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Analyst Blog

On Jun 6, 2014, we issued an updated research report on Staples Inc. (SPLS - Analyst Report) following the company’s first quarter fiscal 2014 earnings release.

Staples’ adjusted earnings of 18 cents per share came short of the Zacks Consensus Estimate of 21 cents per share and decreased 31.0% year over year. Total sales decreased 2.8% year over year to $5,654.0 million and fell short of the Zacks Consensus Estimate of $5,626.0 million. Lower sales due to store closures and unfavorable foreign currency fluctuations weighed on the company’s performance.

Moreover, management gave a cautious commentary. The company expects lower sales for the second quarter of fiscal 2014 compared with the prior-year quarter figure. Also, earnings per share are expected to be in the range of 9–14 cents per share as against 16 cents per share earned in the year-ago quarter.

The tepid outlook triggered a downward revision in the Zacks Consensus Estimate for fiscal 2014 and 2015 that fell 8.3% and 8.4%, respectively, in the past 30 days.

In addition, secular headwinds loom large over the office supplies industry and stiff competition from online giants like Amazon Inc. (AMZN - Analyst Report) remains a cause of concern.

However, to bail itself out, Staples has resorted to vigorous cost cutting initiatives. Recently the company launched a cost reduction program to achieve pre-tax cost savings of about $500 million annually by fiscal 2015 with majority of savings expected to come from retail store closures, supply chain, labor optimization and customer service. The company achieved annualized cost reduction of $100 million in the first quarter of fiscal 2014 and expects $250 million in reductions for 2014.

Also, Staples is closing its underperforming locations and downsizing stores to rationalize its business. Last quarter, the company announced plans to close nearly 225 stores across North America by 2015. In the first quarter of fiscal 2014, the company closed 16 stores and downsized/relocated 4 outlets to the 12,000 square foot store format.

In keeping with the changing trends, Staples has been focusing on boosting its online presence to drive sales. All these efforts along with economic recovery are likely to reinstate Staples on its growth trajectory.

Staples carries a Zacks Rank # 3 (Hold).

Key Picks from the Sector

Better-ranked retail stocks worth investment include Five Below, Inc. (FIVE - Snapshot Report) and Office Depot, Inc. (ODP - Analyst Report). Both carry a Zacks Rank #2 (Buy).

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