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Staples Held at Neutral

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We have maintained our long-term recommendation on the leading office products retailer Staples Inc. at Neutral.

Why the Reiteration?

Staples’ second-quarter fiscal 2013 results disappointed. Both the top and bottom line missed the Zacks Consensus Estimate while decreasing 2.2% and 15.8%, respectively. This Zacks Rank #4 (Sell) company lowered its earnings and sales guidance for fiscal 2013. Staples now expects earnings to be in the range of $1.21 – $1.25 per share, down from its earlier guidance 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.

Going forward, we expect demand for office products to remain soft. Moreover, margins are likely to remain under pressure owing to the company’s price investment and macroeconomic headwinds.

However, it is not only Staples that is passing through difficult times. On the whole, 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.

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.

Staples, on the other hand, has shifted focus toward improving store productivity, accelerating growth in adjacent categories, increasing market share in core office supplies and streamlining its cost structure, which we believe would benefit the company as the economy rebounds and consumer spending increases.

Additionally, Staples is focusing on the delivery business, which requires less capital and generates higher margins. This could prove to be a game changer for the company in the long run.

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