Office supply company
beat analyst estimates when it reported its second-quarter
earnings Wednesday morning, with weak performance at its retail
stores being partially offset by growth in both its commercial
and online segments. While Staples still has plenty of work to do
to combat falling margins, the company is performing far better
, and its second-quarter results show significant progress
in a few key areas.
Staples managed to beat analyst estimates for both revenue and
EPS during the second quarter:
Average Analyst Estimate
Total sales fell by 1.8% year over year, to $5.2 billion, an
improvement over the 2.8% decline during the first quarter.
Operating income collapsed, but backing out the effects of
various one-time charges, Staples produced $120 million in
operating income, a 2.3% operating margin. This is down from 3.5%
during the second quarter of 2013.
Comparable-store sales declined by 5%, an acceleration from
the 4% decline during the first quarter and worse than the
3% decline reported by competitor Office Depot during its second
quarter. Staples closed 80 stores during the quarter as part of
its plan to close 140 this year.
While the retail operation performed poorly, online sales on
Staples.com jumped by 8% year over year, an improvement over the
6% growth during the first quarter. This has been driven by
Staples expanding its product assortment beyond core office
supplies, although the online channel tends to carry lower
The North American commercial business, through which Staples
sells directly to businesses, grew by 2.6% during the quarter,
with operating margin from the segment staying roughly steady at
6.5%. The commercial segment includes two websites targeting
different business customers: Staples Advantage for organizations
of 20 or more employees, and Quill.com for smaller
businesses. Commercial has been a bright spot for
Staples as its stores have underperformed, and the second quarter
marks an acceleration over the 0.7% growth during the first
quarter. In contrast, Office Depot's business solutions segment
declined by 1% during the second quarter, producing an operating
margin of just 4%.
The international division declined by 3.9% year over year,
with the company recording an operating loss of $25 million for
the segment. International operations made up about 18.5% of
total sales during the quarter, so while the division is the
least important for Staples, the constant operating losses are a
drain on the company's profits.
Priorities are in the right place
Staples is mostly a business-oriented company, with about 80%
of its sales going to businesses of all sizes, either through its
retail stores, its commercial business, or its website. While the
retail stores are performing poorly, the other parts of Staples'
business are doing fine, and the strength of the commercial
segment suggests that businesses still see value in doing
business with Staples.
Staples plans to close a total of about 225 stores over the
next couple of years. Along with roughly 400 store closings
expected from Office Depot, this reduction in store count should
lead to better profitability for existing stores as sales are
consolidated. This will take time, and the retail operation has
so far only gotten worse, but it's still a profitable business
for Staples. The same can't be said for Office Depot, which
posted an operating loss of $6 million for its retail division
during the second quarter.
The focus on online sales also gives Staples a key advantage
over Office Depot. While Staples derives about 50% of its revenue
from online sales, either through Staples.com or its commercial
segment, Office Depot doesn't even mention the online channel in
its earnings report. As the office supply industry evolves, a
strong e-commerce operation is becoming critical in competing
against online-only rivals like
, as well as other big-box stores like
While comparable-store sales collapsed during the quarter for
Staples, the all-important commercial segment grew faster than it
did during the first quarter, and online sales surged. The retail
stores need work, but store closings over the next couple of
years should act to boost margins. Staples' results were better
than expected, and with the company still expecting to produce
$600 million in free cash flow during the year, the company is
doing a lot better than its floundering stock price suggests.
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Staples Earnings: Better Than Expected
originally appeared on Fool.com.
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