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Staples Reports In Line

Zacks Equity Research

Staples Inc. (SPLS), the global leader in the supply of office products, recently posted fourth-quarter 2011 results. The quarterly earnings of 41 cents a share came in line with the Zacks Consensus Estimate and increased 5% from 39 cents earned in the prior-year quarter.

Including one time items, earnings increased 8% from 38 cents earned in the year ago quarter.

Revenue and Margins

Staples reported total sales of $6,459.7 million, up 1% from the prior-year quarter. Moreover, the reported sales were almost in line with the Zacks Consensus Estimate of $6,460 million.

Gross profit for the quarter inched up 0.7% to $1,732.3 million, while gross margin remained flat at 26.8%. Operating profit increased 7.8% to $468.8 million, whereas operating margin expanded 48 basis points to 7.3%, reflecting abridged incentive compensation and depreciation expense.  

Segment Details

North American Delivery sales inched up 2% year over year to $2,528.4 million. The revenue increase reflected strong sales growth in facilities and breakroom supplies, and technology products. Operating margin expanded 84 basis points to 9.2%, reflecting lower incentive compensation coupled with distribution efficiencies, partially offset by decrease in product margins.

North American Retail sales grew 3% year over year to $2,631 million.  Comparable-store sales inched up 2% in the quarter, reflecting higher average order size and marginal increase in customer traffic. Operating margin expanded 99 basis points to 9.1%, indicating leverage of fixed expenses and lower incentive compensation.

During the quarter, the company opened 12 stores and closed 4 in the U.S. Further, Staples opened 2 stores while closing one in Canada. In fiscal 2011, the company opened 20 stores and closed 12 stores in the U.S., and opened 11 stores, closing 2 in Canada, ending the year with 1,917 stores.

International sales contracted 5% (in U.S. dollars) year over year to $1,300.3 million. This revenue decrease reflected a 9% decline in comparable store sales in Europe coupled with sluggishness in Australia. Operating margin decreased 173 basis points to 2.5%, reflecting deleveraging of distribution and delivery costs in European retail businesses.

During the fiscal, the company opened 6 stores and closed 9, bringing the total number of international stores to 378.

Other Financial Details

The company ended the year with cash and cash equivalents of $1,264.1 million, long-term debt of $1,599 million and shareholders’ equity of $7,015.2 million, excluding non-controlling interests of $7.1 million. In fiscal 2011, Staples generated free cash flow of $1,192.8 million, whereas incurred capital expenditures of $384 million.

In fiscal 2011, Staples repurchased 37 million shares for $605 million and distributed $278 million through cash dividends.


Management expects sales to increase in the low single-digits in fiscal 2012, while EPS is expected to increase in the high single digits. Staples expects to generate more than $1 billion of free cash flow in fiscal 2012.

Our Take

Staples, which competes with Office Depot Inc. (ODP) and OfficeMax Inc. (OMX), is better positioned compared to its competitors in sustaining its growth momentum based on margin expansion, effective merchandising, and growth prospects across its retail, delivery and international divisions.

Moreover, the company’s strategic alliances with Martha Stewart Living Omnimedia Inc (MSO) and Avery Dennison  Corporation’s (AVY) office and consumer products group for retailing a new product line for the home office, is a smarter move as the decline in business and consumer spending and weak credit markets have reduced the demand for big-ticket items, such as business machines and other durable products.

Further, the home office market offers a huge potential for Staples and will augment sales owing to its size. Further, there are no such big brands offering goods to cater to the needs of the home office space.

Currently, we prefer to maintain a long-term Neutral” rating on the stock. Moreover, Staples has a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.

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