OMX Officemax Incorporated

A sturdy international performance facilitated Staples Inc. (SPLS), the global leader in the supply of office products, to post better-than-expected second-quarter 2011 results. The quarterly earnings of 22 cents a share topped the Zacks Consensus Estimate of 19 cents and jumped 10% from 20 cents delivered in the prior-year quarter.

However, on a reported basis, including one-time items, Staples delivered earnings of 25 cents a share, up 38.9% from the prior-year quarter.

Revenue and Margins

Staples reported total sales of $5,819.6 million that rose 5.2% from the prior-year quarter, and came ahead of the Zacks Consensus Estimate of $5,653 million.

Gross profit for the quarter increased 5.3% to $1,540.4 million, while gross margin expanded 47 basis points to 26.5%. Operating profit tumbled 4% to $278.1 million, whereas operating margin shriveled 46 basis points to 4.8%.

Segment Details

North American Delivery sales climbed 3.1% to $2,433.2 million and 2.5% in local currency. The revenue increase reflected strong customer acquisition and sales increase in facilities and breakroom supplies.

North American Retail sales inched up 1.7% to $2,045.1 million and increased marginally by 0.1% in local currency. Comparable-store sales remained flat in the quarter as the increase in average order size was offset by a decrease in customer traffic. North American Retail opened 4 stores in the U.S.and 4 stores in Canada, while it closed 2 stores in the U.S., ending the quarter with 1,907 stores.

International sales climbed 15.2% to $1,341.3 million but fell marginally by 0.1% in local currency. During the quarter, the company opened 1 store in Germany while closed 1 store in China, bringing the total number of international stores to 378.

Other Financial Details

The company ended the year with cash and cash equivalents of $823.1 million, long-term debt of $1,930.6 million and shareholders’ equity of $7,112.7 million, excluding non-controlling interests of $7 million. Year-to-date, Staples generated free cash flows of $138 million, whereas incurred capital expenditures of $164 million.

During the quarter, the company repurchased 12 million shares, aggregating $199 million. Year-to-date, Staples repurchased 19 million shares for $346 million.

Management forecasts capital expenditures of approximately $400 million for fiscal 2011 and expects to generate free cash flows of more than $1 billion in 2011.

Guidance Raised

Given better-than-expected results, the company raised its fiscal 2011 earnings guidance.  

Staples now expect third-quarter earnings in the range of 46 cents to 48 cents and fiscal 2011 earnings between $1.39 and $1.45 per share. However, on a reported basis, including one-time items, the company expects to deliver earnings in the range of $1.42 to $1.48 per share in fiscal 2011.

Earlier, the company had projected fiscal 2011 earnings between $1.35 and $1.45 per share.

Management now forecasts sales to increase in the low single-digits in the third quarter and fiscal 2011, respectively.

Staples Holds a Zacks Rank #4

We prefer to maintain a long-term “Underperform” rating on the stock. Moreover, Staples holds a Zacks #4 Rank, which translates into a short-term ‘Sell’ recommendation.

Staples, which competes with Office Depot Inc. (ODP) and OfficeMax Inc. (OMX), is better positioned than its competitors to sustain its growth momentum based on margin expansion, effective merchandising, and growth prospects across its retail, delivery and international divisions.

However, we remain cautious about the macroeconomic environment and sluggish job market. The decline in business and consumer spending and weak credit markets has resulted in slow demand for big-ticket items, such as business machines and other durable products. We observe that the demand for office products is closely tied to the health of the economy.

 
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