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Lower sales on account of store closures took a toll on the first-quarter fiscal 2013 earnings of Staples Inc. (SPLS - Analyst Report). The company’s first-quarter earnings came in at 26 cents a share, a penny short of the Zacks Consensus Estimate and declining 7.1% year over year.

Total sales decreased 3% year over year to $5,814.6 million and missed the Zacks Consensus Estimate of $5,951 million. Stronger dollar and 97 store closures in North America and Europe in the past 12 months hindered sales during the quarter.

Gross profit decreased 6% year over year to $1,511 million, while gross margin contracted approximately 60 basis points to 26%. Operating profit plunged 12.7% to $285.1 million, whereas operating margin contracted approximately 52 basis points to 4.9% 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, is more focused 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 stood by its earlier guidance and expects sales to increase in the low single-digits in fiscal 2013, while adjusted earnings per share are expected in the range of $1.30 – $1.35.

Segment Details

Sales at North Stores and Online, which include its retail stores and Staples.com business in U.S. and Canada, marked a decline of 3.5% to $2,768 million, reflecting a dip in sales of business machines, software, computers and technology accessories. Moreover, 48 store closures in the past 12 months negatively impacted sales.

Despite challenges, the segment witnessed increased sales of tablets, facilities and breakroom supplies, and copy and print services.

During the quarter, comparable-store sales declined 2% on account of flat average order size and a 2% decrease in traffic. Sales through Staples.com, increased 3% year over year. Operating income decreased 17.7% year over year to $172 million, whereas operating margin contracted 107 basis points to 6.2%. The decline reflected the company’s increased investment in its .com business and costs related to the optimization of store labor model in the U.S.

North American Commercial, which includes its Contract operations in the U.S. and Canada, witnessed a 1.7% rise in sales to $2,043 million due to the growth witnessed in the facilities and breakroom supplies, partially offset by decreases in office supplies.  Operating income decreased 5.7% to $150 million, while operating margin contracted 56 basis points to 7.3%, reflecting increased marked expenses and lower product margin. 

Revenue at International Operations waned 12.5% to $1,003 million, reflecting lower sales in Europe and Australia. Comparable store sales in Europe marked a decline of 3% on account of lower traffic. However, average order size increased in comparison to the prior-year quarter. 

The segment reported an operating loss of $11 million wider than a loss of $10 million incurred in the year-ago quarter.

Other Financial Details

This Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $1,435.5 million, long-term debt of $1,000.4 million and shareholders’ equity of $6,096.1 million.

Staples generated operating cash flow of about $348 million and incurred capital expenditures of $41 million, resulting in a free cash flow of $306 million. During the quarter, Staples repurchased 4.9 million shares for $65 million. 

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