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Staples Upped to Neutral

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On Dec 17, we upgraded our recommendation on Staples, Inc. to Neutral from Underperform with a target price of $16.00. The company carries a Zacks Rank #3 (Hold).

Why the Upgrade?

Staples was upgraded after it posted in-line earnings for third-quarter fiscal 2013, following a negative earnings surprise streak for two consecutive quarters. The company delivered earnings of 42 cents that met the Zacks Consensus Estimate, while in the second and first quarters it missed the Estimate by 5.6% and 3.6%, respectively.

In the quarter, Staples achieved its cost reduction target of $150 million in 2013, much ahead of its schedule. Through its cost-cutting endeavors, the company intends to save approximately $250 million annually by the end of fiscal 2015 in North America.

In third-quarter fiscal 2013, Staples unveiled the biggest refurbishment of and since 2005. Moreover, the company widened its product offerings in by nearly 50%.

To be abreast with the changing trends, Staples has been focused on boosting its online presence to drive sales. As part of this goal, the company launched its first omni-channel store in June. Further, in August, it announced plans to unveil a Development Center in Seattle to enhance e-Commerce and engineering.

In October, the company acquired California-based software company, Runa to further augment its e-Commerce platform and provide a more customized shopping experience. We view online business expansion as a game changer for Staples, as it will likely help the company counter competition from online giants like Inc. (AMZN - Free Report) .

However, we prefer to be on the sidelines due to certain negative factors. Staples continues to disappoint on the sales and profitability fronts owing to decline in business and consumer spending in the wake of the global meltdown and deteriorating credit markets. This has resulted in tepid demand for big-ticket items. In third-quarter fiscal 2013, the company’s top line came in at $6,111.7 million, which missed the Zacks Consensus Estimate of $6,203 million, and fell 3.8% year over year. On the other hand, bottom line tumbled 8.7%.

Moreover, waning international sales continue to weigh upon Staples’ performance. During the quarter, revenues at its International Operations fell 8.0% to $1,010 million, primarily due to lower sales in Europe and Australia.

The company also faces stiff competition from office supply retailers such as OfficeMax and Office Depot, Inc. (ODP - Free Report) , which merged their businesses to capture a wider market and generate incremental revenues.

Other Stocks to Consider

A better-performing retail stock that looks promising is Barnes & Noble, Inc. , which carries a Zacks Rank #2 (Buy).

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