Staples (SPLS) Q1 Earnings Meet, Sales Miss, Guides Q2

Staples, Inc.SPLS reported in-line earnings for the fourth straight quarter, when it reported first-quarter fiscal 2017 results. This office supplies retailer posted adjusted earnings of 17 cents a share that met the Zacks Consensus Estimate but declined 11% from the year-ago period.

Management now envisions second quarter earnings from continuing operations in the band of 10-13 cents a share. The current Zacks Consensus Estimate for the quarter is pegged at 12 cents.

Staples' top-line continues to struggle, missing the Zacks Consensus Estimate for the third straight quarter. Sales of $4,149 million lagged the Zacks Consensus Estimate of $4,539 million and declined 4.9% year over year. Comparable sales declined 2.6% during the quarter.

Analysts pointed out that demand for office products (paper-based) has been decreasing due to technological advancements. Smartphones, tablets and laptops are fast emerging as viable substitutes for paper-based office supplies. Moreover, there has been persistent weakness in the office products sector. Further, stiff competition from online retailers such as Amazon.com, Inc. AMZN has been playing spoilsport for Staples, which concluded the sale of its businesses in Europe, Australia and New Zealand.

Staples' adjusted operating income came in at $171 million down from $186 million in the year-ago quarter. Adjusted operating margin contracted 15 basis points (bps) to 4.1%.

Strategic Endeavors Undertaken

Staples is streamlining its operations to enhance productivity and performance in North America by expanding services, strengthening customer base, shutting down underperforming stores and decreasing fixed costs. In order to acquire new customers, the company intends to increase its offering of products as well as services beyond office supplies. The company is trying to firm its position in mid-market contracts, as evident from the buyout of an independent office products dealer, Acquired Capital Office Products.

Staples continued with its plan to close stores in North America. In the reported quarter, the company shuttered 18 outlets. Additionally, it plans to close about 70 stores in North America during fiscal 2017.

The strategic endeavors undertaken have helped the stock to gain 2.9% so far in the year, while the Zacks categorized Retail-Miscellaneous/Diversified industry has declined 2.2%.

Segment Details

North American Delivery sales dipped 2.8% to $2,635 million, while comparable sales fell 1%. Growth witnessed across facilities supplies, breakroom supplies and technology solutions, were offset by declines in ink and toner as well as office supplies. Staples Business Advantage sales decreased 2% on a GAAP basis.

Operating income came in at $137 million, down 13.8% year-over-year, whereas operating margin shriveled 66 bps to 5.2%.

Sales at North American Retail declined 8.2% to $1,514 million on account of store closures. Comparable store sales fell 6%. The company witnessed sluggishness across ink and toner, technology products and office supplies.

Operating income increased 8.2% to $53 million, while operating margin expanded 54 bps to 3.5%.

Staples, Inc. Price, Consensus and EPS Surprise

Staples, Inc. Price, Consensus and EPS Surprise | Staples, Inc. Quote

Other Financial Details

Staples ended the quarter with cash and cash equivalents of $1,290 million, long-term debt of $526 million, and shareholders' equity of $3,360 million, excluding non-controlling interest of $8 million.

During the quarter, the company generated $258 million of cash provided by operating activities and incurred capital expenditures of $37 million, thus resulting in free cash flow of about $221 million. The company anticipates generating free cash flow of at least $500 million in fiscal 2017.

Zacks Rank & Stocks to Consider

Staples currently carries a Zacks Rank #3 (Hold). Better-ranked stocks worth considering include Build-A-Bear Workshop, Inc. BBW flaunting a Zacks Rank #1 (Strong Buy) and Office Depot, Inc. ODP carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Build-A-Bear Workshop and Office Depot have a long-term earnings growth rate of 22.5% and 11.4%, respectively.

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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 Nasdaq, Inc.

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

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