By Ben Klayman
DETROIT (Reuters) - STAPLES (SPLS.NQ)Inc
The top U.S. office products retailer also lowered the high end of its full-year earnings forecast to account for a higher tax rate.
"Our view of the business for the back half of 2010 remains unchanged," Chief Executive Officer Ron Sargent said on a conference call with analysts. "We expect to see a modest recovery in the economy and unemployment to remain high.
"It's just going to be a very slow, steady slog from here on out," he added.
Many investors look at office supplies retailers as a barometer of economic health since demand for their products is closely tied to white-collar employment rates.
On Thursday, new data showed that U.S. unemployment benefit claims climbed to a nine-month high, delivering a fresh setback to a recovery.
Still, analysts noted that Staples had met Wall Street's expectations for quarterly profit.
"We look on the results as another 'not as bad as feared' report," Oppenheimer analyst Brian Nagel said in a research note. He has an "outperform" rating on the stock.
Staples' smaller rivals, Office Depot Inc
OfficeMax shares fell 2.9 percent, while Office Depot dipped 1.4 percent.
PROFIT IN LINE, SALES MISS
In the second quarter ended July 31, Staples' profit rose 40 percent to $129.8 million, or 18 cents a share, from $92.4 million, or 13 cents a share, a year earlier.
Excluding one-time items, earnings were 20 cents a share, matching the average forecast of analysts polled by Thomson Reuters I/B/E/S.
Sales were about flat at $5.53 billion, shy of the $5.64 billion analysts had expected.
"Of course, we're a little disappointed in the sales results for the second quarter," Chief Financial Officer John Mahoney said. "We think we missed some opportunities and believe that we won't in the second half of the year."
Gross margins rose to 26.4 percent in the second quarter from 25.7 percent a year earlier.
In the North American retail business, same-store sales were flat. Customer traffic was up for the fourth straight quarter, but orders were smaller.
Same-store sales in Europe slumped 9 percent. President Mike Miles said Staples will freeze new store openings in that region as it changes marketing and merchandising tactics.
Executives declined to discuss how Staples was doing in the important U.S. back-to-school shopping season other than to say it is promotional and competitive as always.
Staples now expects its tax rate to be 37.5 percent for the third quarter and full year, compared with a prior outlook of 34.5 percent. This will hurt full-year earnings by about 6 cents a share.
The company said it had raised the tax forecast because it no longer expects the U.S. Congress to extend allowances for the deferral of income tax on some foreign earnings. It expects its tax rate to return to 34.5 percent for 2011.
Staples cut the high end of its full-year earnings outlook to $1.29 a share from $1.33 before one-time items, while keeping the low end at $1.25. Analysts were expecting $1.33.
Some analysts saw this as Staples increasing the outlook if the higher tax rate is excluded.
The company gave a third-quarter profit forecast of 39 cents to 41 cents a share, while analysts were expecting 43 cents.
Staples said it expects sales for both periods to rise in the low single-digit percentage range.
The company's shares fell 3.8 percent to $18.90 in morning Nasdaq trading.
(Reporting by Ben Klayman in Detroit and Dhanya Skariachan in New York; Editing by Michele Gershberg, Derek Caney and John Wallace)
