Earnings scorecard: Staples

Demand for office products is closely tied to the health of the economy, which is showing no sign of revival.

By Zacks.com Nov 23, 2011 12:55AM

Image: Person signing paperwork, mid section © PhotoAlto/Eric Audras/PhotoAlto Agency RF/Getty ImagesStaples (SPLS) unveiled its third-quarter results on Nov. 15. The quarterly earnings of 47 cents a share came in line with the Zacks Consensus Estimate and jumped 14.6% from 41 cents earned a year earlier.


Total sales of $6.57 billion were up .5% from the prior-year quarter but below the Zacks Consensus Estimate of $6.7 billion. North American delivery sales grew 1.8%, North American retail sales inched up .5% but international sales contracted 1.9%.


Gross profit for the quarter inched up 1.6% to $1.83 billion, whereas gross margin expanded 30 basis points to 27.9%. Adjusted operating profit increased 1.9% to $533.2 million, whereas operating margin expanded 11 basis points to 8.1%.


Agreement of estimate revisions


In the last week, 10 out of 14 analysts covering the stock lowered their estimates, and none raised them for the fourth quarter of 2011. For the first quarter of 2012, two analysts raised their estimates with only one making a downward revision.


For fiscal 2011 and 2012, seven and 11 analysts, respectively, moved their estimates down, with none revising the same upward in the last week.


Magnitude of estimate revisions


The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.


The Zacks Consensus Estimates moved down by 3 cents to 41 cents for the fourth quarter of 2011, but remained constant at 32 cents for the first quarter of 2012, in the last seven days.


For fiscal 2011 and 2012, the Zacks Consensus Estimates dropped 3 cents to $1.38 and 5 cents to $1.52, respectively, in the last seven days.


What drives estimate revisions


Clearly, a negative sentiment is palpable among analysts, who remain pessimistic on the company’s performance. Following the earnings release, the Zacks Consensus Estimates have been falling with the analysts remaining bearish on the stock.


The demand for office products is closely tied to the health of the economy, which is showing no sign of revival. Further, the sluggish performance by the company's international segment that prompted Staples to trim its fiscal 2011 earnings outlook also compelled the analysts. Although management stood by earlier sales guidance, expecting an increase in the low single digits, that was not enough to provide an impetus to the analysts.


Staples now projects fourth quarter earnings of between 39 cents and 43 cents a share. The analysts have a consensus on 41 cents, which lies at the middle of the guidance range. Management forecasts sales to remain flat or increase in low single digits for the fourth quarter.


Moving forward


The future remains uncertain but efforts to battle the tough economy are obvious. Business budgets are tight, consumers remain more watchful than ever before and companies are trying hard to navigate through the challenging environment.


Staples remains well positioned to sustain its growth based on its margin expansion, effective merchandising, and growth prospects across its retail, delivery and international divisions. It is also making prudent investments in the highly fragmented North American retail market to expand its business technology, and copy and print services that generate higher profit margins.


However, consumers and small businesses remain frugal about big-ticket spending on items such as business machines and other durable products. Counting the pulse of the economy, we prefer to maintain our long-term neutral rating on the stock. Moreover, Staples, which competes with Office Depot (ODP) and OfficeMax (OMX), holds a Zacks No. 3 Rank that translates into a short-term hold rating and correlates with our long-term view.


About Earnings Estimate Scorecard


Len Zacks, who holds a doctorate in mathematics from MIT, proved more than 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this groundbreaking discovery into two of the most celebrated stock rating systems in use today: the Zacks Rank for stock trading in a one-to-three month time horizon and the Zacks Recommendation for long-term investing (6+ months).

These "Earnings Estimate Scorecard" articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

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