Office Supply Company Shares Rise After Staples Results

Shares of office-supply retailers were up Tuesday after Staples Inc. (SPLS) posted a 72% jump in fiscal third-quarter earnings and issued an optimistic holiday-season forecast.

As offices have closed and both consumers and corporations have tightened budgets, Staples has battled the subsequent demand declines by marketing more lower-cost products, expanding its higher-margin namesake line of basic supplies and running promotions on high-end items.

The company has weathered the downturn better than smaller rivals Office Depot Inc. (ODP) and OfficeMax Inc. (OMX), both of which posted continued sales declines when reporting third-quarter results last month. But all three are also facing increased competition from discounters looking to steal business with lower prices.

Bernstein Research analyst Colin McGranahan said in a note to clients Tuesday that Office Depot's demand environment is still tough, but trends in retail are gradually improving. Demand in Europe remains soft, he wrote, and the company has said North American retail same-store sales have improved against easy comparisons.

"Overall, we came away from a visit with ODP feeling that topline trends are stable to improving ... and that the company is appropriately focused on driving profit growth even in a sluggish recovery scenario," McGranahan said, but added the path back to "'average' profitability" is likely to be long and choppy.

Office Depot's shares rose 3.9% to $6.38, while Office Max's increased 5.3% to $11.14.

Meanwhile, Staples' earnings rose on prior-year takeover and tax charges as the world's largest office-products retailer by revenue saw its first increase in North America customer traffic in two years.

The company's sales outlook for the holiday season was optimistic, calling for fourth-quarter sales growth between 1% and 3%, while analysts saw a 1% decline, according to a survey by Thomson Reuters. Its earnings forecast was in line with analysts' expectations at 36 cents to 38 cents excluding items like restructuring costs.

For the quarter ended Oct. 31, Staples posted a profit of $269.4 million, or 37 cents a share, from $156.7 million, or 22 cents a share, a year earlier. Excluding acquisition and other charges, earnings fell to 39 cents from 42 cents. Revenue decreased 6.2% to $6.52 billion. A survey of analysts by Thomson Reuters predicted 38 cents a share on $6.45 billion in revenue.

Standard & Poor's equity analysts said they were encouraged by Staples' flat same-store sales at retail stores after nine straight quarters of declines, but that they remain concerned about macroeconomic pressures facing the company's contract business. S&P added it thinks the shares are overvalued.

Bernstein's McGranahan said in a separate note that Staples' results showed continued market-share gains in North America, with the North American retail same-store sales gap "significantly widening" compared with Office Depot and Office Max.

Staples shares rose 5% to $24.48 in recent trading. The stock is up 37% so far this year and 13% in the last month.

-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353; kerry.benn@dowjones.com

(Joan E. Solsman contributed to this article.)

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