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Staples, Inc. (SPLS)

Zacks Equity Research

We downgraded our recommendation on Staples, Inc. (SPLS) to Underperform following dismal second-quarter 2012 results. The quarterly earnings of $0.18 per share missed the Zacks Consensus Estimate of $0.22 and fell 18% from the prior-year quarter due to lower-than-expected sales trends in North America and continuing softness in Europe and Australia. The company witnessed a fall in computer sales and sluggish trends in core categories.

Total sales dropped 6% to $5,498.5 million, and came below the Zacks Consensus Estimate of $5,721 million. Consequently, management lowered its guidance and now expects sales for fiscal 2012 to remain flat compared with the prior year, while the bottom line is expected to increase in low single digits.

We remain cautious about the macroeconomic environment and a sluggish job market, with small businesses and consumers still remaining watchful on their spending. Our target price of $10.50, 7.6X 2012 EPS, reflects this view.

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