Store closures and unfavorable foreign currency fluctuations
) second-quarter fiscal 2014 performance. The company's' quarterly
adjusted earnings of 12 cents per share came in line with the Zacks
Consensus Estimate but fell 25% year over year.
Including one-time items, earnings per share came in at 13 cents
per share, down 19% year over year.
Total sales decreased 1.8% to $5,220 million but came ahead of the
Zacks Consensus Estimate of $5,168 million. Excluding the impact of
store closures and currency fluctuations, revenues fell 1%.
Gross profit decreased 3.8% to $1,308 million while gross margin
contracted approximately 50 basis points (bps) to 25.1%.
Staples reported a near 90% drop in operating income to $19.4
million and operating margin contracted 316 bps to 0.4%. Excluding
impact of restructuring and other related charges, operating profit
fell 36.2% to $120.2 million and operating margin contracted 123
bps to 2.3%. Higher expenses, apart from one-time items, proved to
be a drag.
Staples closed about 80 stores in the quarter and is intends to
shut down another 140 outlets across North America in fiscal
2014. Also, the company achieved $150 million in annualized
cost reductions. The company plans to achieve $500 million in
annualized savings over a two year time frame.
North American Stores and Online,
which include its retail stores and Staples.com business in the
U.S. and Canada, marked a decline of 5.8% to $2,282 million. Apart
from store closures and unfavorable foreign exchange fluctuations,
decline in sales of core office supplies, computers and technology
accessories led to lower sales. Higher sales of facilities and
breakroom supplies along with copy and print services were not
enough to pull up sales.
During the quarter, comparable-store sales (comps) declined 5%
owing to a 4% fall in traffic and 1% average order size from the
prior-year quarter. However, sales through Staples.com rose 8% year
over year due to increased customer conversion and stretched out
assortment in categories apart from office supplies.
Operating income decreased 72% to $28 million while operating
margin contracted 290 bps to 1.2%. The decline reflected the
company's increased investment in its .com business and lower
product margins along with increased marketing expenditure to
North American Commercial,
which includes its Contract operations in the U.S. and Canada,
witnessed a 2.6% increase in sales to $1,997 million, due to growth
in facilities and breakroom supplies along with furniture, partly
offset by lower demand of ink and toner.
Operating margin contracted 5 bps to 6.5%, reflecting increased
investments and higher incentive compensation.
operations continue to be in trouble. Revenues waned 0.5% to $941
million, reflecting lower sales in Europe. Comps in Europe fell 1%
as increased average order size was run down by reduction in
traffic. The segment reported an operating loss of $22 million, up
$2 million from the year-ago quarter.
Other Financial Details
Staples ended the quarter with cash and cash equivalents of $417.2
million, down 64.8% as the company continues with its extensive
investment plans. The company's long-term debt (net of current
maturities) was $1,015.7 million and shareholders' equity was
For the first half, Staples generated operating cash flow of about
$303.6 million and incurred capital expenditures of $109.8 million,
resulting in a free cash flow of $193.8 million. Staples
repurchased 3.5 million shares for $40 million in the quarter.
The office supplies industry is currently grappling with secular as
well as cyclical headwinds. Improvement in technology has reduced
the demand for traditional core office-supply items. In addition,
the decline in business and consumer spending, given the global
meltdown and deterioration of credit markets has resulted in
sluggish demand for big-ticket items, thereby negatively impacting
the top line.
Moreover, intense competition from online bellwethers like
Amazon.com Inc. (
) is making situation all the more worse for office retailers
Though the company is on a store rationalization drive and is
ramping up investments to accelerate growth, turnaround is likely
to be a time consuming affair.
Given the challenges in the near-term, the company projects lower
sales for the third quarter of fiscal 2014 (which includes the
important back-to-school season) compared with the prior-year
quarter figure. Further, earnings per share are likely to be in the
range of 34-39 cents as against 42 cents earned in the third
quarter fiscal 2013.
However, the company continues to expect more than $600 million of
free cash flow generation in the fiscal.
As a result, Staples is currently a Zacks Rank #4 (Sell) stock.
Other Stocks to Consider
Some better-ranked retail stocks worth consideration include
Burlington Stores, Inc. (
) and Citi Trends, Inc. (
). Both sport a Zacks Rank #1 (Strong Buy).
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