Staples (SPLS) Slides on Weak International Sales

Office supply store Staples (SPLS: Charts, News) reported lukewarm first quarter earnings this week, missing on both the top and bottom lines. Shares slid more than 6% during Wednesday trading. The company reported a profit of 27 cents per share, or $187.1 million, on revenue of $6.1 billion.

Earnings increased 3.7% from the prior year quarter, while revenue slid 1.1%. Analysts expected Staples to earn 30 cents per share on $6.18 billion in revenue. Gross margin also shrank slightly from 26.5% to 26.4%. Daily Chart
Staples attributed the challenging quarter to weakness in its international operations, especially in Europe, as well as staff deduction expenses. Those staff reduction expenses and a contractual dispute cost Staples $16 million, or 3 cents per share, during the quarter. While analysts were far from bullish, some highlighted the improved cost cutting efforts. JPMorgan (JPM: Charts, News) analysts stated, "It is only a first step on the path of acknowledging the issues facing the business." Staples' international business posted an 8% decline in sales. Same-store sales in Europe dropped by 6%. Meanwhile, the company's North American same-store sales remained flat. Its North American delivery division increased sales by a thin 1.7% to $2.56 billion, aided by stronger than expected sales growth in facilities and break room supplies, as well as copy, print and promotional products. Coffee sweetener and paper towels were standout products in this division. Despite CEO Ron Sargent's reassurances that Staples is strengthening its North American business, he noted that its international business "remains soft". Staples made few adjustments to its stores, opening a single new one and closing three. The company currently operates 376 international locations in 24 countries, in addition to its 1,583 stores in the United States and 334 in Canada. The company's poor international performance didn't surprise most analysts. UBS analyst Michael Lasser commented, "The international business continues to flounder, but that really does not come as a surprise." Office supply retailers such as Staples have been out of favor over the past year, as government agencies and businesses decrease orders to balance budgets. The widespread usage of electronic documents has also decreased the demand for traditional office supplies such as pens and paper. The popularity of cloud-based servers and tablet computers have also led many analysts to downgrade office supply retailers. Looking forward, Staples expects slow growth in the United States and Europe to weigh on earnings throughout fiscal 2012. The company expects sales growth in the "low single digits" and earnings growth in the "high single digits" for the year. On the bright side, Staples expects to generate over $1 billion in free cash flow during the year. Staples' primary competitors recently posted mixed earnings. Target (TGT: Charts, News) and Office Depot (ODP: Charts, News) shares have performed well, while Wal-Mart (WMT: Charts, News) and Home Depot (HD: Charts, News) have struggled. All of these companies are threatened by the rise of e-commerce leaders Amazon (AMZN: Charts, News) and eBay (EBAY: Charts, News), which are able to offer lower prices due to the lack of brick and mortar expenses. Shares of Staples trade with a forward P/E of 8.5 with a 5-year PEG ratio of 1.04. The stock pays a quarterly dividend of 11 cents per share, or a 3.19% yield, making it an attractive choice for income investors. Shares are near the lower end of its 52-week range of $11.94 to $19.96. Other News About Staples Staples 1st-quarter net income drops on expenses Staples misses on top and bottom lines. Staples international sales fall on weak Europe demand Staples blames international weakness for its lukewarm earnings. Other Stocks in the News Apple readies iPhone with bigger screen Taking a cue from Samsung, Apple increases the iPhone's screen size. J.C. Penney Declines After Posting Loss Amid Slumping Sales J.C. Penney slides - is this the next Sears Holdings? Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. 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Published on May 17, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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