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Sales Softness Hits Staples

The retailer tempers its guidance, citing economic uncertainty.

Office-supply retailer

Staples

(SPLS)

delivered a mixed message Tuesday, posting in-line first-quarter earnings but trimming its full-year guidance due to weaker-than-expected retail sales in North America.

Shares were slipping 64 cents, or 2.5%, to $25.03, in recent trading.

The Framingham, Mass.-based company said its first-quarter earnings rose to $209 million, or 29 cents a share, from $186.1 million, or 25 cents a share, a year ago. Analysts polled by Thomson Financial projected earnings of 29 cents a share.

Sales increased 8% to $4.59 billion, falling short of Wall Street's estimate of $4.67 billion.

Staples noted softer-than-expected sales growth in its retail division in North America. In light of this weakness, the company said it is taking a "more cautious approach" to its earnings forecast for the year.

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While the company still expects earnings growth of 15% to 20% for both the second quarter and full year, it anticipates that earnings will fall in the low end of the range. Staples predicts a full-year profit of $1.43 to $1.49 a share, compared with analysts' average estimate of $1.48.

In the first quarter, North American retail same-store sales, or sales at stores open at least a year, increased 1%. The company said the growth reflected strength in sales of laptop computers, peripherals and business software, which was offset by a flat performance in sales of core office supplies and weak sales of furniture and business machines.

"Now we understand our choppy top line result in North American retail for Q1 is likely to cause concern about what we're seeing in the economy," Chairman and CEO Ron Sargent said during a conference call with analysts. "We've often said it's hard to know what impact it's had on our business in the short run, and that's certainly true today when we're seeing such mixed signals."

Sargent said the mixed results indicate that the consumer and small-business customers are "feeling pressure."

Anthony Chukumba, a senior research analyst with FTN Midwest Securities, has a buy rating on Staples and said nothing he heard on Tuesday prompted him to change his mind. He says the share decline was an overreaction.

"If anything, I view it as a buying opportunity," he says.

Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates, holds a similar view.

"I think the company is the best in class in the sector," he says. "I think they're protected from big hits on earnings."

Separately, Staples said Tuesday that it bought American Identity, a distributor of corporate-branded merchandise, for an undisclosed amount. Staples said the acquisition will help it expand in the $18 billion promotional-products market.