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Staples' Earnings Miss, Guides Low

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Lower sales on account of store closures and lower product margins took a toll on the second-quarter fiscal 2013 earnings of Staples Inc. . The company’s second-quarter earnings of 16 cents a share missed the Zacks Consensus Estimate by a couple of cents and decreased 15.8% year over year.

Total sales decreased 2.2% year over year to $5,314.7 million and missed the Zacks Consensus Estimate of $5,381 million. 103 store closures in North America and Europe in the past 12 months hindered sales during the quarter.

Gross profit decreased 4.2% year over year to $1,359.5 million, while gross margin contracted approximately 50 basis points to 25.6%. Operating profit plunged 17.3% to $187.7 million, whereas operating margin contracted 65 basis points to 3.5% 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 Inc. (AMZN - Free Report) is taking a toll on their profitability. Amid such a scenario, the company’s close competitors, Office Depot Inc. (ODP - Free Report) and OfficeMax Incorporated decided to merge their businesses in order to capture a wider market and generate incremental revenues.

Given the near-term challenges, the company lowered its earnings and sales guidance for fiscal 2013. The company now expects earnings to be in the range of $1.21 – $1.25, down from its earlier guidance range of $1.30 – $1.35. Moreover, total revenue is expected to decline in the low single-digits compared with its earlier guidance of low single-digits increase in sales.

Segment Details

Sales at North Stores and Online, which include its retail stores and business in U.S. and Canada, marked a decline of 2.3% to $2,422 million, reflecting a dip in sales of business machines, ink & toners, computers and technology accessories. Moreover, 54 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 3% on account of a 1% decline in average order size and a 2% decrease in traffic. Sales through, increased 3% year over year. Operating income decreased 23.7% year over year to $100 million, whereas operating margin contracted 118 basis points to 4.1%. The decline reflected the company’s increased investment in its .com business and lower product margins.

North American Commercial, which includes its Contract operations in the U.S. and Canada, witnessed a 1.3% rise in sales to $1,946 million due to the growth witnessed in the facilities and breakroom supplies, tablets and furniture, partially offset by decreases in office supplies and print solutions.  Operating income decreased 10.5% to $128 million, while operating margin contracted 85 basis points to 6.6%, reflecting increased marketing expenses.   

Revenue at International Operations waned 8.3% to $946 million, reflecting lower sales in Europe and Australia. Comparable store sales in Europe marked a decline of 6% on account of lower traffic. The segment reported an operating loss of $20 million wider than a loss of $15 million incurred in the year-ago quarter.

Other Financial Details

Staples ended the quarter with cash and cash equivalents of $1,186.6 million, long-term debt of $1,000.3 million and shareholders’ equity of $6,037.8 million.

Year-to-date, Staples generated operating cash flow of about $348 million and incurred capital expenditures of $124 million, resulting in a free cash flow of $224 million. During the quarter, Staples repurchased 6.4 million shares for $100 million.  

Currently, Staples holds a Zacks Rank #2 (Buy), which could witness a downgrade in the near term.

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