Staples Earnings Rises - Analyst Blog

Staples, Inc. (SPLS), the global leader in the supply of office products, recently posted third-quarter 2010 results. The quarterly earnings of 41 cents a share came a penny ahead of the Zacks Consensus Estimate and rose 5.1% from 39 cents earned in the prior-year quarter.

Despite a marginal increase in the top-line, Staples was able to deliver a mid single-digit growth in its bottom-line on the back of effective cost management. On a reported basis, including one-time items, earnings came in at 40 cents a share, up 8.1% from 37 cents posted in the year-ago quarter.

The Zacks Consensus Estimate slipped by a penny prior to the earnings announcement with 2 out of 17 analysts covering the stock raising their estimates and 2 analysts lowering their projections in the last 30 days.

Staples reported total sales of $6,537.7 million that rose marginally by 0.3% from the prior-year quarter, and came ahead of the Zacks Consensus Revenue Estimate of $6,536 million. The office products retailer forecasts sales to rise in the low single digits in the fourth quarter and fiscal year 2010, and to increase in the low to mid, single digits in fiscal 2011.

Gross profit for the quarter jumped 2.1% to $1,803.7 million, whereas gross profit margin expanded 50 basis points to 27.6%. Adjusted operating profit climbed 8.4% to $523.4 million, whereas operating margin increased 60 basis points to 8% driven by improved product margins, fall in delivery and distribution costs, and lower amortization.

Segment Details

North American Delivery sales climbed 2.5% to $2,537.1 million and 2.2% in local currency due to robust customer acquisition.

North American Retail sales grew 0.6% to $2,644.3 million but fell 0.4% in local currency. Comparable-store sales dropped 1% compared to the year-earlier quarter. North American Retail opened 10 stores and closed one store, ending the quarter with 1,897 stores.

International sales tumbled 4.1% to $1,356.2 million and 0.7% in local currency. The increase in revenue in local currency in the European Contract business was to a greater extent offset by a 2% fall in comparable-store sales in Europe. European Retail opened one store and closed three stores during the quarter under review bringing the total number of international stores to 381.

Other Financial Details

Year-to-date Staples generated free cash flows of $758 million, whereas capital expenditures were $246 million. The company ended the quarter with cash and cash equivalents of $1,369.7 million, long-term debt of $2,054.8 million and shareholders' equity of $6,782.8 million, including non-controlling interests of $7.3 million. The company also repurchased 8 million shares, aggregating $156 million.

Management now expects capital expenditures of approximately $400 million and $500 million for fiscal 2010 and 2011, respectively. The company also expects to generate free cash flows of more than $1 billion in both fiscal 2010 and 2011.

Earnings Guidance

Staples, which competes with Office Depot Inc. (ODP) and OfficeMax Inc. (OMX), now expects fourth-quarter earnings in the range of 39 cents to 41 cents and fiscal year 2010 earnings between $1.27 and $1.29 per share. For fiscal 2011, Staples forecasts earnings in the range of $1.50 to $1.60.

On a reported basis, earnings for the fourth quarter are expected between 38 cents and 40 cents, and for fiscal year 2010 between $1.22 and $1.24 per share.

The current Zacks Consensus Estimates of 40 cents for the fourth quarter and $1.28 per share for fiscal 2010 dovetail with the company's guidance range. For fiscal 2011, the current Zacks Consensus Estimate is $1.55, which also remains in sync with management's outlook.

Our View

Being a leading retailer of office products and services, Staples is better positioned than its competitors to benefit from the economic recovery, and is poised to sustain its growth momentum based on margin expansion, effective merchandising and growth prospects across its retail and delivery divisions.

However, we remain cautious about the macro-economic environment and sluggish job market. The recovery in the economy still lacks luster. As a result, consumers and small businesses still remain watchful on their spending. We observe that the demand for office products is closely tied to the health of the economy.

Currently, we have a Neutral rating on Staples. The company holds a Zacks #3 Rank, which translates into a short-term Hold recommendation, and correlates with our long-term view.

 
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