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The Science of Hitting
The Science of Hitting
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Staples - A Look at Q3 Results

November 16, 2011 | About:

Staples (NASDAQ:SPLS), one of the world’s largest office products companies, reported third-quarter 2011 earnings and held a conference call with investors on Tuesday morning. Here’s a recap from the second quarter results, which I covered in a previous article:

“Total company sales for the second quarter of 2011 increased 5.2% to $5.8 billion compared to the second quarter of 2010, with 4% coming from a positive foreign exchange impact.

North American Delivery grew the top line 3.1% to $2.4 billion, driven by strong double digit sales growth in facilities and break room supplies.

North American Retail grew the top line 1.7% to just over $2 billion, with flat comparable store sales from a mix of lower traffic but higher order size. The company ended the second quarter of 2011 with 1,907 stores in North America (1,576 in the U.S., 331 in Canada).

In International, the top line was up 15.2% to $1.34 in U.S. dollars, but down slightly (0.1%) in local currencies ($178 million positive impact of foreign exchange rates). Europe continues to be difficult, with Retail comps down 5%, partially offset by top line growth in China, India and South America. The company opened one store in Germany and closed one store in China, ending the quarter with 378 international stores.

Net income for the second quarter of 2011 increased 36% year over year to $176 million, while diluted EPS increased 39% to $0.25 from $0.18 in the second quarter of 2010; excluding onetime expenses (tax benefit in 2011, restructuring expense in 2010), diluted EPS increased 10% from $0.20 to $0.22 per share.

EPS increased at a faster rate than net income due to the company’s buyback program: 12 million shares of stock were repurchased in Q2 for $199 million or a cost of roughly $16.58/share; year to date, the company has repurchased 19 million shares at a cost of $346 million, for an average purchase price of $18.21/share. At the end of the second quarter, the company had 711 million shares outstanding.”

In Q3, total company sales increased 0.5% to $6.6 billion compared to the third quarter of 2010, with foreign exchange benefiting the top line by roughly 150 basis points. Through the first nine months of the year, sales are up roughly 2.4% to $18.56 billion.

North American Delivery sales for the third quarter were $2.6 billion, an increase of 1.8% over Q3 2010 (marking the seventh consecutive quarter of growth); as in Q2, this was primarily driven double-digit sales growth in facilities and breakroom supplies.

North American Retail sales were flat in the quarter at $2.7 billion; comparable store sales declined 1%, due to a decrease in traffic and flat ticket. In the quarter, the company closed one store in the U.S. (net) and opened two in Canada, ending Q3 with 1,908 stores in North America, and on track for their goal of 20 net new additions for the full year.

International sales in Q3 were down 1.9% in U.S. dollars (down 7% on a local currency basis) to $1.3 billion, reflecting a 12% decrease in comparable store sales in Europe and weak sales in Australia (“consumer and business confidence there remain low”). The International business ended the quarter with 377 stores, one less than after Q2.

Here are some of the highlights from the prepared remarks about the weak quarter in Europe:

“The European debt crisis hit the business hard in Q3 as the trend toward improving sales in Europe softened… In Europe, our business turned negative in August, coinciding with the escalation of sovereign debt concerns. Europe office products declined 5% in local currency for the quarter after showing 2% growth in Q2. Delivery continues to outperform retail, with particular strength in Contract, which grew sales 2% in local currency versus last year. Our European Retail comps were down 12% for the quarter, with weakness across all markets other than Norway, where we had low single-digit positive comps.”

Q3 GAAP diluted EPS increased 18% to $0.47 compared to $0.40 in Q3 2010; after backing out $9 million of pretax integration and restructuring expense from Q3 2010, adjusted diluted EPS was 15% higher than last year.

In Q4, the company expects flat to low single-digit sales growth and diluted earnings EPS in the range of $0.39-$0.43; for the full year, the adjusted diluted EPS estimate is $1.35-$1.39. On Tuesday, SPLS shares were more than 3.5% lower compared to a relatively flat showing from the major indices; at its current price, Staples trades at just under 11 times management’s estimate for full year diluted EPS.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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