Staples (SPLS) Reports In Line Q2 Earnings, Guides Q3

Staples Inc. SPLS reported second-quarter fiscal 2016 earnings per share of 12 cents, in line with the Zacks Consensus Estimate while being flat year over year. On the other hand, the company’s revenues declined 3.7% year over year to $4,752 million but marginally beat the Zacks Consensus Estimate of $4,750 million.

Including $986 million of pre-tax charges associated with the termination of Office Depot, Inc. ODP buyout and goodwill impairment of European operations as well as other assets, the company reported loss of $1.18 per share. This is in contrast to the year-ago quarter when the company had reported earnings of 6 cents per share. Excluding the impact of store closures and currency fluctuations, revenues dipped 2% year over year.  

For the fiscal third quarter of 2016, the company anticipates sales to fall from the level recorded in the prior-year quarter. Adjusted earnings per share are projected in the range of 32–35 cents, where the earnings guidance excludes charges related to strategic plans.

STAPLES INC Price, Consensus and EPS Surprise

STAPLES INC Price, Consensus and EPS Surprise | STAPLES INC Quote

Following the verdict on the merger, Staples outlined definite plans to increase long-term value. In order to acquire new customers, the company intends to increase its offering of products as well as services beyond office supplies. Staples expects to improve its supply chain capabilities by adding more than 1,000 associates to its mid-market sales team.

Since 2011, Staples has closed more than 300 stores in North America, with plans to close a minimum of 50 stores in North America in 2016. By this streamlining of operations, the company not only intends to increase productivity but also hopes to preserve profitability in North America by expanding its services, strengthening its customer base, shutting down underperforming stores and decreasing fixed costs.

The company plans to initiate a new cost-saving program to garner nearly $300 million of pre-tax cost savings annually by the end of 2018. The company also resumed share repurchase during the fiscal second quarter and intends to return roughly $100 million to shareholders in 2016.

Getting back to the quarterly numbers, gross profit decreased 5.7% to $1,192 million, while gross margin contracted approximately 50 basis points (bps) to 25.1%. Staples’ adjusted operating income inched up 1.5% to $128 million, while its adjusted operating margin negligibly improved 2.7% compared with year-ago figure of 2.6%.

In North America, Staples closed 5 stores during the fiscal second quarter. In fiscal 2015, the company had closed 73 stores. In fiscal 2016, the company plans to shut down nearly 50 stores in North America.

Segment Details

Sales at North American Stores and Online, which include its retail stores and Staples.com businesses in the U.S. and Canada, declined 5.7% to $1,987 million. During the reported quarter, comparable-store sales (comps) decreased 5% owing to fall in traffic. The company registered Staples.com sales (comparable sales) growth of 1% in the reported quarter. Operating income plunged 57.1% to $12 million and operating margin came in at 0.6% compared with 1.3% in the year-earlier quarter.

Sales at North American Commercial, which includes Staples’ contract operations in the U.S. and Canada, declined 0.2% to $2,044 million.

Operating profit of $148 million increased 5.8% year over year, while margin expanded 40 bps to 7.1%.

International operations continued to languish under pressure. Revenues fell 7.5% to $721 million, primarily due to a decline in sales in Europe, which partially overshadowed double-digit growth in China. The segment reported operating loss of $14 million, narrower than an operating loss of $22 million in the prior-year quarter.

Other Financial Details

Staples ended the quarter with cash and cash equivalents of $775 million. The company’s long-term debt (net of current maturities) was $1,015 million (as against $1,018 million as of Jan 30, 2016), while shareholders’ equity was $4,572 million at the end of the reported quarter.

As of Jul 30, 2016, Staples used $11 million of operating cash flows and incurred capital expenditures of $102 million, which resulted in free cash flow of -$113 million. In 2016, the company expects to generate free cash flow of nearly $600 million.

Zacks Rank & Stocks to Consider

Staples currently has a Zacks Rank #3 (Hold). Some better-ranked retail stocks include Barnes & Noble, Inc. BKS and Hibbett Sports, Inc. HIBB. Both stocks hold a Zacks Rank #2 (Buy).

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