Notebooks and pencils helped Staples Inc. (SPLS) offset weak sales of office equipment and meet Wall Street's expectations during the second quarter.

Tuesday morning, the world's largest office supply retailer reported net income of $92 million for the quarter ended August 1, down 38 percent from the same time last year, or 13 cents per share. After factoring out $30 million in restructuring expenses, it worked out to 16 cents per share, just as analysts had expected.

Total sales for the quarter were up 9 percent to $5.5 billion, compared to $5.1 billion last year, but dropped 14 percent if sales of Corporate Express N.V. were added to the year-ago comparison. Staples bought Corporate Express, an office supplies wholesaler catering to businesses, during the second quarter of last year.

North American same-store sales were down 5 percent and customer traffic dropped 2 percent. In a statement, management blamed lower sales of big ticket items such as office furniture and business machines, which were partly made up by stronger sales of computers, ink and paper.

To take advantage of smaller purchases, Staples made a full-court press for back to school shoppers, with sales and promotions on school supplies.

In a conference call with analysts, Staples president Michael Miles said the chain was pleased with response to its back-to-school promotion, "Staples+Savings" which used some enticements such as a ream of paper for one cent and a free backpack for members of its rewards program.

Staples has been hit by the recession, as business small and large have cut back costs. It reported its North American Delivery unit, which caters to businesses, had an 18 percent sales increase to $2.3 billion, but that shrank to a drop of 13 percent once it factored in Corporate Express into the comparison. In its statement, management blamed lower spending by customers.

But Chairman Ron Sargent said he sees improvement in the economy -- and that will lift Staples' numbers in coming quarters. The economy has been showing signs of improvement in the last three quarters, he said.
"We are feeling like maybe the economy is coming back a bit," he said. "We think that is a good indicator of the health of our business."

Indeed, Chief Financial Officer John Mahoney told analysts the company is not expecting major improvements in its margins until the economy improves. Staples has been making investments to improve stores and open new ones, as well as integrating Corporate Express, so profit margin improvement should follow once sales improve in a recovery, he explained.

Still, Staples is doing far better than its rivals. OfficeMax Inc. (OMX) last month reported a $17.7 million loss for the second quarter and a drop of 11.6 percent in same-store sales. Office Depot Inc. (ODP) posted a loss of $82.6 million for the quarter and a 22 percent drop in sales below the same time last year.

Sargent said Staples management has seen competitors try to get business at any cost. Miles hinted that rivals have low-balled bids in business contracts. "Most of our competitors are trying to hold on to their market share right now," Miles said.


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