Staples, Inc. (SPLS), a global leader in the supply of office products, posted second-quarter 2010 results this morning. The quarterly earnings of 20 cents a share was in line with the Zacks Consensus Estimate and rose 25% from 16 cents earned in the prior-year quarter.
On a reported basis, including one-time items, earnings came in at 18 cents a share, up 38.5% from 13 cents posted in the year-ago quarter.
Despite the top-line being flat, Staples was able to deliver double-digit growth on its bottom-line on the back of effective cost management. Cost of goods sold and occupancy costs fell 0.9%; selling, general and administrative expenses dropped 0.3%; amortization of intangibles dipped 44.1%; and interest and other expenses slipped 4.1%.
Staples reported total sales of $5,534.2 million, which remained flat compared with the prior-year quarter but fell short of the Zacks Consensus Revenue Estimate of $5,621 million. The company expects a modest recovery in the second-half of 2010, forecasting sales to rise in the low-single digits in the third quarter and fiscal year 2010.
Gross profit for the quarter jumped 2.7% to $1,462.7 million, whereas gross profit margin expanded 70 basis points to 26.4%. Adjusted operating profit soared 22.7% to $289.8 million, whereas operating margin increased 90 basis points to 5.2%.
Segment Details
North American Delivery sales climbed 1.6% to $2,359.4 million and 1% in local currency. The increase in revenue was due to favorable foreign currency translation and an increase in customers, partially offset by a fall in spending by existing customers.
North American Retail sales grew 1.9% to $2,010.5 million and 0.1% in local currency. Comparable-store sales remained flat compared to the year-earlier quarter reflecting traffic improvement, offset by lower order size. North American Retail opened two stores and closed two stores, ending the quarter with 1,888 stores.
International sales tumbled 5.9% to $1,164.3 million and 1.8% in local currency. The increase in revenue in local currency in the European Catalog and Contract businesses was to a greater extent offset by a 9% fall in comparable-store sales in Europe. European Retail opened one store, closed two stores and acquired nine stores during the quarter under review, bringing the total number of international stores to 376.
Other Financial Details
Year to date, Staples generated free cash flows of $95 million, whereas capital expenditures were $150.7 million. The company ended the quarter with cash and cash equivalents of $872 million, long-term debt of $2,004.8 million and shareholders’ equity of $6,461.4 million, including non-controlling interests of $10.7 million. The company also recommenced its share buyback program during the quarter and bought back 5.1 million shares, aggregating $102 million.
Guidance
Management now expects third-quarter earnings in the range of 39 cents to 41 cents and fiscal year 2010 earnings between $1.25 and $1.29 per share. The company had earlier anticipated fiscal 2010 earnings between $1.25 and $1.33 per share. Staples lowered the high-end of its fiscal 2010 guidance range, reflecting a higher tax rate.
On a reported basis, earnings for the third quarter are expected between 38 cents and 40 cents, and for fiscal year 2010 between $1.20 and $1.24 per share.
The current Zacks Consensus Estimates for the third quarter and fiscal 2010 are 43 cents and $1.32 per share.
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. Recently, Office Depot Inc. (ODP), one of the closest rivals of Staples, witnessed comparable-store sales decline by 1.0% at its North American Retail division and by 5.5% at its North American Business Solutions division during second-quarter 2010.
Another competitor, OfficeMax Inc. (OMX) registered a comparable-store sales decline of 0.3% at its retail segment and 3.6% at its U.S. Contract operations. The office supplies retailer hinted that it now expects third-quarter 2010 sales to be slightly lower than the year-ago quarter. Fiscal 2010 sales are expected to be flat to marginally lower than 2009.
The economic recovery still lacks luster. As a result, consumers and small businesses remain watchful on their spending. We observe that the demand for office products is closely tied to the health of the economy.
Currently, Staples holds a Zacks #4 Rank, which translates into a short-term ‘Sell’ recommendation.
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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Despite the top-line being flat, Staples was able to deliver double-digit growth on its bottom-line on the back of effective cost management. Cost of goods sold and occupancy costs fell 0.9%; selling, general and administrative expenses dropped 0.3%; amortization of intangibles dipped 44.1%; and interest and other expenses slipped 4.1%.
Staples reported total sales of $5,534.2 million, which remained flat compared with the prior-year quarter but fell short of the Zacks Consensus Revenue Estimate of $5,621 million. The company expects a modest recovery in the second-half of 2010, forecasting sales to rise in the low-single digits in the third quarter and fiscal year 2010.
Gross profit for the quarter jumped 2.7% to $1,462.7 million, whereas gross profit margin expanded 70 basis points to 26.4%. Adjusted operating profit soared 22.7% to $289.8 million, whereas operating margin increased 90 basis points to 5.2%.
Segment Details
North American Delivery sales climbed 1.6% to $2,359.4 million and 1% in local currency. The increase in revenue was due to favorable foreign currency translation and an increase in customers, partially offset by a fall in spending by existing customers.
North American Retail sales grew 1.9% to $2,010.5 million and 0.1% in local currency. Comparable-store sales remained flat compared to the year-earlier quarter reflecting traffic improvement, offset by lower order size. North American Retail opened two stores and closed two stores, ending the quarter with 1,888 stores.
International sales tumbled 5.9% to $1,164.3 million and 1.8% in local currency. The increase in revenue in local currency in the European Catalog and Contract businesses was to a greater extent offset by a 9% fall in comparable-store sales in Europe. European Retail opened one store, closed two stores and acquired nine stores during the quarter under review, bringing the total number of international stores to 376.
Other Financial Details
Year to date, Staples generated free cash flows of $95 million, whereas capital expenditures were $150.7 million. The company ended the quarter with cash and cash equivalents of $872 million, long-term debt of $2,004.8 million and shareholders’ equity of $6,461.4 million, including non-controlling interests of $10.7 million. The company also recommenced its share buyback program during the quarter and bought back 5.1 million shares, aggregating $102 million.
Guidance
Management now expects third-quarter earnings in the range of 39 cents to 41 cents and fiscal year 2010 earnings between $1.25 and $1.29 per share. The company had earlier anticipated fiscal 2010 earnings between $1.25 and $1.33 per share. Staples lowered the high-end of its fiscal 2010 guidance range, reflecting a higher tax rate.
On a reported basis, earnings for the third quarter are expected between 38 cents and 40 cents, and for fiscal year 2010 between $1.20 and $1.24 per share.
The current Zacks Consensus Estimates for the third quarter and fiscal 2010 are 43 cents and $1.32 per share.
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. Recently, Office Depot Inc. (ODP), one of the closest rivals of Staples, witnessed comparable-store sales decline by 1.0% at its North American Retail division and by 5.5% at its North American Business Solutions division during second-quarter 2010.
Another competitor, OfficeMax Inc. (OMX) registered a comparable-store sales decline of 0.3% at its retail segment and 3.6% at its U.S. Contract operations. The office supplies retailer hinted that it now expects third-quarter 2010 sales to be slightly lower than the year-ago quarter. Fiscal 2010 sales are expected to be flat to marginally lower than 2009.
The economic recovery still lacks luster. As a result, consumers and small businesses remain watchful on their spending. We observe that the demand for office products is closely tied to the health of the economy.
Currently, Staples holds a Zacks #4 Rank, which translates into a short-term ‘Sell’ recommendation.
OFFICE DEPOT (ODP): Free Stock Analysis Report
OFFICEMAX INC (OMX): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
Zacks Investment Research
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