Shares of Staples Inc. (SPLS) fell more than 12% in pre-market trading as the company announced lower-than-expected fourth-quarter fiscal 2013 earnings. Fueling further concern, the company announced the closure of 225 stores across North America through 2015. Staples’ fourth-quarter earnings of 33 cents came short of the Zacks Consensus Estimate of 39 cents and decreased 28.3% year over year.
For the full year, adjusted earnings came in at $1.16 per share, lagging the Zacks Consensus Estimate of $1.22 and down 17% year over year.
Lower sales due to store closures and stiff competition from online retailers weighed on the company’s performance.
Total sales decreased 10.6% year over year to $5,873.0 million and fell short of the Zacks Consensus Estimate of $5,973 million. Excluding the impact of an additional week in 2012, revenues fell 4%. The shuttering of 109 stores in North America and Europe in the past 12 months, along with foreign currency fluctuations, adversely affected sales in the quarter.
For the full year, revenues came in at $23,114 million, down 5.2% year over year and lagging the Zacks Consensus Estimate of $23,213 million. Excluding the impact of an additional week in 2012, revenues fell 2%.
Gross profit decreased 12.4% year over year to $1,507.1 million while gross margin contracted approximately 50 basis points (bps) to 25.7%. Operating profit fell 31.7% to $338.0 million.
In 2013, Staples enhanced its assortment on Staples.com to 500,000 products from 100,000 at the beginning of 2013. The company achieved gross cost reduction of $200 million in 2013. With regard to its European operations, the company is constantly rationalizing business and reducing expenditure. Staples achieved full-year profitability in the region for 2013. The company also closed about 40 net stores and downsized/relocated another 40 outlets in the year in North America.
The office supply retailers are going through tough times, given the decline in business and consumer spending in the wake of the global meltdown. The financial crisis has resulted in sluggish demand for big-ticket items such as business machines, furniture and other durable products.
Moreover, intense competition from online bellwethers like Amazon.com Inc. (AMZN) is denting the company’s profitability. Recently another office supplies retailer, Office Depot Inc. (ODP) also posted lower-than-expected earnings for fourth quarter 2013.
Given the near-term challenges, the company expects lower sales for the first quarter of fiscal 2014 compared with the prior-year quarter figure. Staples expects earnings per share to be in the range of 17–22 cents. Moreover, the company expects to generate more than $600 million of free cash flow in 2014.
Along with the earnings release, Staples announced to initiate a cost reduction program to achieve pre-tax cost savings of about $500 million annually by 2015.
Segment Details
Sales at North American Stores and Online, which include its retail stores and Staples.com business in the U.S. and Canada, marked a decline of 12.1% to $2,900 million. The fall resulted from decrease in sales of office supplies, business machine, computers and technology accessories.
Moreover, 63 store closures in the past 12 months negatively impacted sales. Despite challenges, the segment witnessed increased sales of facilities and breakroom supplies, print as well as copy and paper.
During the quarter, comparable-store sales (comps) declined 7% owing to a 6% fall in traffic and 1% decrease in average order size from the prior-year quarter. Sales through Staples.com rose 10% year over year due to higher traffic and better customer conversion rate.
On a year-over-year basis, operating income decreased 44.5% to $176 million while operating margin contracted 355 bps to 6.1%. The decline reflected the company’s increased investment in its .com business and lower product margins, along with absence of an additional week compared to the past year.
North American Commercial, which includes its Contract operations in the U.S. and Canada, witnessed a 6.6% fall in sales to $1,963 million due to lower demand in office supplies and paper as well as ink and toner. These were partly offset by growth in facilities and breakroom supplies along with tablets.
Operating income decreased 14.4% to $167 million while operating margin contracted 75 bps to 8.5%, reflecting increased marketing expenses and absence of an additional week compared to the past year.
Revenues at International Operations waned 13.5% to $1,010 million, reflecting lower sales in Europe and Australia. Comps in Europe marked a decline of 1% on account of flattish traffic and reduced average order size. The segment reported an operating income of $14 million, up substantially from the year-ago quarter.
Other Financial Details
Staples ended the quarter with cash and cash equivalents of $492.5 million, long-term debt (net of current maturities) of $1,000.2 million and shareholders’ equity of $6,140.8 million.
For the full year, Staples generated operating cash flow of about $1,108.3 million and incurred capital expenditures of $371 million, resulting in a free cash flow of $737 million. In fiscal 2013, Staples repurchased 21 million shares for $306 million and paid $313 million as dividends.
Currently, Staples holds a Zacks Rank #3 (Hold). Another stock worth considering in the retail sector is Barnes & Noble, Inc. (BKS) with a Zacks Rank #1 (Strong Buy).
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