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Staples: Aggressively Going After Share

 November 15, 2012 04:43 PM

(By Mani) For Staples, Inc. (NASDAQ:SPLS) this was a better quarter than the past few, highlighted by an increase in North American retail profits for the first time this year. They also closed the comp gap once again with competitors.

Looking ahead, they have outlined a number of strategies to drive top line, but need cost savings to pay for them in order to generate higher EBIT dollars.

"The strategies seem plausible, but it's too soon to tell if SPLS can drive share and grow profits simultaneously while dealing with weakness overseas.," Deutsche Bank analyst Mike Baker said in a client note.

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The Framingham, Massachusetts-based company reported a net loss of $596.25 million, or 89 cents a share, for the third quarter, compared with net income of $326.38 million, or 47 cents a share, in the prior-year quarter. Excluding items, adjusted income from continuing operations for the latest quarter was 46 cents a share, topping estimates by a penny. Total sales for the quarter declined 2 percent to $6.35 billion and missed analysts' consensus estimate of $6.45 billion.

In particular, Staples is being aggressive with its online pricing as it competes with the likes of Amazon.com, Inc. (NASDAQ:AMZN). This includes offering free shipping on ink and toner. In the contract business, Staples is also aggressively trying to win new paper business while attempting to push through cost increases. Lastly, larger customers continue to push for better deals.

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Staples, the world's largest office products company, has had some luck adding new categories, with copy and print and breakroom and facilities being high profile recent examples. They will continue to do this particularly in the staples.com business, where they have added 30,000 SKUs this year, bring the total to 100,000.

Copy and print and tech services come to mind as areas where Staples has had recent success. They will continue to test other areas including computer rentals and shredding.

"The above top line drivers will likely compress gross margin rates due to the aggressive pricing and a lower mix of business in some of the newer SKUs, offset somewhat by high margins in services," Baker said.

Staples plan is to pay for this through cost savings measures that are intended to reduce expenses by $250 million via store closures in North America. Most of the reductions will come from relocating stores to smaller footprints, but there will be about 30 closures a year, each of which will help reduce rent expense

"Simply put, Staples has been sharing their strategy with vendors, which to us means they've been telling vendors to expect SPLS to ask for better pricing," the analyst noted.

Staples was successful in driving some share gains this quarter as the gap between Staples and the average of Office Depot (NYSE:ODP) and OfficeMax (NYSE:OMX) once again widened for the total company and in North America.

North American retail profits were up, and the total profit decline in North America including delivery was down less than last quarter. Even the percentage declines in the international business seem to be leveling off.

Looking ahead to fiscal 2012, Staples continues to expect earnings per share from continuing operations to increase in the low single-digits, on sales that are still projected to remain flat with fiscal 2011. Street sees full-year 2012 earnings of $1.36 a share on revenue of $24.77 billion.

"We like the idea that each of the big three competitors are planning to reduce square footage, by 15%+ each. That said, as competitive pressures mount, necessitating ever sharper prices, we are maintaining a somewhat cautious posture on the space," Baker added.

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