Staples profit tops Wall Street view, shares rally

NEW YORK Tue Dec 2, 2008 4:23pm EST

Computer accessories displays are seen inside a Staples store in New York in this May 20, 2008 file photo. The office products retailer posted a higher-than-expected third-quarter profit, helped by higher sales from the acquisition of Dutch peer, Corporate Express. REUTERS/Shannon Stapleton

Computer accessories displays are seen inside a Staples store in New York in this May 20, 2008 file photo. The office products retailer posted a higher-than-expected third-quarter profit, helped by higher sales from the acquisition of Dutch peer, Corporate Express.

Credit: Reuters/Shannon Stapleton

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NEW YORK (Reuters) - Staples Inc (SPLS.O) posted a quarterly profit that edged past analysts' expectations and announced an improved cost-savings outlook on Tuesday, sending its shares up 8 percent.

Staples, the world's largest office products retailer, said it expects to shave $300 million in costs over three years from its recent acquisition of Dutch peer Corporate Express. It had earlier predicted savings of $200 million to $300 million.

Like rivals OfficeMax Inc OMX.N and Office Depot Inc ODP.N Staples has suffered in recent quarters as many of its small-business customers battled a recession, higher commodity costs, a housing slump and the credit crunch.

"Just given all the bad economic news and uncertainty out there right now, I think people looked at this as a victory for the company," FTN Midwest Securities analyst Anthony Chukumba said, referring to Staples' profit.

Office Depot and Office Max both posted losses in the third quarter. Last month OfficeMax predicted a significant sales decline for the rest of the year, while Office Depot said in October it would delay opening new stores.

Also aiding Staples' stock were signs that the integration of Corporate Express is on track and had potential to add meaningfully to the company's future earnings, Chukumba added.

Staples also stood by its plans on Tuesday to open 75 stores in North America next year.

The company said tight expense control would help it tackle a decline in average order size, slower store traffic and weakness in orders of furniture, business machines and computers.

"We know from our experience during previous downturns that if we continue to take care of our customers, invest in the business and control expenses and capital spending, we'll come out on the other side even stronger than before," Chief Executive Ron Sargent said in a conference call.

Staples shares rose as high as $16.77, before closing up $1.20 at $16.32 on the New York Stock Exchange. The Standard & Poor's 500 Index .SPX closed up 4 percent after General Electric Co, a global bellwether, lifted optimism by pledging to leave its stock dividend intact.

SALES IMPRESS DESPITE WEAK CLIMATE

For office supply chains, which sell everything from pens and envelopes to computers and furniture, the holiday shopping period is less important than to other chains that may be more gift-oriented.

While department stores and clothing chains rolled out special promotions and eye-popping discounts last weekend to kick off the season, Staples said it was less aggressive with its discounting.

Net earnings in the third quarter that ended November 1 fell 43 percent to $156.7 million, or 22 cents a share, from $274.5 million, or 38 cents a share, a year earlier.

Excluding costs such as charges tied to the Corporate Express purchase, Staples earned 42 cents a share, slightly ahead of analysts' average estimate of 41 cents, according to Reuters Estimates.

Staples had forecast 41 cents to 42 cents a share.

Sales rose 34 percent to $6.95 billion.

Excluding sales from Corporate Express, sales fell 3 percent to $5 billion, Staples said.

At North American retail stores, sales fell 6 percent. Sales at outlets open at least a year, a key retail metric known as same-store sales, fell 8 percent due to declines in both order size and customer traffic.

Staples' North American delivery service for small to medium-sized businesses posted sales of $2.8 billion, which S&P analyst Michael Souers said he was "impressed" by, given the challenging climate for corporate America.

Staples said it expects to spend $400 million on capital expenditures next year.

Economic volatility kept Staples from being able to give a specific forecast for the current quarter or next year, Chief Financial Officer John Mahoney said on a conference call. He added that the strengthening of the U.S. dollar, which lowers the value of overseas sales, will hurt fourth-quarter earnings and probably "remain a drag" on profit early next year.

(Additional reporting by Aarthi Sivaraman; Editing by Maureen Bavdek, Lisa Von Ahn, Dave Zimmerman, Richard Chang)

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