UPDATE: Staples Profit Grows On Higher Margins, Sales Uptick

Like its smaller rivals, Staples Inc. (SPLS) controlled costs in its fiscal third quarter to boost margins and drive profit growth but, unlike Office Depot Inc. (ODP) and OfficeMax Inc. (OMX), the nation's largest office-supply chain actually saw revenue grow.

Office supply has seen mixed results lately as persistently high unemployment pressures consumers, but its size and market share have allowed Staples to outpace its competitors and avoid some of their woes.

On a conference call to discuss its results, the company said early sales of Amazon.com Inc. (AMZN) market-leading Kindle electronic-book reader are "very good" since its was rolled out in Staples stores nationwide last month. It said it doesn't yet participate in the book-download business, but sales of Kindle accessories have been "very nice." Staples sells "one or two other off-brand" e-book readers, but is staying away from the brands "the book shops have," apparently a reference to Barnes & Noble Inc.'s (BKS) popular Nook and the less-popular Kobo, made by the Toronto company of the same name and backed by Borders Group Inc. (BGP).

North American retail sales, which accounted for the greatest share of Staples's revenue, increased 0.6% but were down 1% on a same-store basis, in line with the company's forecast. North American delivery revenue grew a better-than-expected 2.5%, and on the call it said it won "several new, multi-million-dollar contracts during the quarter."

International sales slid 4.1% driven mainly by a 2% drop in European same-store sales, which President and Chief Operating Officer Michael Miles said is a "nice improvement" from the prior quarter and years past. Its German retail business was a highlight, he said, with every store there profitable, and Staples plans "historic growth" there next year.

Miles said Germany is "probably the strongest" economy in Europe, and the fewer than 60 stores there to serve more than 80 million Germans means its opportunity for new stores there could give the company "several years" of European store growth all by itself. Each European country is a very different market he noted, with the U.K. for instance facing very different challenges, but he hopes expansion in Germany will hold some lessons for how to better its European operations.

For the quarter ended Oct. 30, Staples posted a profit of $288.7 million, or 40 cents a share, 7.2% and 8.1% higher than a year ago, respectively, on revenue that edged up nominally to $6.54 billion.

For its fourth quarter that ends early next year, Staples forecast earnings of 39 cents to 41 cents a share and sales growth in the low-single digits on a percentage basis, roughly in line with analysts' views, and it lifted the low end of its per-share profit projections for the full year. The company, which had seen flat revenue compared with the prior fiscal year, said on the call that the increase to the bottom of its annual earnings view has more to do with both rounding and the number of shares it uses to calculate per-share numbers than it does with results exceeding its expectations.

Staples shares recently traded 2.9% higher at $20.66, and its results helped boost Office Depot stock by 2.7% and OfficeMax stock by 2.5%. Office Depot shares are still down nearly 32% during the past year while OfficeMax has rebounded nicely from previous struggles to post a 47% rise during the same time and overtake Office Depot as the second-largest chain by market capitalization at nearly $1.5 billion. That market cap is still not a tenth of behemoth Staples' despite a 10.3% slide for Staples stock since last November.

-By Maxwell Murphy, Dow Jones Newswires; 212-416-2171; maxwell.murphy@dowjones.com

(Matt Jarzemsky contributed to this article.)

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