Staples Reports In-Line Q2 Earnings, Revenues Beat Estimates - Analyst Blog

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Store closures and unfavorable foreign currency fluctuations weighed on Staples Inc. ( SPLS ) 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.

Segment Details

Sales at 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 promote awareness.

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.

International 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 $6,071.8 million.

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.

Outlook

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. ( AMZN ) is making situation all the more worse for office retailers including Staples.

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. ( BURL ) and Citi Trends, Inc. ( CTRN ). Both sport a Zacks Rank #1 (Strong Buy).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: SPLS , AMZN , CTRN , BURL

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