Staples Downgraded to Underperform

Zacks

On Apr 4, we downgraded our recommendation on office supply retailer, Staples Inc. (SPLS), 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) and OfficeMax Incorporated (OMX) 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 (CAB) holding a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on ODP

Read the Full Research Report on SPLS

Read the Full Research Report on OMX

Read the Full Research Report on CAB

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