OMX Officemax Incorporated

We recently downgraded our recommendation on Staples Inc. (SPLS), the leading global supplier of office products, to Underperform with a price target of $15.00, following lower-than-expected first-quarter 2011 results and truncated guidance. Earlier, we had a Neutral rating on the stock.

Staples’ first-quarter 2011 earnings of 28 cents a share missed the Zacks Consensus Estimate of 32 cents and remained flat with the prior-year quarter. Given lower-than-expected results, the company took a cautious stance and trimmed its fiscal 2011 earnings guidance.

Staples now expects the second quarter earnings in the range of 18 cents to 20 cents and fiscal 2011 earnings between $1.35 and $1.45 per share. Earlier, the company had projected fiscal 2011 earnings between $1.50 and $1.60 per share. Management now forecasts sales to be flat to marginally positive in the second quarter and to increase in the low single-digits in fiscal 2011.

The decline in business and consumer spending in the wake of the global meltdown and the deterioration of credit markets has resulted in sluggish demand for big-ticket items, such as business machines and other durable products.

As the demand for office products remained sluggish, the company plans to open fewer stores and also hinted at reducing the size of existing stores. We observe that the demand for office products is closely tied to the health of the economy.

Staples also faces stiff competition from office supply retailers, such as OfficeMax Inc. (OMX) and Office Depot Inc. (ODP), discount stores, mass merchandisers, computer and electronics superstores on attributes such as store format, pricing strategy and in-stock consistency. This may weigh upon the company’s results.

Currently, we have a long-term Underperform rating on the stock. Moreover, Staples holds a Zacks #5 Rank, which translates into a short-term Strong Sell rating.

 
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