Staples Inc. (SPLS: 17.951, +0.011 (+0.06%)) announced third quarter earnings before the bell on Tuesday as shares made strong gains in morning trading. Even as consumers continue to cut back on discretionary spending, the world’s largest office products company surprised investors with earnings per share coming in at 42 cents versus Wall Street’s estimates of 41 cents. Strong performance in customer service, inventory management, and free cash flow up over 75 percent from the same period last year helped offset a 43 percent drop in net earnings from 2007. Net earnings dropped to $156.7 million, or 22 cents per share compared with $274.5 million or 38 cents per share in 2007.
Total company sales were up 37 percent to $7 billion, but this was attributed to the acquisition of the Dutch company Corporate Express in August. After removing their approximate $2 billion in sales for the quarter, net sales were down 3 percent to $5 billion.
Business Segments
Staples operates in three main business segments: North American Delivery, North American Retail, and International Operations. North American Delivery, which provides office supply solutions for small and mid-sized to Fortune 1000 companies, was up 61 percent to $2.8 billion. If you take out Corporate Express’ exposure, sales fell 1 percent during the quarter due to a lower spending per customer rate. Numbers were positive however in the areas of customer acquisition and retention, which comes as no surprise as Staples has been the clear front-runner in the office supplies industry.
Staples’ other North American segment, retail operations, was not affected by the Corporate Express acquisition and sales suffered as consumers across the U.S. and elsewhere in North America reduced their number of trips to the world’s largest office products company over the last three months, as sales in their retail division fell 6 percent from the third quarter in 2007. Also, comparable store sales fell 8 percent fueled by declines in both order size and customer traffic. At the end of the third quarter, Staples operated 1,832 stores in North America and had plans to open 107 new stores in 2008.
The recent acquisition had the largest effect on Staples’ International Operations as sales spiked over 127 percent from 2007 with Corporate Express’ European reach funneling in $886 million during the quarter. Comparable store sales declined 6 percent across Europe with strength in core office supplies and business services offset by a lag in performance of computers, furniture and business machines. Staples continued to integrate Corporate Express over the quarter and were encouraged by strong top line growth in China, South America and India.
Looking Forward
Staples flexed their muscle a little bit with this latest earnings report as they have shown they are focused on building their brand and expanding into Europe and the world’s emerging economies. With the integration of the Corporate Express smoothly underway in domestic markets and abroad, management expects savings from the acquisition to be at the high end of the $200-300 million range that was projected. They also appear to have sound liquidity with $888 million in cash and cash equivalents and $686 million available in credit. It is clear if you are looking for an industry leader that you can look no further than Staples as competitors Office Depot (ODP: 2.77, +0.22 (+8.63%)) and OfficeMax (OMX: 6.9457, +0.3357 (+5.08%)) have suffered tremendous losses in the last six months. (6 month chart: spls, opd, omx)
However, with sales numbers down across the board for Staples, the small and mid-sized businesses that make up Staples’ largest revenue base, I am worried that a long recession will begin to hurt the bottom line in a bigger way going into 2009. I am also concerned with the lack of guidance for the end of 2008 and looking into next year, due to the unsettled economic landscape. Even though the Corporate Express acquisition has given Staples great exposure abroad and expanded their North American Delivery segment, expect further weakness and little chance of a sustained rebound for the stock price without some positive economic news as a catalyst.
- Chris Barrella
Disclosure: None
