Shares of Staples Inc. SPLS fell nearly 10.0% in pre-market trading as the company announced lower-than-expected first-quarter fiscal 2014 earnings. Staples' first-quarter adjusted earnings of 18 cents per share came short of the Zacks Consensus Estimate of 21 cents per share and decreased 31.0% year over year.
Including one-time items, earnings per share came in at 15 cents per share, down 42.0% year over year.
Lower sales due to store closures and unfavorable foreign currency fluctuations weighed on the company's performance.
Total sales decreased 2.8% year over year to $5,654.0 million and fell short of the Zacks Consensus Estimate of $5,626.0 million. Excluding the impact of store closures and currency fluctuations, revenues fell 2.0%.
Gross profit decreased 6.7% year over year to $1,410.3 million while gross margin contracted approximately 100 basis points (bps) to 24.9%.
Staples reported a 44.3% drop in operating income to $158.8 million whereas operating margin contracted 209 basis points (bps) to 2.8%. Excluding impact of restructuring and other related charges, operating profit fell 35.8% to $182.8 million and operating margin contracted 167 bps to 3.2%.
In the first quarter, Staples made huge investment in Make More Happen” brand campaign to drive awareness. Moreover, it has expanded product offering in over 600 stores across U.S.
Staples closed about 16 stores in the quarter and finalized another 80 outlets to be shut down across North America in the second quarter of fiscal 2014. Also, the company achieved $100 million in annualized cost reduction in the quarter. The company plans to achieve $500 million in annualized savings over a two year time frame.
The office supply retailers are going through tough times, given the decline in business and consumer spending in the wake of a global meltdown. The financial crisis has resulted in sluggish demand for big-ticket items such as business machines, furniture and other durable products.
Moreover, intense competition from online bellwethers like Amazon.com Inc. AMZN is denting the company's profitability.
Given the challenges in the near-term, the company expects lower sales for the second quarter of fiscal 2014 compared with the prior-year quarter figure. Staples expects earnings per share to be in the range of 9–14 cents. Moreover, the company expects to generate more than $600 million of free cash flow in 2014.
Segment Details
Sales at North American Stores and Online, which include its retail stores and Staples.com business in the U.S. and Canada, marked a decline of 4.9% to $2,634 million. The fall largely resulted from decrease in sales of office supplies, business machine, computers and technology accessories.
Despite challenges, the segment continues to witness increased sales of facilities and breakroom supplies, print as well as copy and paper.
During the quarter, comparable-store sales (comps) declined 4.0% owing to a 4.0% fall in traffic and flat average order size from the prior-year quarter. Sales through Staples.com rose 6.0% year over year due to increased customer conversion and stretched out assortment in categories apart from office supplies.
On a year-over-year basis, operating income decreased 45.9% to $93 million while operating margin contracted 270 bps to 3.5%. The decline reflected the company's increased investment in its .com business and lower product margins along with increased marketing expenditure to promote awareness.
North American Commercial, which includes its Contract operations in the U.S. and Canada, witnessed a 0.7% increase in sales to $2,056 million, due to growth in facilities and breakroom supplies along with furniture, partly offset by lower demand in office supplies and paper as well as ink and toner.
Operating income decreased 9.3% to $136 million while operating margin contracted 74 bps to 6.6%, reflecting increased investments and lower margins.
Revenues at International Operations waned 3.9% to $964 million, reflecting lower sales in Europe. Comps in Europe remained flattish as a 2% increased average order size was run down by a 1% reduction in traffic. The segment reported an operating loss of $25 million, up substantially from the year-ago quarter.
Other Financial Details
Staples ended the quarter with cash and cash equivalents of $792.9 million, long-term debt (net of current maturities) of $1,016.9 million and shareholders' equity of $6,171.1 million.
For the quarter, Staples generated operating cash flow of about $359.9 million and incurred capital expenditures of $48.0 million, resulting in a free cash flow of $311.8 million. Staples repurchased 5.7 million shares for $70 million in the quarter.
Currently, Staples holds a Zacks Rank #3 (Hold). Some better-ranked retail stocks worth investment includes Aaron's, Inc. AAN and Office Depot, Inc. ODP. Aaron's sports a Zacks Rank #1 (Strong Buy) and Office Depot has a Zacks Rank #2 (Buy).
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