Staples Upgraded to Neutral

We upgrade our recommendation on Staples Inc ( SPLS - Analyst Report ) to ‘Neutral’ from ‘Underperform’ with a target price of $12.00, following its bottom line results during the recently concluded quarter and the strategic initiatives taken by the company to boost the financial results.

Staples posted third-quarter 2012 earnings of 46 cents a share, beating the Zacks Consensus Estimate by a penny. Management expects bottom line to increase in the low-single digits for fiscal 2012.

Staples now focuses on improving store productivity by generating incremental sales per store, accelerating growth in adjacent categories, increasing market share in core office supplies, reviving international operations, and streamlining its cost structure. Through its cost-cutting endeavors, the company intends to save approximately $250 million annually by the end of fiscal 2015.

Being a leading retailer of office products and services, Staples is better positioned than its competitors, OfficeMax Inc. ( OMX - Analyst Report ) and Office Depot Inc. ( ODP - Analyst Report ) , to sustain its growth based on effective merchandising, increasing customer awareness, enhanced online features, expanded assortments and store refurbishing program. The company is gradually lowering its exposure to less profitable ventures and eyeing opportunities with lucrative growth prospects to augment profitability.

However, the quarter’s downside was the 2% decline in total sales to $6,353.1 million. Moreover, the reported revenue came well below the Zacks Consensus Estimate of $6,461.0 million. Management anticipates fiscal 2012 sales to remain at par with the prior-year level.

Alongside, 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%.

Going forward, we remain cautious on the macroeconomic environment and a sluggish job market, with small businesses and consumers still remaining watchful on their spending.

Currently, shares of Staples hold a Zacks #2 Rank that translates into a short-term “Buy” rating, and well defines the slew of measures undertaken by the company to uplift itself.