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Staples soldiers on in Q3

FRAMINGHAM, Mass. — Profits at Staples grew 13% to $326 million and earnings per share grew 18% to 47 cents as the nation’s leading office products company overcame weak revenue growth that saw sales advance half a percent to $6.6 billion.

 “Our results in North America reflect our team’s ability to drive strong profit improvement in a tough environment,” said Ron Sargent, Staples’ chairman and CEO. “International results were weaker than expected as tight expense management was more than offset by very challenging top line trends.” 

Nowhere was that more evident than in the company’s 1,908-unit North American retail division where sales were flat at $2.7 billion and comps were down 1% as fewer people shopped the company’s stores. Despite the weak top line, Staples managed a slight improvement in the division’s operating margin, which now stands at 10.7% as margin growth more than offset increased labor costs and investments in growth initiatives.

The top-line performance of Staples North American Delivery business was slightly better as sales increased 1.8% to $2.6 billion and were driven by double-digit improvement in such categories as facilities and breakroom supplies and promotional products. And as was the case with the retail division, there was improvement in the operating margin rate which now stands at 9.5%.

The weakest area of performance was in Staples’ international division where sales declined 1.9%, or 7% on a local currency basis, to $1.3 billion. Same-stores sales in Europe declined 12%, and sales were also weak in Australia. The operating income rate, which already lagged the U.S. businesses by a wide margin, slipped further and ended the quarter at 3%.

 Despite the challenging sales climate, Staples managed to produce operating cash flow of $1.1 billion and invested $244 million in capital expenditures, which resulted in free cash flow of $852 million for the first three quarters of 2011. Staples also ended the quarter in much better financial position than its direct competitors with $2.3 billion in liquidity, including $1.1 billion in cash and cash equivalents. Some of those funds, $144 million, were used to buy back stock which provided a tailwind to earnings. Ten million shares were repurchased during the third quarter bringing the year-to-date total to 29 million shares repurchased at a price of $490 million. The company expects to spend more than $600 million on its own stock by the ends of its fiscal year.

Staples remained appropriately cautious in its guidance for the fourth quarter considering there has been little change in the economic climate to suggest the business customers who drive the company’s results are about to accelerate spending. Accordingly, Staples said it expect sales growth in the fourth quarter will be flat to slightly positive and earnings will range from 39 cents to 43 cents. Full-year profitability is expected to be in the range of $1.38 to $1.42.

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