Staples indicates weakness ahead

FRAMINGHAM, Mass. — If Staples is a proxy for the health of the U.S. economy don’t look for conditions to improve any time soon.

Staples reported weak second-quarter results Wednesday morning and shared a bleak outlook for the remainder of the year. That’s bad new not just for Staples shareholders, but for anyone looking for signs of economic improvement as Staples has exposure to businesses of all sizes. If economic conditions were improving it would be evident in more robust demand for the type of products and services offered by Staples.

Instead, the company said second-quarter sales declined 6% to $5.5 billion and earnings per share fell a whopping 28% to 18 cents compared to 25 cents the prior year. The earnings decline wasn’t quite as severe if a one time $21 million tax refund received during the second quarter the prior year is excluded. Excluding the tax benefit earnings per share only declined 18%. Either way, not a good showing for Staples and a troubling commentary on the health of the U.S. and European economies.

“Our second-quarter results fell short of our expectations due to softer than expected sales trends in North America and ongoing weakness in Europe and Australia,” said Ron Sargent, Staples’ chairman and CEO. “We continue to build momentum in categories beyond office supplies, but these improvements were more than offset by weakness in computers and core office supplies during the second quarter.”

Sales in the company’s North American Delivery units fell 1% to $2.4 billion as the company lost two large contract customers. North American retail sales declined 3% to $2 billion and same-store sales declined 2% with results negatively affected by fewer customers visiting the company’s stores.

Lower sales of computers, software, and computer accessories were somewhat offset by growth of copy and print, mobile phones and accessories, and facilities and breakroom supplies, according to the company. Staples ended the quarter with a total of 1,915 stores in the U.S. and Canada after opening four stores and closing five.

Things were even bleaker on the international front where sales of $1.1 billion reflected a decrease of 18% in U.S. dollars and a decrease of 10% in local currencies.

Economic weakness drove declines in the company’s European delivery businesses, as well as a 9% decline in comparable-store sales in Europe. Staples ended the quarter with 375 international stores.

Due to the weaker than expected second quarter showing, Staples revised its outlook for the remainder of the year and now envisions slower growth in the United States and continued weakness in Europe.

“We’re taking a hard look at each of our businesses, and we plan to make significant changes to improve results,” Sargent said. “We’re also building a plan to reallocate resources, take advantage of our best growth opportunities, and drive increased cost savings.”

The company expects full-year sales to be flat compared with the prior year and full-year earnings per share to increase in the low single-digits.