OMX Officemax Incorporated

Staples Inc. (SPLS), the global leader in the supply of office products, recently posted third-quarter 2011 results. Street analysts had enough time to ponder on the company’s scores. In the paragraphs that follow, we cover the recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.

Last Quarter Synopsis

Staples unveiled its third quarter financial results on November 15. The quarterly earnings of 47 cents a share came in line with the Zacks Consensus Estimate and jumped 14.6% from 41 cents earned in the prior-year quarter.

Total sales of $6,569.9 million were up 0.5% from the prior-year quarter but below the Zacks Consensus Estimate of $6,704 million. North American Delivery sales grew 1.8%, North American Retail sales inched up 0.5% but International sales contracted 1.9%.

Gross profit for the quarter inched up 1.6% to $1,832.8 million, whereas gross margin expanded 30 basis points to 27.9%. Adjusted operating profit increased 1.9% to $533.2 million, whereas operating margin expanded 11 basis points to 8.1%.

(Read our full coverage on this earnings report: Staples Report In Line)

Agreement of Estimate Revisions

The agreement of estimate revisions indicates that the analysts were unidirectional following Staples’ third-quarter 2011 results.

In the last 7 days, 10 out of 14 analysts covering the stock lowered their estimates, and none raised the same for the fourth quarter of 2011. For the first quarter of 2012, 2 analysts raised their estimates with only 1 analyst making a downward revision in the estimate.

For fiscal 2011 and 2012, 7 and 11 analysts, respectively, moved their estimates down, with none revising the same upward in the last 7 days.

Magnitude of Estimate Revisions

The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.

The Zacks Consensus Estimates moved down by 3 cents to 41 cents for the fourth quarter of 2011, but remained constant at 32 cents for the first quarter of 2012, in the last 7 days.

For fiscal 2011 and 2012, the Zacks Consensus Estimates dropped 3 cents to $1.38 and 5 cents to $1.52, respectively, in the last 7 days.

What Drives Estimate Revisions

Staples’ third-quarter 2011 results failed to impress the analysts following the stock, and majority of them tweaked their estimates. Clearly, a negative sentiment is palpable among analysts, who remain pessimistic on the company’s performance. Following the earnings release, the Zacks Consensus Estimates have been falling with the analysts remaining bearish on the stock.

The demand for office products is closely tied to the health of the economy, which is showing no sign of revival. Further, the sluggish performance by its international segment that prompted Staples to trim its fiscal 2011 earnings outlook also compelled the analysts to take a back foot. Although management stood by its earlier sales guidance and expects it to increase in the low single digits, it was not enough to provide an impetus to the analysts.

Staples now projects fourth quarter earnings between 39 cents and 43 cents a share. The analysts have a consensus on 41 cents, which lies at the mid of the guidance range. Management forecasts sales to remain flat or increase in low single digits for the fourth quarter.

Let’s Conclude

The future remains uncertain but efforts to battle the tough economy are obvious. Business budget remains tight, consumers remain more watchful than ever before and companies are trying hard to navigate through the challenging environment.

Staples remains well positioned to sustain its growth based on its margin expansion, effective merchandising, and growth prospects across its retail, delivery and international divisions. It is also making prudent investments in the highly fragmented North American retail market to expand its business technology, and copy and print services that generate higher profit margins.

However, consumers and small businesses remain frugal about big-ticket spending on items such as business machines and other durable products. Counting the pulse of the economy, we prefer to maintain our long-term Neutral rating on the stock. Moreover, Staples, which competes with Office Depot Inc. (ODP) and OfficeMax Inc. (OMX), holds a Zacks #3 Rank that translates into a short-term Hold rating and correlates with our long-term view.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

 
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