Staples: How It's Dealing With a Sluggish Economy

It was a disappointing third quarter for Staples (NAS: SPLS) , the largest office solutions company in the United States. The Framingham, Mass.-based company posted lower-than-expected third-quarter results mainly due to weak European demand. Let's take a closer Foolish look to see what's going on with Staples.

Figuring out the figures
Total sales for the quarter were up a paltry half a percent to $6.6 billion, while net income managed to pull itself up by 13% to $326 million because of cost controls and slightly lower than expected interest expenses.

Staples' North American operations saw delivery sales increase by 1.8% to $2.6 billion primarily due to growth in break-room supplies, facilities, and promotional products. Operating margins stood at 9.5%, up 63 basis points, reflecting the improved profitability of the company's Canadian operations.

Retail sales for the region remained flat as same-store sales declined a percent due to low store traffic and zero growth in the average size of orders.

The company's international sales were cushioned by foreign exchange and dropped only 1.9% to $1.3 billion. The actual fall was far worse at 7% on a local currency level. The weak performance was due to poor same-store sales in Europe that declined by 12% and lower sales in Australia.

Office blues
Staples is not alone in witnessing a sales deceleration. Office suppliers in general have taken it on the chin as customers and small businesses continue to remain tight-fisted. The combination of rising inflation, high levels of unemployment, and a seemingly endless European debt crisis have crimped consumer spending.

But what's even more worrisome is that CEO Ron Sargent thinks this trend might not change very soon. Nevertheless, Staples managed to outperform smaller rivals such as OfficeMax (NYS: OMX) and Office Depot (NYS: ODP) , both of which witnessed a 2% drop in their latest quarterly revenues, much to the disappointment of analysts.

Old wine in a new bottle
Unwilling to give in to the dull economic atmosphere, Staples' business-to-business division, Staples Advantage, unveiled a brand new e-commerce website for its business customers. The new site gives customers access to a complete range of office solutions with a faster and more intuitive interface. This is a good move as business customers are likely to prefer a facility that makes it easier for them to purchase supplies and services at a low cost. Improvements include a product catalogue accessible from every page, a message board, and compliance and budgeting filters.

I think it's always good to keep things new and fresh, even for B2B customers. I doubt whether this would make a big difference in terms of sales volumes, but it could help retain customers.

The Foolish bottom line
Like many other businesses, the office supplies sector has witnessed a slowdown. With the European crisis unwilling to let up, this space could continue to see flattish to slightly lower sales volumes until economic jitters subside. The company has factored this in and expects to attain flat to low single-digit sales growth for the fourth quarter compared to that of the previous year.

It'll be interesting to see how the next few quarters pan out for Staples. To stay up to speed with Staples' progress, feel free to add it to your very own watchlist by clicking here. It's free and helps you to stay in touch with all the latest news and analysis for your favorite companies.

At the time thisarticle was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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