Staples cuts outlook, 1Q results disappoint

AP News
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Posted: May 18, 2011 5:21 PM
Staples cuts outlook, 1Q results disappoint

Weaker-than-expected sales weighed on Staples Inc. in the first quarter, prompting the nation's biggest office supply retailer to cut its full-year earnings guidance.

The Framingham, Mass., company's quarterly earnings and revenue did climb, but fell short of Wall Street's expectations. Those misses, combined with disappointing full-year and second-quarter outlooks, pushed Staples' stock to a 52-week low Wednesday.

Shares of the chain slid $3.02 or 15.4 percent, to close at $16.863.

Staples Chairman and CEO Ron Sargent also indicated during a conference call that the company will not be opening as many new stores as initially planned due to weak retail demand for office products.

The retailer now expects to open about 20 new U.S. stores and 10 new Canadian stores, while closing 10 stores. This will give Staples 20 new stores in North America, half of the 40 new stores originally projected.

In addition, Sargent said the chain "plans to be aggressive in reducing the size of existing stores," as it has about 500 leases up for renewal over the next three years.

Despite missing estimates and scaling back its store plans, Staples reported better first-quarter sales overseas and increased buying by small businesses in North America.

For the period ended April 30, revenue rose 2 percent to $6.18 billion from $6.06 billion a year ago. Wall Street was looking for revenue of $6.2 billion.

Revenue in stores open at least a year dipped 1 percent, mostly on a decline in Canadian retail customer traffic. This measure is considered a key gauge of a retailer's health because it excludes stores that opened or closed during the year.

Revenue in the North American delivery segment, which serves small business, increased 2 percent, partly on sales of break room supplies and paper.

"We continue to invest in salespeople, training and lower prices to drive the facilities and break room category," Sargent said.

International revenue climbed 4 percent, helped by strong performances from China and South America. North American retail revenue edged up 1 percent, with copy and print sales rising 4 percent.

Staples reported net income of $198.2 million, or 28 cents per share, for the quarter. A year earlier it earned $188.8 million, or 26 cents per share.

The performance came in below the 32 cents per share that analysts polled by FactSet expected.

"Our first quarter results show that we're making good progress on our key growth initiatives and we're gaining share in North America, but at a cost to our bottom line," Sargent said.

Staples said it is having a hard time passing on price increases to contract customers who are resistant to absorbing such costs. Even still, the company said it is being aggressive in trying to gain new contract customers and keeping its existing clients as competition heats up.

The chain now expects 2011 earnings of $1.35 to $1.45 per share. Its prior forecast was for earnings of $1.50 to $1.60 per share. Analysts had expected $1.53 per share.

The company maintained its outlook for a low single-digit increase in full-year revenue.

The reduced earnings guidance led Citi Investment Research analyst Kate McShane to downgrade Staples to "Hold" from "Buy" and cut its price target to $20 from $27.

For the second quarter, Staples anticipates earnings of 18 cents to 20 cents per share, with revenue flat to slightly higher than the prior-year period. Analysts had expected 26 cents per share.

Staples operates in 26 countries throughout North and South America, Europe, Asia and Australia.