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Staples Reports Soft 1Q

Zacks Equity Research

Staples Inc. (SPLS) the global leader in the supply of office products, recently posted first-quarter 2012 results. The quarterly earnings of 30 cents a share came in line with the Zacks Consensus Estimate and increased 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 $6,104.8 million, down 1.1% year over year and below the Zacks Consensus Estimate of $6,187 million.

Gross profit for the quarter inched down 1.6% to $1,609.7 million, while gross margin contracted 10 basis points to 26.4%. Operating profit decreased 8.7% to $318.1 million, whereas operating margin contracted 43 basis points to 5.2%. The company stated that costs related to headcount reductions and deleveraging of fixed expenses in International operations took a toll on operating margin.

Segment Details

North American Delivery sales inched up 2% year over year to $2,555.1 million. The revenue increase reflected strong sales in facilities and breakroom supplies coupled healthy growth in the sales of copy and print and promotional products. Operating margin increased 3 basis points to 7.9%, reflecting supply chain effectiveness, offset by decrease in product margins.

North American Retail sales remained approximately flat at $2,323.8 million. Comparable-store sales also remained flat in the quarter, reflecting no change in the average order size and customer traffic. Operating margin decreased 43 basis points to 7.2%.

During the quarter, the company opened 3 stores and closed 6 in the U.S. Further, Staples opened one store in Canada and closed one, ending the quarter with 1,914 stores in North America.

International sales contracted 8% (in U.S. dollars) year over year to $1,225.9 million, reflecting a decrease of 6% in comparable store sales in Europe coupled with sluggishness in Australia. Operating margin decreased 225 basis points to 1.5%, reflecting increased costs related to headcount reductions and deleveraging of fixed expenses.

During the quarter, the company opened one store and closed 3, bringing the total number of international stores to 376.

Other Financial Details

The company ended the year with cash and cash equivalents of $1,204.5 million, long-term debt of $1,595.9 million and shareholders’ equity of $7,088.1 million, excluding non-controlling interests of $7.1 million. During the quarter, Staples generated free cash flow of $94.8 million, whereas incurred capital expenditures of $52 million.

During the reported quarter, Staples repurchased 5.9 million shares for $93 million and distributed $75 million through cash dividends.


Management stood by its earlier forecast and expects sales to increase in the low single-digits in fiscal 2012, while the bottom line is expected to increase in the high single digits. The company expects to generate more than $1 billion of free cash flow in fiscal 2012.

Currently, we prefer to maintain a long-term Neutral rating on the stock. Moreover, Staples which competes with Office Depot Inc. (ODP) and OfficeMax Inc. (OMX), has a Zacks #2 Rank, which translates into a short-term Buy recommendation.

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