Bernstein downgrades Staples, Office Depot

Reuters News
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Posted: Jul 11, 2012 11:30 AM
Bernstein downgrades Staples, Office Depot

(Reuters) - Bernstein Research downgraded office supplies chains Staples Inc <SPLS.O> and Office Depot Inc <ODP.N> to "market-perform" from "outperform," citing stalling employment trends in the United States and a broadening recession in Europe.

The research firm expects Staples' full-year revenue to decline and said that its cost-cutting initiatives will not significantly add to its earnings.

Growing competition from online retailer Amazon Inc <AMZN.O> could also hurt profits, Bernstein analyst Colin McGranahan said in a note to clients.

"Current cost efforts (of Staples) look to be more surgical than transformative, and we do not expect much margin benefit in a sluggish topline environment," McGranahan said.

For Office Depot, he expects benefits from the company's margin-boosting initiatives to moderate over the rest of the year.

The company's plan to increase retail store footprint by converting bigger stores to several smaller ones will also not significantly add to margins, the firm said.

The stock has nearly halved in value over the past year, indicating investor pessimism. The analyst too said the cyclical business had few growth catalysts for the next several quarters.

Data released last week showed that U.S. employers hired at a dismal pace in June, with non-farm payrolls growing by just 80,000 jobs in June.

McGranahan lowered his price target on Staples to $14.00 from $18.00, and that on Office Depot to $2.50 from $6.00.

Staples shares were down 2 percent at $12.66 on the Nasdaq, while those of Office Depot were down 5 percent at $2.06 on the New York Stock Exchange on Wednesday.

(Reporting By Krithika Krishnamurthy; Editing by Sreejiraj Eluvangal)