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Staples Downgraded to Underperform

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On Apr 4, we downgraded our recommendation on office supply retailer, Staples Inc. , to Underperform, foreseeing concerns regarding the future outlook of the stock amid a sluggish macro-economic backdrop and frugal consumer spending.

Why the Downgrade?

Estimates for Staples have been displaying a downtrend ever since the company reported its fourth quarter fiscal 2012 results on Mar 6. Though the company’s fourth-quarter earnings of 46 cents a share beat the Zacks Consensus Estimate by a penny, its sales fell short of the Estimate. Moreover, excluding the impact of an additional week, sales waned 4.2%, reflecting a 3.9% decline in International sales. Comparable-store sales declined 5% on account of flat average order size and a 5% decrease in traffic.

In the last 30 days, the Zacks Consensus Estimate for fiscal 2013 and 2014 decreased by 7.6% and 4.1% to $1.34 and $1.42, respectively. With the Zacks Consensus Estimate for both 2013 and 2014 going down, the company now has a Zacks Rank #4 (Sell).

Cause for Concern

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 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.

Going forward, secular headwinds and dismal international sales are likely to remain near-term deterrents for the stock.  

Specialty Retail Stock that Warrants a Look

While we prefer to avoid Staples until we see signs of improvement in the company’s performance, the other specialty retailer worth a look is Cabela's Incorporated holding a Zacks Rank #1 (Strong Buy).

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