Staples’ Q2 Profit Slips

Staples, Inc. (SPLS - Analyst Report), a global leader in the supply of office products, recently reported second quarter 2009 financial results with a high double-digit fall in the bottom-line. Net profit (excluding one-time items) dipped 25.6% year over year to $111.8 million compared to $150.3 million reported in the prior-year quarter.

Earnings per share (excluding one-time items) were 16 cents, in line with the Zacks Consensus Estimate, but slid 23.8% from 21 cents in the year ago quarter. Increased amortization expenses, a rise in interest expense and the stronger U.S. dollar drove the fall in EPS.

Staples acquired Corporate Express (a leading supplier of office products) in July 2008, and reiterated its cost savings expectation of approximately $300 million yearly from the acquisition. On a reported basis, Staples delivered EPS of 13 cents, down 38.1%.

Staples’ top-line continued to increase, achieving high-single digit growth, although at a decelerating rate as the deepening recession continued to depress the demand for office products. Total revenue for the quarter was up 9% to $5,533.8 million, after increasing 19.1% in first quarter 2009.

North American retail sales fell 5.5% to $1,973.3 million. Comparable sales declined 5% in the quarter due to a slump in demand for business machines, furniture and other durable products, offset to some extent by a rise in sales of basic items such as ink, paper and computers. However, comps for the quarter improved after declining 8% and 7% in the first quarter of 2009 and second quarter of 2008, respectively.

The retailers of office products have been experiencing lower demand from consumers and small businesses, all of whom are grappling with the recession.

North American delivery sales increased 18.2% to $2,322.9 million due to synergies related to the acquisition of Corporate Express.

International sales climbed 21.2% to $1,237.7 million. However, a stronger US dollar adversely impacted the sales by $109 million. In local currency, sales increased 32%. Comparable store sales in Europe improved, and fell by 3% compared to a decline of 7% in the year-ago quarter, as UK and Germany attained positive comps. Comps improved substantially from the first quarter of 2009, when it declined 14%.   

Staples generated free cash flow of $568 million year-to-date compared to $19 million generated in the same period in the prior year. Free cash flow was used to reduce debt by $256 million during the quarter. Staples has lowered its debt-load by about $1.5 billion since it acquired Corporate Express.

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