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Bearish View on Staples

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We downgraded our long-term recommendation on Staples, Inc. to Underperform as it continues with its dismal performance for the second consecutive quarter in fiscal 2013. The stock currently carries a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Estimates for Staples have shown a downtrend since the company reported disappointing second-quarter results on Aug 21, 2013. The company continues to disappoint on the sales and profitability front, as decline in business and consumer spending in the wake of the global meltdown and the deterioration of credit markets have resulted in soft demand for big-ticket items.

Lower sales on account of store closures and lower product margins took a toll on the company’s performance. The quarterly earnings of 16 cents a share missed the Zacks Consensus Estimate and decreased 15.8% year over year. Total sales also declined 2.2% year over year to $5,314.7 million and fell short of the Zacks Consensus Estimate of $5,381 million.

The company’s international operations remain a concern in the quarter with sales waning 8.3% to $946 million, reflecting lower revenue from Europe and Australia.

Going forward, we expect the 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.

Given the near-term challenges, the company lowered its earnings and sales guidance for fiscal 2013. Staples now expect earnings to be in the range of $1.21 to $1.25, down from its earlier guidance range of $1.30 to $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.

The lower-than-expected results triggered a downtrend in the Zacks Consensus Estimates, as analysts become less constructive on the stock’s future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that fell 7.5% to $1.23 for fiscal 2013 and 7.7% to $1.31 per share for fiscal 2014 in the past 60 days.

Other Stocks That Warrant a Look

Not all retail stocks are performing as disappointingly as Staples. Other stocks worth considering in the retail sector, include Citi Trends, Inc. and Lumber Liquidators Holdings, Inc. (LL) both sporting a Zacks Rank #1 (Strong Buy), and DSW Inc. (DSW - Free Report) holding a Zacks Rank #2 (Buy).

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