Staples Inc. (SPLS), the global leader in the
supply of office products, recently posted third-quarter 2011
results. The quarterly earnings of 47 cents a share came in line
with the Zacks Consensus Estimate and jumped 15% from 41 cents
earned in the prior-year quarter.
Revenue and Margins
Staples reported total sales of $6,569.9 million, up 0.5% from
the prior-year quarter. However, the reported sales were below the
Zacks Consensus Estimate of $6,704 million.
Gross profit for the quarter inched up 1.6% to $1,832.8 million,
while gross margin expanded 30 basis points to 27.9%. Operating
profit crept up 1.9% to $533.2 million, whereas operating margin
expanded 11 basis points to 8.1%.
Segment Details
North American Delivery sales crept up 1.8%
year over year to $2,582.7 million. The revenue increase reflected
strong sales growth in facilities and breakroom supplies, tablets,
laptops, promotional products and computer accompaniments.
Operating margin expanded 63 basis points to 9.5%, reflecting
higher profits from the Canadian delivery businesses.
North American Retail sales inched up 0.5% year
over year to $2,656.6 million. Comparable-store sales inched down
1% in the quarter, reflecting flat average order size and 1%
decrease in customer traffic. Operating margin expanded 12 basis
points to 10.7%, reflecting improved product margins.
During the quarter, the company opened 2 stores each in the U.S.
and Canada, while it closed 3 stores in the U.S., ending the
quarter with 1,908 stores.
International sales contracted 1.9% year over
year to $1,330.6 million. This revenue decrease reflected a 12%
decline in comparable store sales in Europe coupled with
sluggishness in Australia and European Printing Systems businesses.
Operating margin decreased 136 basis points to 3%, reflecting
deleveraging of fixed costs in Australia and European retail
businesses.
During the quarter, the company opened 1 store in Germany,
bringing the total number of international stores to 377.
Other Financial Details
The company ended the year with cash and cash equivalents of
$1,060.4 million, long-term debt of $1,557.1 million and
shareholders’ equity of $7,172.9 million, excluding non-controlling
interests of $7.1 million. Year to date, Staples generated free
cash flow of $851.9 million, whereas incurred capital expenditures
of $244 million.
During the quarter, the company repurchased 10 million shares,
aggregating $144 million. Year-to-date, Staples repurchased 29
million shares for $490 million. Staples now expects to buyback
approximately $600 million shares, indicating an increase from its
earlier guidance of $300 million to $500 million.
Management forecasts capital expenditures of approximately $400
million for fiscal 2011 and expects to generate free cash flow of
more than $1 billion in 2011.
Guidance Trimmed
Given the sluggish performance of its international segment, the
company trimmed its fiscal 2011 earnings guidance.
Staples now expects earnings between $1.35 and $1.39 per share
in fiscal 2011 from its earlier guidance range of $1.39 and
$1.45.
For the fourth-quarter of 2011, management expects earnings in
the range of 39 cents to 43 cents on a reported basis, including
one-time items.
Management now forecasts sales to remain flat or increase in low
single-digits for the fourth quarter of 2011. For fiscal 2011, the
company stood by its earlier guidance and expects sales to increase
in the low single-digits.
Staples Holds a Zacks #3 Rank
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.
Moreover, Staples entered into partnership with Martha
Stewart Living Omnimedia Inc (MSO) and Avery
Dennison Corporation’s (AVY) office and consumer
products group for retailing a new product line for the home
office.
Considering the current macroeconomic environment and sluggish
job market, it is considered to be a smarter move as the decline in
business and consumer spending and weak credit markets have slowed
the demand for big-ticket items, such as business machines and
other durable products.
Further, the home office market offers a huge potential for
Staples and will augment sales owing to its size. Further, there
are no such big brands offering goods to cater to the needs of the
home office space.
Currently, we prefer to maintain a long-term Neutral rating on
the stock. Moreover, Staples has a Zacks #3 Rank, which translates
into a short-term Hold recommendation.
AVERY DENNISON (AVY): Free Stock Analysis Report
MARTHA STWT LIV (MSO): Free Stock Analysis Report
OFFICE DEPOT (ODP): Free Stock Analysis Report
OFFICEMAX INC (OMX): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
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