Staples Inc. (SPLS), the global leader in the
supply of office products, recently posted fourth-quarter 2011
results. The quarterly earnings of 41 cents a share came in line
with the Zacks Consensus Estimate and increased 5% from 39 cents
earned in the prior-year quarter.
Including one time items, earnings increased 8% from 38 cents
earned in the year ago quarter.
Revenue and Margins
Staples reported total sales of $6,459.7 million, up 1% from the
prior-year quarter. Moreover, the reported sales were almost in
line with the Zacks Consensus Estimate of $6,460 million.
Gross profit for the quarter inched up 0.7% to $1,732.3 million,
while gross margin remained flat at 26.8%. Operating profit
increased 7.8% to $468.8 million, whereas operating margin expanded
48 basis points to 7.3%, reflecting abridged incentive compensation
and depreciation expense.
Segment Details
North American Delivery sales inched up 2% year
over year to $2,528.4 million. The revenue increase reflected
strong sales growth in facilities and breakroom supplies, and
technology products. Operating margin expanded 84 basis points to
9.2%, reflecting lower incentive compensation coupled with
distribution efficiencies, partially offset by decrease in product
margins.
North American Retail sales grew 3% year over
year to $2,631 million. Comparable-store sales inched up 2%
in the quarter, reflecting higher average order size and marginal
increase in customer traffic. Operating margin expanded 99 basis
points to 9.1%, indicating leverage of fixed expenses and lower
incentive compensation.
During the quarter, the company opened 12 stores and closed 4 in
the U.S. Further, Staples opened 2 stores while closing one in
Canada. In fiscal 2011, the company opened 20 stores and closed 12
stores in the U.S., and opened 11 stores, closing 2 in Canada,
ending the year with 1,917 stores.
International sales contracted 5% (in U.S.
dollars) year over year to $1,300.3 million. This revenue decrease
reflected a 9% decline in comparable store sales in Europe coupled
with sluggishness in Australia. Operating margin decreased 173
basis points to 2.5%, reflecting deleveraging of distribution and
delivery costs in European retail businesses.
During the fiscal, the company opened 6 stores and closed 9,
bringing the total number of international stores to 378.
Other Financial Details
The company ended the year with cash and cash equivalents of
$1,264.1 million, long-term debt of $1,599 million and
shareholders’ equity of $7,015.2 million, excluding non-controlling
interests of $7.1 million. In fiscal 2011, Staples generated free
cash flow of $1,192.8 million, whereas incurred capital
expenditures of $384 million.
In fiscal 2011, Staples repurchased 37 million shares for $605
million and distributed $278 million through cash dividends.
Forecast
Management expects sales to increase in the low single-digits in
fiscal 2012, while EPS is expected to increase in the high single
digits. Staples expects to generate more than $1 billion of free
cash flow in fiscal 2012.
Our Take
Staples, which competes with Office Depot Inc.
(ODP) and OfficeMax Inc. (OMX), is better
positioned compared to its competitors in sustaining its growth
momentum based on margin expansion, effective merchandising, and
growth prospects across its retail, delivery and international
divisions.
Moreover, the company’s strategic alliances 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, is a smarter move as the decline in business and consumer
spending and weak credit markets have reduced 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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