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Staples Stumbles, Takes Office Depot, Office Max With It: Stock Roundup

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Staples (SPLS) was one of Wednesday's big stock losers following a disappointing second quarter earnings report and lowered full-year sales and profit outlook amid slower U.S. growth and waning European demand. The stock sank more than 14% on high volume --  topping the most-active stocks list for Wednesday, according to Yahoo! Finance data -- dipping below $12 and hitting close-to-a-decade lows of $10.99 in intraday trade. Shares have seen a 52-week range between $12.10 and $16.93.

Fruit stand: Photo credit AP

Net income for Staples fell to $120.4 million and 18 cents per share vs. $176.4 million  and 25 cents per share last year. This marks a slip of 31.7% year-over-year. Revenue declined 5.5% to $5.5 billion from a year ago. This fell well short of analyst expectations.

At the same time, smaller rivals Office Depot (ODP) and Office Max (OMX) both sank more than 3%, making it a rough day all around for the office-supply space. Office Depot last week also reported earnings that missed expectations, citing, as Staples did, softening U.S. growth and weaker European sales. The stock closed today at $1.55, down considerably from its 52-week high of $3.81.

Office Max actually beat the Street with its earnings report on August 2; four quarters straight of earnings beats have attracted some positive analyst attention (a Forbes column from Aug. 14 calls it "a true value stock"), although a year-over-year revenue decrease in the last quarter did end a two-quarter winning streak. Earnings expectations for the next quarter have also fallen slightly, from 26 cents to 25 cents per share. The stock closed today down 3% at $5.03. Its 52-week range is between $3.90 and $6.45.

Following yesterday's better-than-expected retail report and strong earnings this week from retailers such as Home Depot (HD)  and Target (TGT), Staples' slump is a bit of a damper, especially when considering the back-to-school season should perhaps be a stronger one for them. On the earnings call CEO Ronald Sargent stated that, on the upside, Staples managed to accelerate growth with products outside of their core office supply base -- such as paper and ink -- such as copy, print, breakroom supplies and mobile phones and related accessories.

"Unfortunately," Sargent said, "a steep decline in computer sales, soft trends in core categories and ongoing weakness in the European economy more than offset our progress." The slump in North American sales was a particular blow for the company, as recent quarters had been significantly stronger.

But he noted a "solid pipeline of new technology products and services" to come and, likely in response to a slowdown in the PC market, Staples has recently added the the Google Nexus tablet to its inventory. Windows 8 is also expected to hit the shelves later this year.

The euro's decline (5% against the dollar in 2Q) was also cited as a factor in its lowered outlook; the Framingham-Mass.-based store makes 21% of its revenue outside of North America.

Like Office Depot and OfficeMax before it, Staples now pledges to overhaul its operations and is likely to do so by methods including slimming down its European operations and cutting costs across the board in order to reinvest.

"We're taking a hard look at each of our businesses, and we plan to make significant changes to improve results," Sargent said in the earnings release. "We're also building a plan to reallocate resources, take advantage of our best growth opportunities, and drive increased cost savings."

The office-supply space can be viewed as a major barometer of overall economic health, since demand for its products is at least partly in line with employment numbers, particularly those of white collar workers. So an unemployment rate still stuck above 8% could be hurting Staples' performance -- along with the overall office-supply arena. Staples is also facing increasing competition from retailers who are not direct office-supply rivals, such as Wal-Mart (WMT), discount stores like Dollar General (DG) and  Five Below (FIVE) and, of course, online retail giant Amazon.com (AMZN), all of which offer the same supplies the office-specialized stores do.

Wal-Mart, which reports its earnings amid high expectations Thursday before the bell, is a major player in the back-to-school space, but discounters such as Five Below -- a 2012 IPO success story that caters to the teen and tween set -- could also benefit in the current economic environment.

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