Bearish View on Staples - Analyst Blog
16 October 2012 - 2:45AM
Zacks
Staples, Inc.
(SPLS) seems to be in an unfavorable position as the unstable
economic climate continues to weigh upon the performance of this
beleaguered office products and services retailer, as evident from
its dismal second-quarter 2012 results and trimmed outlook.
The company’s disappointing
performance compelled us to take a bearish stance on the stock, and
hence we downgrade our recommendation to Underperform with a price
target of $10.50. Earlier, we had a Neutral view on the stock.
Staples posted sluggish
second-quarter results. The quarterly earnings of 18 cents a share
missed the Zacks Consensus Estimate of 22 cents and decreased 18%
from the prior-year quarter due to lower-than-expected sales trends
in North America and continuing softness in Europe and Australia.
The company witnessed a sharp fall in computer sales and sluggish
trends in core categories.
Staples, which competes with
OfficeMax Inc. (OMX) and Office Depot
Inc. (ODP), reported total sales of $5,498.5 million, down
6% year over year and well below the Zacks Consensus Estimate of
$5,721 million. In constant currency, total revenue fell 3%. North
American Delivery sales edged down 0.8%, North American Retail
sales descended 2.7% and International sales plunged 18.2%.
Given the soft results, management
lowered its earlier guidance and now expects sales for fiscal 2012
to remain flat compared with the prior year, while the bottom line
is expected to increase in low single digits. Management had
earlier forecasted sales to increase in the low single-digits,
while the bottom line was projected to jump in the high single
digits in fiscal 2012.
It is apparent that Staples is
struggling both at the top and bottom lines. With the economy still
witnessing uneven recovery, consumers and small businesses remain
apprehensive about big-ticket spending such as business machines
and other durables. Thus, the demand for office products is likely
to remain slothful as the performance of this sector is correlated
to the economy’s health.
Staples expects sluggish growth in
the U.S. economy and hinted that demand will remain soft in Europe.
With the European debt crisis yet to be fixed, Staples has a dull
picture to portray as it suffered a 9% decline in its
comparable-store sales in the region in the last reported
quarter.
Due to high exposure to
international markets, Staples remains prone to currency
fluctuations. The weakening of foreign currencies against the U.S.
dollar may require the company to either raise prices or contract
profit margins in locations outside of the U.S. An increase in
price may have an adverse impact on the demand for the
products.
The above analysis supports our
unbiased view, and advocates our bearish stand on the stock, which
is well defined through our Zacks #5 Rank that translates into a
short-term “Strong Sell” rating. However, the company has
undertaken slew of measures, which are yet to show results.
OFFICE DEPOT (ODP): Free Stock Analysis Report
OFFICEMAX INC (OMX): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
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