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Staples Restructuring Is 'Too Late,' Says Analyst

NEW YORK (TheStreet) -- Shares of Staples (SPLS) were sinking 11.5% to $11.85 after the office supplies chain reported first-quarter earnings that were worse-than-expected amid a restructuring plan meant to shift focus to e-commerce and more business-to-business products. At least one analyst said the transformation comes "too late."

Staples reported first-quarter net income of $96 million, or 15 cents a share, which fell 43% from the first quarter of 2013. Non-GAAP earnings came in at $115 million, or 18 cents a share, missing analysts' estimates by 3 cents, according to Thomson Reuters. The 3-cent shortfall came from an $11 million tax charge related to the repatriation of foreign earnings as well as a $22 million net gain related to the sale of its Smilemakers business, Staples said.

Revenue of $5.65 billion fell 2.8% from the year-earlier quarter, but exceeded analysts' estimates of $5.61 billion. Staples' gross margin fell 90 basis points from the year-earlier quarter to 25.1%.

Staples' comparable-stores sales in its North American business fell 4% from a decline in traffic and flat average order size, it said, while online sales rose by 6% in local currency driven by "increased conversion on the company's desktop and mobile Web sites as well as its previously-announced expanded assortment of products for small businesses beyond just office supplies." Staples is also focusing on growing its copy and print sales. The company noted in its earnings release that same-store sales for copy and print in North America stores rose in the "high single digits," while online copy and print sales rose in the "double digits."

Staples is battling against the likes of Walmart (WMT), Best Buy (BBY) and Amazon (AMZN) in in the office supply space. Its competitor Office Depot (ODP) said two weeks ago that it plans to shutter 21% of its 1,900 stores by 2016. Office Depot merged with Office Max in November.

Staples announced on March 6 that as part of a company-wide restructuring that it would shutter 225, or roughly 10%, of its store base, the bulk to be closed this year. Staples said on Tuesday during its first-quarter earnings call that it closed 16 stores in the first quarter and plans to close 80 underperforming stores in the second quarter. The company plans to close 40 stores in the back half of the year, it said on Tuesday.

Some analysts aren't convinced the restructuring will work. As an investor, it might be tough to take the blows as the company reforms itself.

"We look upon the weaker-than-expected 1Q (Apr.) results and 2Q (Jul.) guidance that SPLS reported today as 'more of the same' from the struggling chain in an increasingly challenged sector," wrote Oppenheimer analyst Brian Nagel, in a research note. He has a "perform" rating on the stock.

"Staples is working aggressively to adapt its enterprise amid rapidly changing dynamics within the Office Products Retail Category. We are encouraged with SPLS' turnaround efforts, but remain concerned that a strategic repositioning at the chain is simply occurring 'too late.' SPLS continues to generate substantial cash and enjoys a very solid balance sheet. However, we do not foresee any type of significant recovery in sales and EPS trends at the company in the near to intermediate term," the note said.

The company announced on the same day as the restructuring that it had launched the first two of its so-called omnichannel stores.

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