Staples Surges on Cost-Cutting Initiative: What Wall Street's Saying

NEW YORK (TheStreet) - Staples (SPLS) shares surged nearly 10% on Wednesday following the office supplies chain's report that its cost-savings strategy is starting to take hold from shuttering stores and ratcheting in expenses.

The Framingham, Mass.-based company shaved more than $200 million of expenses this year as part of its two-year plan to eliminate at least $500 million in annual expenses, according to its latest quarterly earnings statement. It also generated more than $700 million in free cash flow this year and expects that figure to rise above $800 million by year end - above its initial free cash flow guidance of $600 million, it said.

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Staples plans to close additional 43 stores this year, having shuttered 127 to date. For the fourth quarter, Staples expects to earn between 27 cents and 32 cents a share, with sales down from last year.

For the Nov. 1-ending quarter, the company reported earnings of $217 million, or 34 cents a share, from continuing operations, compared to $220 million, or 34 cents a share, a year earlier. Excluding one-time items, the company reported non-GAAP net income of $236 million, or 37 cents a share, from continuing operations. Consensus estimates pegged Staples quarterly profit at 36 cents a share. Total sales declined 2.5% to $5.96 billion, the company said.

Shares were gaining 9.5% to $13.97 at last check. Here's what analysts said.

Anthony C. Chukumba, BB&T Capital Markets (Hold)

We saw several encouraging signs in Staples' Q3'14 results, including sequential top-line improvement (albeit adjusted for store closures and foreign exchange rate changes); improved NA Commercial and International profit margin trends; and the increased free cash flow guidance. All that said, we do not think Staples is "out of the woods" yet by any stretch of the imagination, especially considering the fact top-line growth (particularly in NA Retail) continues to be a challenge and profitability remains under pressure. Thus, we are maintaining our Hold rating.

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Gary Balter, Credit Suisse (Outperform, $15 PT)

Investors in Staples should be encouraged by its international results, where despite the weak European economies and issues in China, operating margins rose by 46 bps y/y. We believe this reflects the efforts led by John Wilson and Ron Sargent to consolidate the multiple country operations in Europe. Importantly, we also view this as a precursor to the savings opportunity in North America, although that was not evident in results to-date with total operating expenses up 1.1% y/y, despite the company securing $200+ million of annualized cost savings and the top-line declining 2.5% y/y.

With a better FCF outlook this year, if investors begin to see the company's savings initiatives translate into better margins in North America, there's reason for some optimism. However, we still believe given the well-known headwinds in the OSS space that the long-term outlook for the industry dictates one player.

Brian Nagel, Oppenheimer (Perform, $12 PT)

We view the essentially in-line Q3 (Oct.) results that Staples reported today as largely reflective of the ongoing sector-related pressures. Comps in the SPLS Retail Division declined 4%. Some bright spots are nonetheless emerging. Management indicates that the company has now secured $200M in cost savings. The chain is more aggressively closing underperforming stores. Cash flow prospects for SPLS are now better than just a few months ago. We maintain a wait-and-see approach toward SPLS. We are impressed with the efforts of management to reposition the company, but remain concerned with intensifying sector headwinds. Our rating on SPLS is Perform.

Denise Chai, Bank of America Merrill Lynch (Underperform, $9 PT)

We reiterate our Underperform rating on SPLS, as we continue to believe that savings from cost reduction will be more than offset by weak results within retail, structural pressure within core categories and reinvestment. NA Retail operating income is down $219mn, or 39%, YTD. Unlike Buy-rated ODP, which reported a better-than-expected 3Q last week, on a continuation of strong cost reduction and improvements in operations, SPLS remains at the mercy of tough industry conditions, and internal restructuring initiatives have yet to gain ground or translate through to improved earnings.

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TheStreet Ratings team rates STAPLES INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate STAPLES INC (SPLS) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its reasonable valuation levels, largely solid financial position with reasonable debt levels by most measures and notable return on equity. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, poor profit margins and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • SPLS's debt-to-equity ratio is very low at 0.19 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Despite the fact that SPLS's debt-to-equity ratio is low, the quick ratio, which is currently 0.64, displays a potential problem in covering short-term cash needs.
  • SPLS, with its decline in revenue, slightly underperformed the industry average of 1.1%. Since the same quarter one year prior, revenues slightly dropped by 1.8%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
  • The gross profit margin for STAPLES INC is currently lower than what is desirable, coming in at 27.02%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 1.56% trails that of the industry average.
  • Net operating cash flow has significantly decreased to -$56.27 million or 1406725.00% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

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-Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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