Staples Inc. (SPLS, Financial) recently reported its first-quarter results for fiscal 2015 with earnings that were in line with the consensus estimate but dropped 6% year-over-year to $0.17 a share. At the same time, earnings from continuing operations, including one-time items and pre-tax restructuring charges, came in at $0.09 a share, significantly lower than the $0.15 a share reported in the year-ago quarter. The company attributed the lower-than-expected performance to foreign currency headwinds and ongoing store closures. Following the results, Staples shares dropped to $15.98 during the day’s trading before climbing to $16.15 at closing bell.
Slump in comparable-store sales
Staples reported 6.9% year-over-year decline in revenues for the first quarter of fiscal 2015 to $5.26 billion, falling short of the consensus estimate of $5.46 billion. Revenues were also down 0.6% on a year-over-year basis, excluding the impact of negative foreign currency headwinds and store closures. While Staples’ gross profit for the quarter fell 4.5% to $1.34 billion, gross margin expanded around 70 basis points to 25.6% of net sales. At the same time, the company saw a whopping 38.4% year-over-year decline in operating profit to $98 million, excluding restructuring and related charges. While adjusted operating income dropped 5.5% year-over-year to $173 million, adjusted operating margin grew 10 basis points to 3.3% of sales.
Segmentwise, Staples saw 10% year-over-year decline in sales to $2.37 billion at its brick and mortar as well as online stores in North America. While store closures and foreign currency headwinds affected revenues, the company also saw a drop in sales of technology accessories and business machines. However, the company reported higher sales of copy and print services as well as break-room supplies during the quarter. While online sales grew 1% compared to the year-ago quarter, comparable-store sales dropped 5% on the back of a 2% decline in traffic and a 3% year-over-year decline in average order size. At the same time, Staples saw 2.5% growth in revenues to $2.10 billion at its North American Commercial segment that includes the company’s contract operations in Canada and the U.S. The company attributed the growth to increase in sales of break-room supplies, facilities and furniture that offset reduced demand for toner and ink. Staples’ International Operations reported 18.9% year-over-year decline in revenues to $782 million owing primarily to a 7% fall in comparable-store sales.
Restructuring costs drag near-term earnings
As the office supply industry continues to navigate secular headwinds and online giants such as Amazon.com Inc. (AMZN, Financial) and mass-merchandisers such as Walmart Stores Inc. (WMT, Financial) make inroads into the office supplies market, retailers such as Staples are finding themselves swimming in a larger pool of competitors. Consequently, Staples has been trying to accelerate growth through acquisitions as well as store rationalization. The company’s take-over of rival Office Depot Inc. (ODP, Financial) in a stock-and-cash deal worth $6.3 billion is likely to come through by the end of 2015. Concurrently, the company shut down around 28 underperforming stores in the first quarter, taking the total number of store closures to 197 since commencing its store rationalization program in 2014. Moreover, Staples remains on track to shut down a total of 225 stores across North America by the end of 2015. The company also achieved annualized cost reductions of $100 million during Q1 2015, taking the overall annualized savings to $350 million. While these steps are expected to help the company in the long run, they are eating into its near-term earnings.
Following the results, Staples also announced its guidance for Q2 2015. The company projected a year-over-year drop in sales for the second quarter, while earnings are projected to be in the $0.11 to $0.13 a share range. While revenues for the quarter are expected to come in at $5.22 billion, the company’s forecast for adjusted EPS stands at $0.12 a share. Consensus estimates peg Staples’ Q2 earnings at $0.11 a share at the lower end of the company’s guidance.
Final thoughts
Staples reported lower-than-expected revenues for Q1 2015, with comparable-store sales declining across most operating segments. With the company grappling with multiple challenges including decreasing demand for traditional office supplies, increased competition, foreign currency headwinds and store optimizations costs, experts are skeptical regarding the company’s near-term prospects. Experts are looking at an average annual earnings growth rate of just 1.3% for Staples over the next five years in Staples, with a peak expected in fiscal 2018 when the company’s impending acquisition of Office Depot is expected to lift the sagging revenues. The Staples stock currently carries a "hold" guidance.
