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Staples results reflected limited improvement in economy

FRAMINGHAM, Mass. — It has been a rough couple years for retailers, and no segment has been hit harder than office products, which has suffered a double whammy from the downturn in consumer and business spending. Staples, long the leader in the office products industry, has fared better than rivals Office Depot and OfficeMax, and its dominance was evident again on Wednesday, even if the second quarter results the company reported were uninspiring.

Total company sales increased 5.2% to $5.8 billion, net income increased 36% to $176.4 million, but if a $21 million tax refund is excluded adjusted earnings per share increased 10% to 22 cents.

“Our core business is solid, our growth initiatives are building momentum, and we delivered better than expected earnings and cash flows,” said Ron Sargent, Staples chairman and CEO.

The largest segment of the company’s business, North American Delivery, saw sales increase 3.1% to $2.4 billion while North American Retail produced a 1.7% sale increase to $2 billion aided in part by a weak dollar. Same-store sales were flat.

While the company’s two largest divisions saw some top line growth, operating profits declined slightly. Profits for the delivery business declined to $204.7 million from $216.4 million, and the retail unit’s profits dropped to $102.8 million compared to $105.7 million.

The company said reduced profitability in the delivery business was the result of increased labor to support growth initiatives, higher fuel costs and investments in website development and other information systems, partially offset by reduced marketing expenses and improvements in supply chain. Profitability in the retail unit suffered due to higher marketing and labor expense to drive growth in Copy & Print and technology solutions, partially offset by improved product margins and reduced rent and occupancy costs.

Expansion activity was limited during second quarter with the opening of eight stores, four each in the U.S. and Canada, leaving the company with a total of 1,907 units.

Offsetting the performance of the delivery and stores divisions was the smaller international unit where sales increased 15.2% to $1.3 billion and operating profits grew from $16.6 million from $13.5 million. The topline growth was a bit deceiving thought due to the weak dollar. When measured in local currencies international sales actually declined 0.1%. Internationally, delivery and retail businesses are reflected in the company’s results and Staples ended the period with 378 stores.

While the consumer and business spending climates remain challenging, Staples said it expects to grow sales in the low single-digit range during the third quarter. Profits are expected to fall within a range of 46 cents to 48 cents a share during the third quarter while full year profits are expected to reach $1.42 to $1.48. If a second quarter tax refund of $21 million is excluded from the calculation the full year estimate drops by three cents.