Wednesday, office products giant Staples, Inc. (SPLS) reported a 16% decline in profit for the second quarter due to higher operating expenses, notwithstanding a double-digit sales growth mainly on Corporate Express acquisition. Quarterly earnings per share declined from last year, yet came in line with market projections. Further, the company maintained its fiscal 2008 earnings and sales growth forecast.
Second-quarter net income declined to $150.23 million or $0.21 per share from $178.83 million or $0.25 per share in the prior-year quarter.
Framingham, Massachusetts-based Staples acquired Dutch rival Corporate Express N.V. in July 2008, and the company's 2008 results had a positive impact of $10.86 million or $0.02 per share, which was more than offset by one-time expenses of $11.50 million or $0.02 per share.
On an adjusted basis, quarterly earnings were $150.87 million or $0.21 per share, lower than last year's $178.83 million or $0.25 per share. On average, 13 analysts polled by First Call/Thomson Financial expected earnings of $0.21 per share for the quarter.
Total sales increased 18% to $5.07 billion from $4.29 billion a year ago, and beat analysts' consensus estimate of $4.69 billion. Excluding Corporate Express' share of $672.52 million for the month of July, the company's total sales were $4.40 billion, a growth of 3% from last year.
In the preceding first quarter, earnings were $212.17 million or $0.30 per share on sales of $4.88 billion.
Among peers, Office Depot Inc. (ODP) recently reported a net loss for the second quarter of $2.00 million or $0.01 per share compared to a profit of $105.58 million, or $0.38 per share in the year-ago quarter, hurt by lower spending by retail customers in a weak U.S. economy. On an adjusted basis, earnings were $9.8 million or $0.04 per share, lower than $114.3 million or $0.41 per share last year. Total company sales for the quarter decreased 1% year-over-year to $3.61 billion.
Illinois-based OfficeMax Inc. (OMX) also reported a loss in its second quarter compared to a profit in the year-ago quarter, hurt primarily by the impact of goodwill impairment and severance charge. The company's loss applicable to common shareholders for the quarter was $895.27 million, or $11.79 per share, compared to a profit of $26.43 million or $0.35 per share last year. Excluding the unusual items, the company posted net income of $913.6 million or $12.03 per share for the quarter. Sales declined about 7% to $1.98 billion from $2.13 billion in the prior-year period, reflecting the weakness in the economy and OfficeMax's stricter customer retention policies.
In the second quarter, Staples' North American Retail sales dropped 1% year-over-year to $2.09 billion and comparable store sales decreased 7% impacted by declines in customer traffic and average order size together with weakness in furniture, desktop computers, printers and digital cameras. These were partially offset by strength in laptops, ink and technology services.
North American Delivery grew sales 25% to $2.0 billion, while sales growth was 2% excluding the impact of Corporate Express to $1.6 billion. International sales surged 69% to $1.0 billion, and excluding the impact of Corporate Express, International sales rose 17% in US dollars and 6% in local currency. Comparable store sales in Europe fell 7% on weakness in customer traffic and average order size.
The company's total operating income dropped to $245.42 million from last year's $280.47 million, and operating margin declined 170 basis points to 4.84%, reflecting higher operating expenses of $1.11 billion. Excluding the impact of Corporate Express, operating income rate declined 127 basis points to 5.27%, mainly reflecting margin pressure in North American Retail business.
During the quarter, Staples opened 35 stores, closed five stores, and acquired 65 stores worldwide as a result of the Corporate Express acquisition, ending the second-quarter operating 2,171 stores.
For the first six months of fiscal 2008, Staples' net income declined to $362.52 million or $0.51 per share from last year's $387.97 million or $0.53 per share. The company's 2008-first-half adjusted net income was $363.15 million or $0.51 per share. The six-month sales increased to $9.96 billion from $8.88 billion a year ago. Excluding Corporate Express, 2008 revenue was $9.29 billion.
Further, Staples maintained its fiscal 2008 outlook, still expecting low single-digit earnings per share growth, including modest accretion from Corporate Express, compared to $1.38 reported for 2007. On a non-GAAP basis, the company anticipates flat earnings per share for 2008. The non-GAAP expectation excludes the impact on 2007 earnings of the $38 million pre-tax charge related to the settlement of California wage and hour class action litigation, and the impact of the Corporate Express acquisition.
For its pre-acquisition business, Staples expects low single-digit sales growth for 2008.
Analysts currently expect earnings of $1.45 per share for the full year on revenues of $23.33 billion, representing a growth of 20.4% from last year.
Ron Sargent, Staples' chairman and chief executive officer said, "We are optimistic about the future for each of our three businesses. We're excited about the opportunity to drive immediate shareholder value by integrating the Corporate Express acquisition into our North American Delivery business, we're working hard to improve store productivity in North American Retail, and we're taking the right steps to build on our foundation for long term growth in International markets."
As a result of the Corporate Express acquisition, the company also anticipates total annual synergies in a range of $200 million to $300 million over a three-year period.
Further, the company estimates more than $100 million incremental interest expense and between $50 million and $70 million amortization of intangibles for the second half of 2008, while these expenses are projected to double in 2009. Staples also anticipates integration and restructuring expense to range between $30 million and $40 million in the second half of 2008, and to range from $50 million to $70 million in 2009.
In the near term, Staples said it plans to deploy free cash flows primarily to repay short term debt, and therefore does not anticipate repurchasing any of its shares.
SPLS closed Tuesday's regular trading session at $24.77, up $0.50, on a volume of 12.3 million shares.
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