MAE ANDERSON

NEW YORK (AP) ¿ Staples Inc., the largest U.S. office supply retailer, provided an upbeat outlook Tuesday as it reported that its customers bought more school and office supplies and technology products in its stores in the third quarter.

Staples North American retail sales rose 1 percent to $2.6 billion in the third quarter, the first rise in five quarters. But contract sales remained weak as small businesses are slow to recover from the recession.

CEO Ron Sargent said the company is feeling "increasingly optimistic about the future" and predicted total sales will rise in the current quarter ¿ which includes January, when many businesses start afresh with new budgets. He also expects a better holiday season than last year's.

The outlook sent shares up 6 percent to their highest point in the year during midday trading. Still, Sargent said any substantial recovery in the economy overall will hinge on job growth.

"As it relates to Staples, we are seeing nice recovery in our stores and we're starting to see the pickup in our catalog business, but not as much in contract (sales), and I think if people aren't working they aren't consuming office supplies," Sargent said.

The improvement in North American sales is encouraging because consumers have been buying less office and school supplies during the recession, dampening sales at retailers like Staples, Office Max and Office Depot. Also, in past recessions, retail sales have recovered before contract sales.

Sales in North American Staples stores open at least one year ¿ considered a key indicator of a retailer's financial health ¿ were flat compared with the third quarter of 2008, the first non-decline in nine quarters. And customer traffic rose ¿ also for the first time in nine quarters.

Computer ink and toner sold well, but sales of durable goods such as business machines and furniture remained weak, the company said. The better-than-expected launch of Windows 7 in the last 10 days of the quarter also boosted results.

Deutsche Bank analyst Mike Baker said Staples appeared to be gaining market share from smaller rivals Office Depot Inc. and Office Max Inc., which both reported weaker sales than Staples in their stores open at least one year. That measure is a key indicator of a retailer's financial health because it excludes stores that open or close during the year.

Staples earned $269.4 million, or 37 cents per share, for the quarter that ended Oct. 31, up 72 percent from $156.7 million, or 22 cents per share, a year earlier. Excluding integration and restructuring costs of $16 million, it made 39 cents per share, just beating the average forecast of 38 cents per share from analysts polled by Thomson Reuters.

Staples acquired Dutch office supply company Corporate Express NV in July 2008 for $2.7 billion. It said average orders from Corporate Express have since risen to $180 from $160. Average orders at Staples are about $220.

The retailer, which is based in Framingham, Mass., said sales slipped 6 percent to $6.52 billion from $6.95 billion. That beat the $6.45 billion Wall Street expected.

Staples' North American delivery sales fell 11 percent in the quarter to $2.5 billion, and its international sales dropped 10 percent to $1.4 billion.

Staples anticipates an adjusted fourth-quarter profit of 36 cents to 38 cents per share. Analysts forecast 37 cents per share. The company expects quarterly sales to rise between 1 percent and 3 percent.

Staples shares rose $1.43, or 6.1 percent, to $25.75 during midday trading, a 52-week high.

Standard & Poor's analyst Mike Souers said he was encouraged by better sales in stores open at least one year but reiterated his "sell" rating on the company.

"We remain concerned by macro pressures facing the contract business, which is showing little improvement," he said.

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Associated Press Writer Michelle Chapman in New York contributed to this report.
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