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Staples, Inc. (SPLS), Office Depot Inc (ODP): A Tough Quarter For This Office Supply Company

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There are many industries that have been negatively affected by the rise of mobile computing, and one of the most obvious is office supplies. The demand for paper products is declining as an increasing number of documents never leave their original digital form, with tablets creating an alternative to hard copy. This is a troubling trend for the giants of the industry like Staples, Inc. (NASDAQ:SPLS), and it seems as though the deterioration of the market is happening even faster than predicted.

Staples, Inc. (NASDAQ:SPLS)

Staples, Inc. (NASDAQ:SPLS) reported its second quarter earnings on Aug. 21, an event that promptly caused the stock to plummet by 15%. The news was bad on almost all fronts as investors dumped their shares, but were they wrong to sell? Is Staples, Inc. (NASDAQ:SPLS) in better shape than its earnings report suggests?

First, the bad

There was plenty to dislike within Staples, Inc. (NASDAQ:SPLS)’s second quarter earnings release. Total sales were down by 2% year-over-year, although half of this decline was a result of the 103 store closures in North America and Europe over the past year. Operating margin declined by 65 basis points as net income declined by 17% year-over-year. Diluted EPS came in at $0.16, short of analyst expectations of $0.18.

North American Stores, a division which also contains online sales, suffered a year-over-year revenue decline of 2.3% as comparable store sales dropped by 3%. The combination of store closures, a 2% decline in traffic, and a 1% decline in average order size were the culprits. Operating income fell by 24% as lower product margins and investments in the online business dragged down profitability.

International operations fared even worse. Revenue fell by 8.3% year-over-year as comparable store sales in Europe declined by 6% on lower traffic. Operating losses grew to $20 million from $15 million in the same period last year as both Europe and Australia offer difficult environments for the company.

Staples, Inc. (NASDAQ:SPLS) lowered its full year earnings guidance to the range of $1.21-$1.25 per share, although the company’s expected free cash flow for the year remained constant at $900 million.

Glimmers of hope

Among all of the bad news in the earnings report there were some bright spots. Staples.com grew sales by 3% year-over-year, and this growth offset at least some of the decline on the retail side. In the earnings conference call CEO Ron Sargent gave some detail about how this growth was achieved. During the quarter Staples, Inc. (NASDAQ:SPLS) added about 40,000 new products on Staples.com, including items in categories like teaching and education, technology, and furniture. The website now has 150,000 products for sale, with a stated goal to expand to 300,000 products by the end of this year.

Another bright spot was in-store services. The copy and print business grew in the mid-single digits, driven by strong demand for color printing and wide-format signs. EasyTech, which is Staples’ tech support service, saw double-digit growth as new cloud-based diagnostic and antivirus protection services were introduced.

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