The weak sales were mainly due to continued weakness in its North American business which was weaker than 4Q11’s 1% decline and matched the weakness exhibited by its competitor Office Depot Inc (NYSE:ODP) and OfficeMax which reported 6% and 4% respectively. Further, it experienced continued weakness in Europe (comps declined 9%). International profitability also suffered as the company’s headcount reductions in Europe and Australia failed to offset lower product margin and sales de-leverage.
Gross Profit Margins declined 60bps but Adjusted Operating margins increased 18 basis points to 7.5% due to lower selling, general and administrative costs as a result of lower incentive based compensation.
For the quarter, results included $181 million of pretax charges related to its restructuring in Europe and Australia and U.S. store closures, a $57 million pretax charge related to the early extinguishment of debt, and a $26 million pretax charge related to the termination of the company’s existing joint venture agreement in India. (Note, for comparison, results have been adjusted for the same).
Excluding the above changes, net profit was 46 cents a share a penny below analyst estimates of $0.45.
Staples has over $1 billion in cash (well within its target of $500-$600 million) and achieved $895 million in operating cash flows. The question arises, how is the company going to utilize this cash. Currently, it is not using the cash for growth or innovation, but only for the traditional dividend, share repurchases, and debt repayment expenses.
Recently, the company announced a 9% increase in its dividend. Further, in 4Q it issued $1 billion in debt to prepay its $1.5 billion debt due in January 2014. Company has mentioned that it will repay the remaining debt of ~$633 million in cash at maturity.
Weak 1Q13 outlook:
Staples issued weak FY13 outlook of low single-digit sales with $1.30 to $1.35 in EPS, which is below analysts’ projections of $1.44 a share (Source: Bloomberg). It has announced $250 million in annual pretax savings in North America by 2015 which will be driven mainly through savings in product cost, indirect procurement and store operations. It will re-invest these savings back into the business through sharper prices, increased investment in IT, expanded brand marketing and customer acquisitions.
Conclusion:
Staples, Inc. (NASDAQ:SPLS) is currently in a transition mode and until the industry shows signs of improvement, the shares are likely to be range bound. I would give the company brownie points for its straightforward objectives of reviving top-line growth in North America, increased focus on growing its online business and repairing its European operations. However, it still has a long way till it warrants an investment.
The article The Office Product Industry Is Getting Interesting! originally appeared on Fool.com.
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