Staples Finds Ways to Rebound

Staples Inc. ( SPLS - Analyst Report ) has been grappling with lingering economic woes and soft job market that have been impeding its growth. Consequently, this leading retailer of office products and services came up with slew of measures, which it believes will prove to be a game changer.

In a move to uplift itself, Staples now tends to focus on improving store productivity, accelerating growth in adjacent categories, reviving international operations, and streamlining cost structure. Through its cost-cutting endeavors, the company intends to save approximately $250 million annually by the end of fiscal 2015.

With the economy still struggling to find its way out of the woods, consumers and small businesses remain apprehensive about big-ticket spending such as business machines and other durables. Thus, the demand for office products is likely to remain slothful as the performance of this sector is correlated to the economy’s health.

Accordingly Staples is now concentrating more on product categories adjacent to core office supplies, such as facilities and breakroom supplies, copy and print, mobile phones and accessories, and new technology products like tablets and eReaders.

Further, with increasing consumers’ inclination toward online shopping, the companies are contemplating to enhance their e-commerce activities. Staples also felt the need of coalescing U.S. Retail and Staples.com businesses to better serve the changing preferences of consumers, as well as augmenting investment in online and mobile competences.

Given the unstable environment, we appreciate Staples’ rational approach to close underperforming locations and downsize stores. As a part of its strategy to optimize real estate portfolio, Staples hinted to shrink its store square footage by about 15% in North America, involving closure of 15 U.S. outlets, by the end of fiscal year 2015. The company plans to close 30 stores and said that 30 more are under scanner to undergo relocation or downsizing.

With the European debt crisis yet to be fixed, Staples has a dull picture to portray as it suffered a 9% decline in its comparable-store sales in the region in the last reported quarter. In order to revamp its beleaguered European operations, Staples plans to close 45 outlets and cease delivery businesses by the end of the current fiscal year.

The company also announced that John Wilson will now spearhead the European operations, in place of Rob Vale, who is retiring. As a part of its restructuring plan, Staples plans to divest European Printing Systems unit and refurbish its Australian operations.

These restructuring actions also relate to the muted second-quarter 2012 performance. Staples posted earnings of 18 cents a share that missed the Zacks Consensus Estimate of 22 cents and decreased 18% from the prior-year quarter due to lower-than-expected sales trends in North America and continuing softness in Europe and Australia.

The company witnessed a sharp fall in computer sales and sluggish trends in core categories. Total sales of $5,498.5 million declined 6% year over year, and also fell short of the Zacks Consensus Estimate of $5,721 million.

Given the disappointing results, management lowered its 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. Earlier, Staples had guided sales to increase in the low single digits and earnings per share to rise in the high single digits in fiscal 2012.

However, Staples did not forget its commitment toward stakeholders and is returning much of its free cash to them. The company also maintains credit ratios that are necessary for an investment-grade rating. Staples’ buyback plan includes shares worth $450 million and expects to reimburse Senior Notes of $325 million due October 2012. The company expects to return over $1 billion to shareholders during fiscal 2012.

Currently, we prefer to be on the sidelines until the efforts taken to combat the uneven economic recovery result in top and bottom lines’ growth. Consequently, we maintain our Neutral recommendation on the stock. However, Staples, which competes with OfficeMax Inc. ( OMX - Analyst Report ) and Office Depot Inc. ( ODP - Analyst Report ) , holds Zacks #4 Rank that translates into a short-term Sell rating, and well defines the current scenario with which the company is contending.