Staples Reports In Line

Staples Inc. (SPLS - Analyst Report), the global leader in the supply of office products, recently posted third-quarter 2011 results. The quarterly earnings of 47 cents a share came in line with the Zacks Consensus Estimate and jumped 15% from 41 cents earned in the prior-year quarter.

Revenue and Margins

Staples reported total sales of $6,569.9 million, up 0.5% from the prior-year quarter. However, the reported sales were below the Zacks Consensus Estimate of $6,704 million.

Gross profit for the quarter inched up 1.6% to $1,832.8 million, while gross margin expanded 30 basis points to 27.9%. Operating profit crept up 1.9% to $533.2 million, whereas operating margin expanded 11 basis points to 8.1%.

Segment Details

North American Delivery sales crept up 1.8% year over year to $2,582.7 million. The revenue increase reflected strong sales growth in facilities and breakroom supplies, tablets, laptops, promotional products and computer accompaniments. Operating margin expanded 63 basis points to 9.5%, reflecting higher profits from the Canadian delivery businesses.

North American Retail sales inched up 0.5% year over year to $2,656.6 million. Comparable-store sales inched down 1% in the quarter, reflecting flat average order size and 1% decrease in customer traffic. Operating margin expanded 12 basis points to 10.7%, reflecting improved product margins.

During the quarter, the company opened 2 stores each in the U.S. and Canada, while it closed 3 stores in the U.S., ending the quarter with 1,908 stores.

International sales contracted 1.9% year over year to $1,330.6 million. This revenue decrease reflected a 12% decline in comparable store sales in Europe coupled with sluggishness in Australia and European Printing Systems businesses. Operating margin decreased 136 basis points to 3%, reflecting deleveraging of fixed costs in Australia and European retail businesses.

During the quarter, the company opened 1 store in Germany, bringing the total number of international stores to 377.

Other Financial Details

The company ended the year with cash and cash equivalents of $1,060.4 million, long-term debt of $1,557.1 million and shareholders’ equity of $7,172.9 million, excluding non-controlling interests of $7.1 million. Year to date, Staples generated free cash flow of $851.9 million, whereas incurred capital expenditures of $244 million.

During the quarter, the company repurchased 10 million shares, aggregating $144 million. Year-to-date, Staples repurchased 29 million shares for $490 million. Staples now expects to buyback approximately $600 million shares, indicating an increase from its earlier guidance of $300 million to $500 million.

Management forecasts capital expenditures of approximately $400 million for fiscal 2011 and expects to generate free cash flow of more than $1 billion in 2011.

Guidance Trimmed

Given the sluggish performance of its international segment, the company trimmed its fiscal 2011 earnings guidance.

Staples now expects earnings between $1.35 and $1.39 per share in fiscal 2011 from its earlier guidance range of $1.39 and $1.45.

For the fourth-quarter of 2011, management expects earnings in the range of 39 cents to 43 cents on a reported basis, including one-time items.

Management now forecasts sales to remain flat or increase in low single-digits for the fourth quarter of 2011. For fiscal 2011, the company stood by its earlier guidance and expects sales to increase in the low single-digits.

Staples Holds a Zacks #3 Rank

Staples, which competes with Office Depot Inc. (ODP - Analyst Report) and OfficeMax Inc. (OMX - Analyst Report), is better positioned than its competitors to sustain its growth momentum based on margin expansion, effective merchandising, and growth prospects across its retail, delivery and international divisions.

Moreover, Staples entered into partnership with Martha Stewart Living Omnimedia Inc (MSO - Snapshot Report) and Avery Dennison  Corporation’s (AVY - Analyst Report) office and consumer products group for retailing a new product line for the home office.

Considering the current macroeconomic environment and sluggish job market, it is considered to be a smarter move as the decline in business and consumer spending and weak credit markets have slowed the demand for big-ticket items, such as business machines and other durable products.

Further, the home office market offers a huge potential for Staples and will augment sales owing to its size. Further, there are no such big brands offering goods to cater to the needs of the home office space.

Currently, we prefer to maintain a long-term Neutral rating on the stock. Moreover, Staples has a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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