Staples (SPLS) Q4 Earnings Beat Estimates, Down Y/Y - Analyst Blog

Staples Inc. SPLS reported fourth-quarter fiscal 2014 adjusted earnings per share of 31 cents that fared a penny better than the Zacks Consensus Estimate but fell 6% year over year.
 

Staples Inc. - Earnings Surprise | FindTheCompany

Including $410 million of pre-tax goodwill impairment charge and other one-time items, loss per share from continuing operations came in at 41 cents as opposed to earnings of 33 cents in the prior-year quarter.

Total sales decreased 3.7% to $5,656.5 million and also fell short of the Zacks Consensus Estimate of $5,747 million. Excluding the impact of store closures and currency fluctuations, revenues inched up a mere 0.8%.

For the fiscal, adjusted earnings came in at 96 cents, in line with the Zacks Consensus Estimate but down 17% year over year. Moreover, revenues of $22,492.4 million fell 2.7% year over year and also missed the Zacks Consensus Estimate of $22,532 million.  

Store closures and unfavorable foreign currency fluctuations continue to mar Staples quarterly performance.

Gross profit decreased 1.4% to $1,486.4 million whereas gross margin expanded approximately 60 basis points (bps) to 26.3%.

Staples reported a 15.1% drop in adjusted operating income to $286.6 million, while its adjusted operating margin contracted 69 bps to 5.1%. Excluding the impact of restructuring and other related charges, the company posted operating loss of $197 million as against profit of $338 million in the prior-year quarter.

Staples closed about 169 stores in the fiscal and intends to shut down a total of 225 outlets across North America by fiscal 2015. Also, the company achieved $250 million in annualized cost reductions in the fiscal. The company plans to achieve $500 million in annualized savings by fiscal 2015.

Segment Details

Sales at North American Stores and Online, which include its retail stores and Staples.com business in the U.S. and Canada, declined 6.9% to $2,699 million. Apart from store closures and unfavorable foreign exchange fluctuations, decline in sales of business machines, technology accessories, along with computers ran down the higher sales of breakroom supplies as well as copy and print services.

During the quarter, comparable-store sales (comps) declined 4% owing to a 1% fall in traffic and 4% fall in average order size from the prior-year quarter. However, sales through Staples.com rose 9% year over year due to continued customer conversion and stretched out assortment in categories apart from office supplies.

Operating income decreased 23.3% to $135 million while operating margin contracted 108 bps to 5%. The decline reflected the company’s increased investment in its .com business and higher incentive compensation.
Sales at North American Commercial, which includes Staples’ contract operations in the U.S. and Canada, increased 4.9% to $2,059 million due to growth in facilities and breakroom supplies as well as furniture sales, partly offset by lower demand of ink and toner.

Operating profit of $145 million fell 13.2% year over year while margin fell 145 bps to 7.1%, reflecting increased investments and higher incentive compensation.

International operations continue to be in trouble. Revenues dwindled 11.1% to $898 million, reflecting lower online sales in Europe. Comps in Europe were also down 2% year over year as increased average order size was run down by reduction in traffic.

However, the segment reported operating income of $20 million, 42.9% growth year over year while operating margin increased 84 bps to 2.2%. Extensive cost cutting and higher product margins in Europe acted as catalysts.

Other Financial Details

Staples ended the quarter with cash and cash equivalents of $627.2 million. The company’s long-term debt (net of current maturities) was $1,024 million and shareholders’ equity was $5,313.4 million.

For the fiscal, Staples generated operating cash flow of about $1,042.9 million and incurred capital expenditures of $360.9 million, resulting in a free cash flow of $682.1 million. Staples repurchased shares and paid dividends worth $496 million.

Outlook

The office supplies industry is grappling with secular headwinds. Advancing technology has reduced demand for traditional core office supplies items offering very little growth prospect in the last couple of years.

Moreover, rising competition from online giants like Amazon.com Inc. AMZN, along with penetration into the office supplies space by mass merchandisers like Wal-Mart Stores Inc. WMT, has considerably hampered the office retailers business.

As a result, Staples has been on a store rationalization drive, together with investments to accelerate growth. Moreover, to effectively combat odds, Staples will be acquiring rival Office Depot, Inc. ODP in a $6.3 billion cash and stock deal. The transaction is expected to conclude by the end of 2015, subject to customary and antitrust regulatory approvals.

Given the challenges in the near-term, the company projected lower sales for the first quarter of fiscal 2015 compared with the prior-year quarter figure. Further, adjusted  earnings per share are likely to be in the range of 16–18 cents as against 18 cents earned in the first quarter of fiscal 2014.

The company now expects to generate $600 million of free cash flow in fiscal 2015.

Staples is currently Zacks Rank #3 (Hold) stock.

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