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Staples Earnings

Staples, the largest U.S. office supplies retailer, posted an 11% rise in quarterly profit Tuesday, but North American sales in stores open more than a year slipped and its stock fell.

Staples Store
Staples Store

Despite posting results that were in line with Wall Street's estimates, Staples Chief Executive Ron Sargent told investors that he was "worried" about the current state of consumer spending.

Second-quarter net income rose to $178.8 million, or 25 cents a share, from $161.2 million, or 22 cents a year earlier.

The Framingham, Massachusetts-based company said sales for the quarter that ended Aug. 4, rose 11 percent to $4.3 billion from $3.9 billion a year earlier, helped by gains in its delivery business and higher sales of laptop computers and software.

Both profit and revenue met analysts' expectations, according to Reuters Estimates.

But comparable-store sales at its North American division slipped 2 percent compared with the year-earlier quarter, a decline the company blamed on lower sales of furniture and supplies.

Sargent said on a conference call that he was "worried" about consumers and said he is seeing more of a consumer slowdown than a business slowdown.

Last week, the Reuters/University of Michigan Surveys of Consumers showed that U.S. consumer sentiment -- which is seen as an indicator of future spending -- fell to its lowest point this year in August.

Small-business consumers, a key Staples shopper, have also been adversely affected, Sargent added.

"If you're a one-person business or two-person business, you tend to act a little more like a consumer than a business," Sargent said on the call ... They're having the same pressure the consumers are having."

Total retail sales in North America however, climbed 5 percent and sales at Staples' delivery segment rose 16 percent from a year ago.

International sales, meanwhile, rose 18 percent as the company expanded sales of its private label items in Europe.

"These results reinforce Staples' distinctive strength in delivery, for which it has sharply outperformed competition for many quarters," Goldman Sachs analyst Matthew Fassler wrote in a research note. "Retail results though, reinforce our concerns about the market ... We expect earnings to exert a modest drag on the stock near-term," wrote Fassler, who has "neutral" rating on the stock.

Staples also said it expects to begin retail operations in India later this year. In July, the company began selling office products to contract customers in India.

The company said in May that it was taking a cautious approach regarding expectations for the rest of the year due to a soft sales environment at its North American retail business during the first quarter.

Looking ahead, Staples said it expects to see 15 percent earnings-per-share growth for the third quarter and full year.

Analysts on average were expecting earnings of 41 cents per share for the third quarter, up 14 percent from a year earlier before special items, and $1.44 for the year, up 13 percent from the prior 12 months.

The company also said it anticipates low-double-digit sales growth for the third quarter, with slightly lower to flat same-store sales in North America.

"In this environment, with a strong balance sheet and attractive valuation, Staples remains one of our safer and better names," Credit Suisse analyst Gary Balter wrote in a research note. "We recommend buying (Staples) shares on weakness this morning," Balter, who has an "outperform" rating on Staples' stock, wrote.

For the year, Staples said it expects low-double-digit sales growth.

Staples shares were down 53 cents, or 2.27 percent, at $22.78 in midday Nasdaq trading.

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