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Earnings Preview: Staples

Zacks Equity Research

Staples Inc. (SPLS), a leading retailer of office products and services, is slated to report its second-quarter 2012 financial results on August 15, 2012. The current Zacks Consensus Estimate for the quarter stands at 22 cents per share (flat when compared with the prior-year quarter) on revenues of $5.73 billion.

First-Quarter Recap

Staples, which competes with Office Depot Inc (ODP) and OfficeMax Inc (OMX), posted quarterly earnings of 30 cents a share in the first quarter, in line with the Zacks Consensus Estimate and up 7.1% from 28 cents earned in the prior-year quarter. Including one-time items, earnings decreased 3.6% year over year to 27 cents.

Staples reported total sales of $6.1 billion, down 1.1% year over year. Sales marginally missed the Zacks Consensus Estimate of $6.2 billion.

Management expects sales to increase in the low single digits in fiscal 2012, while the bottom line is expected to augment in the high single digits.

Agreement of Estimate Revisions

Over the past 30 days, 4 out of 14 estimates have been revised downwards, while none were raised for the second quarter. Moreover, for fiscal 2012, 5 out of 16 estimates have been revised in the downward direction, while none moved in the opposite direction.   

The analysts believe that the challenging macro economic outlook continues to remain a drag on the company’s results as the sector’s performance is closely related to the health of the economy.  Further, Staples’ significant exposure to the European market remains a matter of concern.

Magnitude of Estimate Revisions

Given the downward estimate revisions, the Zacks Consensus Estimate for fiscal 2012 came down by a couple of cents to $1.47 in the last 30 days. The Zacks Consensus Estimate remained stable for the upcoming quarter.

Surprise History

With respect to earnings surprises, Staples surpassed as well as met the Zacks Consensus Estimate over the last four quarters in the range of 0% to 10%. The average remained at 10%, indicating that the company has outperformed the Zacks Consensus Estimate consistently over the trailing four quarters.

Our Take

Being a leading retailer of office products and services, Staples is better positioned than its competitors to sustain growth based on its margin expansion, effective merchandising, and growth prospects across its retail, delivery and international divisions.

However, we remain concerned regarding the company’s International segment, which is suffering from declining sales.

Currently, we have a long-term “Neutral” recommendation on the stock. Moreover, Staples holds a Zacks #3 Rank that translates into a short-term “Hold” rating. 

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