Staples Inc. SPLS -12.55% reported a 43% drop in profit, revealing a downside of its push to sell more than just office supplies.
The company, which reported softer sales and less traffic at stores in its fiscal first quarter, predicted slower-than-expected profit growth through the summer. The company’s shares fell $1.68, or 13%, to close at $11.71 on Tuesday.
Staples and its rivals have faced tough competition from online stores. Staples has responded by expanding marketing to business customers such as schools and restaurants, while stocking thousands of new items online. The retailer also is closing stores and shrinking those that remain to improve results.
Products other than office supplies are close to driving half of Staples’ sales, Chief Executive Ron Sargent said Tuesday.
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But many of those goods, such as vitamins and snacks, were less profitable than dependable basics, such as ink and paper. As a result, the company’s operating margin fell to 2.8% in the quarter from 4.9% a year earlier.
“I wish I could tell you exactly when we’ll be back to historical margins,” Mr. Sargent said during a call with analysts. “I can’t, but I can tell you we’re making a lot of progress internally.”
Staples said profit fell to $96.2 million for the quarter ended May 3 from $169.9 million a year earlier. Sales declined 2.8% to $5.65 billion. Sales in North American stores open at least a year fell 4%.
Staples in March said it would shut as many as 225 of its stores by the end of next year. The company said Tuesday that it had approved the closure of 112 stores in North America, 16 of which were closed in past quarter. The company expects to close 80 more stores this summer.
Rival Office Depot Inc. ODP -6.23% this month unveiled its plan to close at least 400 U.S. stores, seeking to cull overlapping locations following last year’s merger with rival OfficeMax.
Staples gradually is moving its stores into smaller spaces to adapt to a market that demands fewer bulky items. The company plans to shift about 25 locations to the smaller format this year. The chain has about 1,800 stores in the U.S. and Canada.
Executives said the company spent more than usual on marketing to address challenges and increase awareness of its expanded product range.
Analysts said the company’s margins are likely to be pressured for some time.
“Staples is chasing a moving pricing target in trying to bring their prices closer to e-commerce competitors,” Credit Suisse analyst Gary Balter said.
Date: May 20, 2014