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Staples Inc (SPLS - Analyst Report) recently posted sluggish second-quarter 2012 results. The quarterly earnings of 18 cents a share missed the Zacks Consensus Estimate of 22 cents and decreased 18% from the prior-year quarter. Including one-time items, earnings decreased 25% year over year.

Staples reported total sales of $5,498.5 million, down 6% year over year and well below the Zacks Consensus Estimate of $5,721 million.

Given the sluggish results, management reduced its earlier guidance and now expects sales for fiscal 2012 to remain flat compared with the prior year, while the bottom line is expected to increase in low single digits.

Gross profit for the quarter decreased 7.3% to $1,427.3 million, while gross margin contracted by approximately 50 basis points to 26%. Operating profit decreased by approximately 21% to $220.1 million, whereas operating margin contracted 78 basis points to 4%, reflecting deleveraging of fixed expenses and lower product margins.

Segment Details

North American Delivery sales inched down 1% (in U.S. dollars) year over year to $2,412.8 million. The revenue decreased on account of absence of two large contract customers. However, this was offset by sales increases in facilities and breakroom supplies coupled healthy growth in the sales of promotional products. Operating margin decreased 72 basis points to 7.7%, reflecting lower product margins.

North American Retail sales fell 3% at $1,989.1 million during the quarter. Comparable-store sales decreased 2%, reflecting no change in the average order size along with 2% decline in customer traffic. Operating margin decreased 59 basis points to 4.4%.

During the quarter, the company opened 4 stores and closed 5 in the U.S. Further, Staples opened two stores in Canada, ending the quarter with 1,915 stores in North America.

International sales plunged 18% (in U.S. dollars) year over year to $1,096.6 million, reflecting a decrease of 9% in comparable-store sales in Europe coupled with sluggishness in Australia. The segment reported an operating loss during the quarter, due to deleveraging of fixed expenses Europe and Australia and decrease in product margins in Europe.

During the quarter, the company closed one store, bringing the total number of international stores to 375.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $984.7 million, long-term debt of $1,542.6 million and shareholders’ equity of $6,789.7 million, excluding non-controlling interests of $7 million. Year-to-date, Staples generated operating cash flows of about $257 million and incurred capital expenditures of $126 million.

The company generated free cash flow of $131 million and expects to generate more than $1 billion of free cash flow in fiscal 2012. During the reported quarter, Staples repurchased 12.1 million shares for $159 million.

Currently, we prefer to maintain a long-term Neutral rating on the stock. Moreover, Staples which competes with Office Depot Inc. (ODP - Analyst Report) and OfficeMax Inc. , has a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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