May 20, 2014 / 11:15 AM / in 4 years

UPDATE 3-Staples warns of falling sales, shares slump

(Adds details on margins and sales; updates shares)

By Siddharth Cavale

May 20 (Reuters) - Staples Inc forecast a fall in sales in the current quarter as customers shift to e-retailers, mass merchants and drugstores to buy their office supplies, and the company reported its weakest quarterly gross margins since May 2003.

Shares of the largest U.S. office supply retailer fell as much as 13 percent on Tuesday, after the company also reported its fifth straight decline in quarterly sales.

Staples has been stocking more electronics such as tablets and offering copy and print services as demand wanes for traditional office supplies such as paper and printer toner.

Facing competition from mass merchants such as Wal-Mart Stores Inc and online retailers such as Inc , Staples has been spending more on its online business and on advertising to create awareness that it sells more than traditional office supplies.

The increased investment, along with mark-downs to clear inventory, pushed down gross margins in the first quarter to 24.94 percent from 25.98 percent a year earlier.

The company said it expected stepped-up investments in e-commerce and marketing to continue to weigh on profit in the current quarter.

Staples forecast earnings of 9-14 cents per share for the quarter ending Aug. 3, falling short of the average analyst forecast of 15 cents per share.

The company said store closures and weak demand would result in a decline in sales in the current quarter, compared with a year earlier, but did to provide a figure. Staples reported sales of $5.32 billion in the second quarter of 2013.

Analysts are expecting second-quarter sales of $5.18 billion, according to Thomson Reuters I/B/E/S.

Staples said in March it would close 140 of its 1,846 stores in North America this year to boost profits and focus on its online business.

“We think the company is taking the right steps, including aggressively closing stores this year ...,” Deutsche Bank Markets Research analyst Mike Baker wrote in a note, maintaining a “hold” rating on the stock.

First-quarter sales fell nearly 3 percent to $5.65 billion. North America sales rose just 1 percent as a fall in sales of core office supplies offset most of the benefit of a rise in sales of breakroom supplies and furniture.

International sales fell 4 percent.

“While sales were better than expectations, profitability remains a question mark within the retail business ... ” Janney Capital Markets analyst David Strasser wrote in a note.

Staples’ net income fell 44 percent to $96 million, or 15 cents per share. Excluding items, the company earned 18 cents per share. Analysts on average had expected earnings of 21 cents per share on sales of $5.61 billion.

Staples shares were down 13 percent at $11.64 in early afternoon trading on the Nasdaq. (Reporting by Siddharth Cavale in Bangalore; Editing by Savio D‘Souza, Kirti Pandey and Ted Kerr)

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