2nd UPDATE: Staples Net Up 3.2% Despite International Slump

Staples Inc.'s (SPLS) earnings rose 3.2% in the fiscal fourth quarter, held back by international operations that took a step back in 2011, prompting layoffs in the key weak spots of Europe and Australia.

Shares in the office-supplies retailer fell 7.8% to $14.76 in recent trading. The stock had risen 5% Tuesday, drafting off Office Depot Inc.'s (ODP) stock surge after the smaller rival predicted continuing profitability improvement this year and better-than-expected sales.

Wednesday, Staples reported a 4.6% decline in international sales driven by a 9% slump in European same-store sales, and executives said its European business needs to be fixed. Tuesday, Office Depot also noted increasing business pressures across Europe.

Part of the fix includes layoffs, which Staples said it began earlier this month in both Europe and another sore spot, Australia. Chief Operating Officer Michael A. Miles said on a conference call with analysts that the reduction involved roughly several hundred people. The company said it does not break out headcount numbers by region.

"Unfortunately we probably took a step back in 2011" on overhead costs in Europe, Miles said, adding that the lost ground would make it harder for the company to reach its long-term goal of getting international operating margins to 7.5% from the 3% of previous years.

However, Miles noted Europe is mostly battling very weak sales in technology categories like computers and printers while the office supplies and contract businesses are performing better, comparatively.

Sales in Europe and Australia had been weak in the fiscal third quarter as well, and Staples expects the soft European demand of the second half to persist this year.

While it also predicted slow growth in the U.S., Staples guidance for the new fiscal year was in line with analysts' estimates. Including the effects of an extra selling week, severance from the job cuts and strong-dollar pressure, the company projected full-year earnings per share would increase in a high single-digit percentage on sales growth in a low single-digit. The consensus estimates from analysts surveyed by Thomson Reuters indicated earnings-per-share growth of about 8.8% and sales growth of 1.4%.

Despite the problems abroad, Staples's larger North American operations improved.

In the latest period, North American retail sales rose 2.7% as same-store sales increased 2%. Those are modest gains but still represent the highest growth rates in nearly two years. Same-store sales in the latest period benefited from higher average order size and a slight increase in customer traffic. Sales in the North American delivery division were up 1.5% from a year earlier.

Office suppliers like Staples, the largest chain in the U.S., are operating in an intensely competitive retail environment, a challenge compounded by declining demand for office products as governments contend with budget cuts and traditional supplies increasingly evolve into electronic forms.

Tuesday, Office Depot reported its profitability-focused initiatives helped it swing to the black in the fourth quarter and said the strategies still have "a lot of leg left." Some of them echo Staples maneuvers, such as improving in-store customer experience and remodeling to reduce average store size.

While Office Depot and OfficeMax Inc. (OMX) both have indicated they would focus on margin this year, Staples appears more willing to drive sales.

"We've got to get the top line going again," Chairman and Chief Executive Ronald L. Sargent said when discussing the company's plans for new product categories.

For the quarter ended Jan. 28, Staples posted a profit of $283.6 million, or 41 cents a share, up from a year-earlier profit of $274.7 million, or 38 cents a share. Sales inched up 0.7% to $6.46 billion.

In November, the company had called for earnings of 39 cents to 43 cents a share on sales ranging from flat to low-single-digit growth. That outlook was generally below analysts' expectations at the time.

Gross margin was flat at 26.8%.

-By Joan E. Solsman, Dow Jones Newswires; 212-416-2291; joan.solsman@dowjones.com

--Mia Lamar contributed to this report.

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