--Impairment on Europe business pushes bottom line into red
--Core profit per share is flat, a penny better than
expected
--Shares rise as company unexpectedly reaffirms full-year
guidance
(Updates share movement in second paragraph; adds further
details, comments from executives starting in the fifth
paragraph)
By Joan E. Solsman and Saabira Chaudhuri
Staples Inc. (SPLS) swung to a fiscal third-quarter loss as it
swallowed the falling value of its struggling European operations,
but it managed to hold its core bottom line steady despite lower
sales.
Shares were up 2.3% at $11.52 in recent trading, as the largest
office-supply chain in the U.S., unlike rivals, showed improvement
in same-store sales from the previous quarter and unexpectedly held
its outlook steady.
However, also unlike rivals, it failed to flip the sales
pressure into profit growth. Its smaller competitors, Office Depot
Inc. (ODP) and OfficeMax Inc. (OMX), earlier this month reported
unexpectedly strong third-quarter earnings growth as they benefit
from progress in turnaround strategies, something Staples has only
recently begun in earnest.
The sector has long faced a climate of increasing competition
for weaker demand as governments contend with budget cuts and
traditional items are replaced by electronics. Staples in September
said it would need to intensify restructuring to cope, after an
unexpected downturn in North American sales in the second quarter
combined with continued sluggishness abroad.
Wednesday, the company said it expects to cut headcount again in
Europe, the center of its international division's weak
performance. On a conference call to discuss results, Chief
Operating Officer Michael Miles said the process was in its early
stages with progress expected to build over the coming year.
Staples now plans to close 46 underperforming stores,
representing about 14% of its European retail network, with about
half of them located in the U.K. It is exiting Belgium retail with
six closures. It is also consolidating unprofitable delivery
business units, serving Denmark with operations in Sweden, for
example.
Previously, Staples eliminated about 300 positions in Europe and
Australia in the first quarter and made further reductions in the
second.
In the latest period, Staples same-store sales in North American
retail fell 1%, an improvement from the second quarter's 2%
decline. By comparison, Office Depot's held steady sequentially at
a 4% decline and OfficeMax's deteriorated to a 2.1% drop.
Staples overall North American retail sales were flat as traffic
declined but average order size increased. Sales in its North
American delivery division rose 1%. The company suffered from the
same weak technology sales in computers and software that others
have, but it had a strong showing in core office supplies, copy and
print services and facilities and breakroom items.
Chief Executive Ron Sargent said while the third quarter only
had two days of sales linked to Microsoft Corp.'s (MSFT) Windows 8,
"the early response from our customers has been positive."
"We look forward to continued momentum from Windows 8 throughout
the holiday season," he said.
However, international revenue decreased 12%, or 8% on a local
currency basis, because of continued weakness in Europe and
Australia. Economic woes drove the declines in Europe, Staples
said, including a 6% decline in the region's same-store sales.
Helping preserve the bottom line was retail operating margin in
North America, which edged up to 10.8% from 10.7%. Staples improved
efficiency and reduced distribution costs, though it also weakened
the margin with promotions.
For the quarter ended Oct. 27, Staples posted a loss of $596.3
million, or 89 cents a share, versus a year-earlier profit of
$326.4 million, or 47 cents a share. The latest quarter included an
$811 million impairment charge linked to its European retail and
catalog businesses, as well as lesser charges for restructuring and
amortization. Stripping out one-time items, Staples's per-share
profit was flat at 46 cents.
Sales slipped 2%--1.4% on a constant currency basis--to $6.35
billion.
Analysts polled by Thomson Reuters recently expected per-share
earnings of 45 cents on revenue of $6.45 billion.
Gross margin narrowed to 27.6% from 28.1%.
Staples reaffirmed its view for the year, predicting sales would
be flat with the prior year and per-share earnings would increase
in the low single-digits. Analysts were expecting 1% declines in
both.
Chief Financial Officer Christine Komola said disruptions from
Hurricane Sandy would be a "modest headwind to the top and bottom
line" in the fourth quarter, which was reflected in the
guidance.
Write to Joan E. Solsman at joan.solsman@dowjones.com and
Saabira Chaudhuri at saabira.chaudhuri@dowjones.com
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