Staples (SPLS) Q3 Earnings Meet Estimates; Guides Q4

Staples, Inc. (NASDAQ:SPLS) reported in-line earnings for the second straight quarter. This office supplies retailer posted third-quarter fiscal 2016 adjusted earnings of 34 cents a share that met the Zacks Consensus Estimate but declined 3% from the year-ago period. Management now projects fiscal fourth-quarter earnings in the range of 23–26 cents a share. The current Zacks Consensus Estimate for the quarter is pegged at 26 cents.

The company’s total sales declined 4.3% year over year to $5,355 million, and also came below the Zacks Consensus Estimate of $5,411 million, after surpassing the same in the preceding two quarters. However, excluding the impact of the sale of the Staples Print Solutions business in the preceding quarter, store closures and foreign currency translations, total sales fell 2%.

Stiff competition, soft international sales and sluggish demand for paper-based office products due to technological advancements remain major concerns for Staples. For the final quarter, management expects sales to decline compared with the year-ago period.

Concurrent with the earnings release, the company announced that has entered into an agreement to sell its UK retail business and operations to Hilco Capital Limited. In May, the company had announced plans to explore strategic options for its European operations. The company also informed about the buyout of an independent office products dealer, Acquired Capital Office Products.

Moreover, Staples continued with its plan to close stores in North America. In the reported quarter, the company shuttered 16 outlets, while year to date it has closed 35 stores with plans to close at least 50 stores in North America during 2016.

Staples’ adjusted operating income came in at $355 million compared with $358 million in the year-ago quarter. Operating margin expanded 22 basis points to 6.6%.

Segment Details

North American Commercial sales fell 2.9% to $2,110 million. The sale of the Staples Print Solutions business in the fiscal second quarter adversely impacted the segment’s sales. Moreover, growth witnessed across facilities supplies, breakroom supplies, and technology products, were partly offset by declines in ink and toner and office supplies. Sales at Staples Business Advantage grew 2% on an adjusted basis but decreased 3% on a GAAP basis.

Operating income came in at $171 million, marginally down from $172 million in the year-ago quarter. Operating margin expanded 18 basis points to 8.1%.

Sales at North American Stores and Online declined 4.5% to $2,496 million on account of store closures. Comparable sales fell 3%, reflecting a decline of 4% in comparable-store sales and a drop of 1% at Staples.com sales. The company witnessed sales decline across ink and toner, business machines, technology accessories and mobility, which were partly offset by growth registered in computers and facilities supplies.

Operating income tumbled 4% to $193 million, however, operating margin expanded 7 basis points to 7.8%.

International Operations sales fell 7.2% to $749 million (or down 5% in local currency), primarily due to sales decline in Europe, partly mitigated by a double-digit growth in China. The segment reported operating income of $6 million.

Other Financial Details

Staples ended the quarter with cash and cash equivalents of $1,076 million, long-term debt of $1,024 million, and shareholders’ equity of $4,647 million, excluding non-controlling interest of $8 million.

For the 39-week period ended Oct 29, 2016, net cash provided by operating activities was $630 million and the company spent $158 million on the buyout of property and equipment, thus resulting in free cash flow generation of about $472 million. The company now expects to generate free cash flow of approximately $700 million in fiscal 2016, up from the previous estimate of about $600 million.

Zacks Rank & Stocks to Consider

Staples currently has a Zacks Rank #4 (Sell). Better-ranked stocks in the retail sector include Burlington Stores, Inc. (NYSE:BURL) , Zumiez, Inc. (NASDAQ:ZUMZ) and Foot Locker, Inc. (NYSE:FL) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Burlington Stores delivered an average positive earnings surprise of 16.1% in the trailing four quarters and has a long-term earnings growth rate of 18.4%.

Zumiez delivered an average positive earnings surprise of 32% in the trailing four quarters and has a long-term earnings growth rate of 15%.

Foot Locker delivered an average positive earnings surprise of 3.1% in the trailing four quarters and has a long-term earnings growth rate of 9.9%.

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