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Staples Inc. (SPLS - Analyst Report) posted fourth-quarter fiscal 2012 earnings of 46 cents a share, a penny ahead of the Zacks Consensus Estimate and up 12% year over year. However, including one-time items, earnings dropped 66% to 14 cents per share.

Total sales increased 3% year over year to $6,568 million, but missed the Zacks Consensus Estimate of $6,703 million. Moreover, excluding the impact of an additional week, sales declined 4.2% year over year to $6,107 million.

The company’s gross profit remained flat at $1,719.4 million during the quarter. However, gross margin contracted 80 basis points to 26.2%. Adjusted operating profit increased 5.5% to $495 million, whereas adjusted operating margin improved 18 basis points to 7.5% during the quarter.

The office supply retailers are going through a rough patch as decline in business and consumer spending in the wake of the global meltdown has resulted in sluggish demand for big-ticket items such as business machines, furniture and other durable products.

Moreover, increased competition from online rivals like Amazon.com Inc. (AMZN - Analyst Report) is taking a toll on their profitability. Amid such a scenario, the company’s close competitors, Office Depot Inc. (ODP - Analyst Report) and OfficeMax Incorporated decided to merge their businesses in order to capture a wider market and generate incremental revenues.

Staples, on the other hand, tends to focus on improving store productivity, accelerating growth in adjacent categories, enhancing online features,reviving international operations and streamlining its cost structure.

With these measures in place, the company now expects sales to increase in the low single-digits in fiscal 2013, while adjusted earnings per share are expected to be in the range of$1.30 – $1.35.

Segment Details

Staples realigned its business segments during the fourth quarter and will now operate under 3 new segments named North American Stores and Online, North American Commercial and International Operations.

Sales at North Stores and Online, which include its retail stores and Staples.com divisions in U.S. and Canada, increased 3.1% year over year to $3,298 million, reflecting increased sales of facilities and breakroom supplies, tablets, e-readers and copy and print services, partly offset by revenue declines in digital cameras, computers and software sales. 

During the quarter, comparable-store sales declined 5% on account of flat average order size and a 5% decrease in traffic. Sales through Staples.com, increased 7% year over year. Operating income rose 7.1% year over year to $317 million, whereas operating margin improved 37 basis points to 9.6%.

North American Commercial, which includes its Contract operations in the U.S. and Canada, witnessed a 7.2% rise in sales to $2,102 million. Operating income increased 10.8% to $195 million, while operating margin expanded 31 basis points to 9.3% during the quarter.

Revenues at International Operations decreased 3.9% (in U.S. dollars) to $1,168 million, reflecting lower sales in Europe and Australia. The segment reported an operating income of $6 million, significantly down from $32 million in the comparable year-ago quarter. Operating margin contracted 215 basis points to 0.5%.

Other Financial Details

This Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $1,334.3 million, long-term debt of $1,001.9 million and shareholders’ equity of $6,136.1 million.

In fiscal 2012, Staples generated operating cash flows of about $1.2 billion and incurred capital expenditures of $350 million. The company generated free cash flow of $870 million and expects to generate more than $900 million in free cash flow in fiscal 2013.

During fiscal 2012, Staples repurchased 35 million shares for $449 million and distributed $294 million through dividends.

Separately, the company announced that it has hiked the quarterly dividend payout by 9% to 12 cents a share. The increased dividend will be payable on Apr 18 to shareholders of record on Mar 29.

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