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Staples (SPLS) Q2 Earnings Meet, Revenues Beat Estimates

Zacks Equity Research

Staples, Inc. SPLS, which accepted the buyout offer of Sycamore Partners, reported in-line earnings for the fifth straight quarter, when it reported second-quarter fiscal 2017 results. Further, the company’s top line beat estimates after four consecutive quarters of sales miss.

Q2 Highlights

Staples posted adjusted earnings from continuing operations of 12 cents per share that met the Zacks Consensus Estimate. However, the same declined 7.7% from the year-ago period.

Staples, Inc. Price, Consensus and EPS Surprise

Staples, Inc. Price, Consensus and EPS Surprise | Staples, Inc. Quote

On a GAAP basis, the company recorded earnings from continuing operations of 10 cents per share, which compares unfavorably with a loss of 17 cents in the year-ago period.

In fact, this office supplies retailer’s quarterly sales came in at $3,905 million, which declined 3.1% from the year-ago quarter. However, the top line surpassed the Zacks Consensus Estimate of $3,848 million. Comparable sales dipped 1.1% year over year in the quarter.

Further, mid-market sales at Staples Business Advantage (its North American contract business) increased 11% from the year-ago period. Also, profits enhanced at the company’s North American Retail business owing to the operating loss rate contraction of 30 basis points (bps) year over year.

Analysts pointed out that demand for office products (paper-based) has been decreasing due to technological advancements. Smartphones, tablets and laptops are fast emerging as viable substitutes for paper-based office supplies. Moreover, there has been persistent weakness in the office products sector.

Furthermore, stiff competition from online retailers such as Amazon.com, Inc. AMZN has been playing spoilsport for Staples, which concluded the sale of its businesses in Europe, Australia and New Zealand.

The company posted gross profit of $997 million, which declined 2.7% from the year-ago period. Further, its adjusted operating income came in at $116 million in the quarter, versus operating profit of $136 million in the year-ago quarter. Also, its adjusted operating margin contracted 41 bps to 3.0%.

Strategic Endeavors Undertaken

Staples is streamlining its operations to enhance productivity and performance in North America by expanding services, strengthening customer base, shutting down underperforming stores and decreasing fixed costs.

In order to acquire new customers, the company intends to increase its offering of products as well as services beyond office supplies. In addition, Staples is trying to firm its position in mid-market contracts as evident from the buyout of an independent office products dealer, Acquired Capital Office Products.

Overall, these strategic endeavors have helped the stock to gain 12.3% in the last three months, as against the industry’s decline of 9.9%. Currently, the industry is placed at the bottom 2% of the Zacks classified industries (251 out of 256).

Other Financial Details

Staples ended the quarter with cash and cash equivalents of $1,199 million, long-term debt of $524 million, and total shareholders’ equity of $3,387 million, excluding non-controlling interest of $8 million.

During the reported quarter, the company generated $279 million of cash provided by operating activities and incurred capital expenditures of $89 million, thus resulting in free cash flow of about $190 million.

Zacks Rank & Stocks to Consider

Staples currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the same industry include Sally Beauty Holdings, Inc. SBH and Five Below, Inc. FIVE.

Sally Beauty has long-term earnings growth rate of 5.6% and currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Five Below, with  long-term earnings growth rate of 28.5%, came up with an average positive earnings surprise of 6.3% in the trailing four quarters. Also, the stock carries a Zacks Rank #2 (Buy).

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