Staples' Mediocre-At-Best Q1

Staples, Inc. SPLS reported on Tuesday its first-quarter results in which the office supply retailer's earnings of $0.17 was in line with expectations and revenue of $4.15 billion fell short of the $4.50 billion analysts were expecting.

According to Loop Capital Markets' Anthony Chukumba, Staples' earnings was "mediocre at best." On the one hand, sales fell nearly 5 percent from a year ago and missed his estimate by $142 million, North American Delivery sales fell 2.8 percent, North American Retail sales fell 8.2 percent and overall North American comps were weak.

On the more positive side of the report, Staples' management did note its weak comp trends were due to weak customer traffic but the conversion rate actually rose 300 basis points. Operating margin also improved by 54 basis points from a year ago to 3.5 percent and was driven by a higher product margin rate.

Nevertheless, Staples' results reflect the ongoing weakness in its retail segment and the only "saving grace" was operating margin improvement. But at the end of the day, the analyst is questioning how sustainable the margin improvements can be moving forward.

Bottom line, Chukumba's bearish outlook on Staples remains unchanged following the print and the stock is trading at "appropriate" levels at 10.8x his 2017 diluted earnings per share estimate.

Shares remain Hold rated with an unchanged $10 price target.

Staples Vs. Office Depot: Who Won Q1?

Office Depot Inc ODP, Staples' chief rival, reported its first-quarter results on May 9. The company which Staples failed to acquire last year earned $0.16 per share in the quarter on revenue of $2.7 billion versus expectations for $0.12 per share and $2.71 billion.

While Chukumba characterized Staples' report as "mediocre at best," he came away more positive on Office Depot's report.

The analyst believes the report came in better than expected and should help Office Depot's new CEO Gerry Smith "build credibility" among the investment community. However, the company still faces the same secular and competitive challenges as Staples, which makes it difficult for investors to become constructive on the stock.

Overall, Office Depot's overall sales, North American Retail, and North American Business Solutions all saw their sales decline on a year-over-year basis. But on the other hand, operating margin rose 130 basis points from a year ago to 5.6 percent and earnings per share rose 33.3 percent to $0.16.

Looking forward, Chukumba thinks that Office Depot is off to a "nice start" under Smith's leadership. However, the analyst does question if the earnings beat in the quarter is sustainable over the long term, especially after the OfficeMax synergies end.

Shares remain Hold rated with an unchanged $5 price target.

Related Links:

Leveraged Buyout Of Staples Merits Consideration, But Not A 'Slam Dunk'

Compare And Contrast: Staples Vs. Office Depot

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