% to $1.11Bn in Q2'08, reflecting U.S. Contract sales decline of 12.9%, partially offset by International Contract operations sales growth of 9.4% in U.S. dollars (a sales decrease of 0.1% in local currencies). U.S. Contract sales declined compared to the prior year period primarily due to weaker sales from existing corporate customer accounts, our continued discipline in account acquisition and retention, and lower sales from small market customers.

Gross margin increased to 21.7% from 21.4%, primarily due to improved account profitability, partly offset by deleveraging of fixed delivery and occupancy costs.

Operating expense increased by 59.2% in the second quarter of 2008 from 18.0%/sales, primarily due to the $464.0m non-cash unusual expense item related to the impairment of goodwill and other intangible assets, representing 41.7% of sales.

Retail Segment Results compared to Q2'07
Sales decreased 6.7% to $872.7m reflecting a same-store sales decrease of 10.0% partly offset by sales from new stores. Retail same-store sales declined across all major product categories due to weaker U.S. consumer and small business spending.

Gross margin decreased to 27.7% from 29.9%/sales, primarily due to deleveraging of fixed occupancy-related costs and increased inventory shrinkage, partly offset by a sales mix shift to an increased percentage of higher-margin office supplies category sales.

Operating expense increased by 82.8% from 27.3%/sales, primarily due to the $471.3m non-cash unusual expense item related to the impairment of goodwill and other intangible assets representing 54.0% of sales.

During Q2'08, OfficeMax opened 12 retail stores in the U.S. and 5 retail stores in Mexico. OfficeMax ended the second quarter of 2008 with a total of 999 retail stores, consisting of 920 retail stores in the U.S. and 79 retail stores in Mexico.

"Despite the headwinds of a tough U.S. economy, we continued implementing our turnaround plan and operating initiatives during the second quarter," Mr. Duncan concluded. "We continue to build the foundation for OfficeMax to generate long-term shareholder value."

Editor's Comment
Can you believe Duncan's comments? How can a CEO be happy to lose a projected $1Bn sales this year and be "pleased with the performance of the contract segment…down 12.9% in the US and flat internationally. The US business market was in growth, therefore Max lost a major chunk of market share.

How can Duncan delude himself that after 3 years at the helm "we continue to build the foundation of OfficeMax" when a ll he has done is destroy shareholder value and company morale? Pure bullshit.

The same store retail performance at 10% down was similar to Depot's and possibly Staples will report marginally better results later this month.

Max is a 'hospital case' in need of 'surgery' and new management in its delivery business. The sum of the two parts separately we feel are worth more than the whole under its 'retailer'  led management…they just don't understand the 'relationship' driven delivery business.

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Pinnacle vision from Guernsey

Like-for-like development

Time to rethink the 'All things to all people' strategy and adjust to modern day challenges

"We feel  there is a strong case for niche marketing. Conventional dealer groups today are 'all things to all dealers... Pinnacle believes there is room, and reason, behind a niche model that serves only the large dealer population. It really is just that simple," said Guernsey

"What I've learned from all this is that every initiative has a shelf life...if not an entire remake, certainly some serious tweaking is in order. In this industry,

independents can't assume just because something worked in the past that it would always work. Change is a given. We have to "rethink"  what we do and not risk complacency," continued Guernsey.

Guernsey OP, a $50m superdealer from Chanti