Staples cuts outlook on weak global demand

Wed Aug 15, 2012 3:37pm EDT

A Staples store is shown in Encinitas, California in this February 28, 2012 file photo. Staples Inc., reported lower-than-expected quarterly results on weak demand in North America, Europe and Australia, prompting the largest U.S. Office supply chain to cut its profit and sales forecasts for the year. REUTERS/ Mike Blake/Files

A Staples store is shown in Encinitas, California in this February 28, 2012 file photo. Staples Inc., reported lower-than-expected quarterly results on weak demand in North America, Europe and Australia, prompting the largest U.S. Office supply chain to cut its profit and sales forecasts for the year.

Credit: Reuters/ Mike Blake/Files

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(Reuters) - Staples Inc (SPLS.O) reported lower-than-expected second-quarter results as a struggling global economy weakened demand in North America, Europe and Australia, prompting the largest U.S. office supply chain to cut its profit and sales forecasts for the year.

Current expectations for the year assume slower growth in the U.S. economy and continued weakness in Europe, Staples said on Wednesday. After the news, Staples shares fell as much as 16.8 percent to their lowest level since 2003.

Many investors look at office supply retailers as a barometer of economic health because demand for their products is closely tied to white-collar employment rates.

"The weakness in Europe was not a surprise, but the deterioration in the U.S. was more significant than anticipated," said Janney Capital Markets analyst David Strasser.

He tied the weakness in Staples' home turf to the slowdown in the U.S. economy, nagging high unemployment and rising competition.

Sales worsened in July, Staples chief executive Ron Sargent said during a conference call with analysts.

Staples is looking at store closings in the United States and at measures to fix its overseas business, Sargent said.

"I think it is the point where we have just got to make a decision, is the macro environment in Europe going to get better anytime soon or not? If not we need to make some changes, more changes I guess," he said. He did not give specifics about the steps the company would take, but said Staples would be able to talk about them this quarter.

Besides its office supply peers, Staples faces tough competition from mass merchants such as Wal-Mart Stores Inc (WMT.N), drugstores, dollar stores and online retailer Amazon.com Inc (AMZN.O).

For the year, Staples said it expected sales to stay flat and earnings per share to rise only at a low single-digit percentage rate from last year's $1.37. Previously, it had forecast growth in the low single digits for sales and in the high single digits for earnings per share.

The retailer said existing business customers in North America were cutting back their spending on office supplies.

"The size of orders was down, and that was just cautiousness on the part of our customers buying only what they needed when they needed it," said Joseph Doody, president of Staples' North American delivery business.

That unit includes Staples Advantage, which serves medium-sized-to-Fortune 1000 businesses; Staples Business Delivery, which serves small businesses through Staples.com and catalogs; and Quill, a 50-year-old direct marketer of office products to small and medium-sized businesses.

Staples said it was also finding it harder to pass along price increases on items like paper to large corporate and healthcare customers.

Sales fell 5.5 percent to $5.50 billion in the second quarter ended July 28, well below analysts' average estimate of $5.72 billion.

International sales dropped 18 percent to $1.1 billion, hurt by weakness in Europe, which is in the throes of a debt crisis, and lackluster demand in Australia.

Sales were particularly weak in southern Europe where ongoing economic headwinds remain especially challenging and the market has become increasingly competitive, Staples said.

Staples' results came after Office Depot Inc (ODP.N), the No. 2 U.S. office supply chain, reported a wider-than-expected quarterly loss last week on tepid demand in Europe and the United States.

Third-ranked OfficeMax Inc OMX.N has said it expects third-quarter sales to be flat or slightly higher than a year earlier.

Sales at these chains have suffered as corporate customers and other shoppers cut back on discretionary spending. As a result, the companies have had to rely on cost cuts to boost earnings in recent quarters.

Staples' net income fell to $120.4 million, or 18 cents a share in the second quarter, compared with $176.4 million, or 25 cents a share, a year earlier. Analysts, on average, were expecting a profit of 22 cents, according to Thomson Reuters I/B/E/S.

Sales at stores open at least a year fell 2 percent in North America, as customer traffic declined and average order size was flat. Sales of computers and core office supplies were particularly weak.

The company attributed some of the weakness in computer sales to shoppers holding back ahead of Microsoft Corp's (MSFT.O) planned launch of the Windows 8 operating system in late October.

Staples shares were down 15.08 percent at $11.42 on Nasdaq on Wednesday afternoon.

(Reporting by Dhanya Skariachan in New York; Additional reporting by Brad Dorfman in Chicago; Editing by Lisa Von Ahn and Matthew Lewis)

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