Staples Inc. ( SPLS - Analyst Report ) recently posted third-quarter 2012 earnings of 46 cents a share, beating the Zacks Consensus Estimate by a penny and remained in line with the prior-year quarter’s earnings. Including one-time items, loss per share came in to 85 cents against earnings of 46 cents in the prior-year quarter.

Recently, one of the company’s peers, OfficeMax Inc. ( OMX - Analyst Report ) posted adjusted earnings of 27 cents a share, which modestly exceeded the Zacks Consensus Estimate by a penny.

Staples reported total sales of $6,353.1 million, down 2.0% year over year and well below the Zacks Consensus Estimate of $6,461.0 million. On a local currency basis, total sales dipped 1.4% in the quarter.

Gross profit for the quarter decreased 3.8% year over year to $1,751.9 million, while gross margin contracted by approximately 50 basis points from the prior-year quarter to 27.6%. Operating profit decreased by approximately 5.5% to $500 million, whereas operating margin contracted 30 basis points to 7.9%. The year-over-year decline is attributable to investments made for implementing strategic plans along with lower product margins at North American Delivery segment and International segment, partially offset by lower compensation and promotional expenses.

Segment Details

North American Delivery sales inched up 1% (in U.S. dollars) year over year to $2,609.0 million. The increase in revenue was driven by sales increases in facilities and breakroom supplies and copy and print services, partially offset by sales decrease due to the absence of two large contract customers. Operating margin decreased 76 basis points to 8.7%, reflecting lower product margins and heavy investments, offset in part by lower promotional expenses.

North American Retail sales remained flat at $2,646.6 million during the quarter compared with the last year quarter. Comparable-store sales crept down 1%, reflecting a 2% decline in customer traffic, which was partly offset by a hike of 1% in average order size. Operating margin expanded 9 basis points to 10.8%, driven by reduced operating and distribution expenses, partially offset by investments made for marketing the products.

International sales plunged 12% (in U.S. dollars) year over year to $1,097.6 million, reflecting a decrease of 6% 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 in Europe and Australia and decrease in product margins in Europe, offset in part by reduced salary expenses in Europe and Australia arising from job cuts.

Guidance

The company maintained its guidance for fiscal 2012 and anticipates total sales to remain at part with the prior year level. Earnings per share are expected to rise in low single-digit percentage.

Other Financial Details

The company ended the quarter with cash and cash equivalents of $1,020.0 million, long-term debt of $1,541.8 million and shareholders’ equity of $6,171.6 million, excluding non-controlling interests of $7.2 million. Year-to-date, Staples generated operating cash flows of about $895.0 million and incurred capital expenditures of $204 million.

The company generated free cash flow of $691 million and expects to generate more than $1 billion of free cash flow in fiscal 2012. During the reported quarter, Staples repurchased 9.4 million shares for $111.0 million, resulting in year-to-date repurchases of 27.4 million shares amounting to $362.0 million. By the end of the fiscal, Staples plans to buy back shares of worth $450.0 million.

Moreover, the company reduced a debt on bonds by paying an amount equivalent to $325.0 million, which matured on October 1, 2012.

Currently, we prefer to maintain a long-term ‘Underperform’ recommendation on the stock. However, Staples has a Zacks #3 Rank, which translates into a short-term Hold rating for the next 1-3 months.