Staples forecasts fall in sales, shares drop

(Reuters) - Staples Inc forecast a fall in sales in the current quarter as customers shift to e-retailers, mass merchants and drugstores to buy their office supplies.

Shares of the largest U.S. office supply retailer fell as much as 11 percent on Tuesday morning, after the company reported its fifth straight fall in quarterly sales.

Staples has been stocking more electronics such as tablets and offering copy and print services as demand wanes for traditional office supplies such as paper and toner.

Like Office Depot Inc , Staples is facing competition from drugstores, mass merchants such as Wal-Mart Stores Inc and online retailers such as Amazon.com Inc .

Staples said in March it would close 140 of its 1,846 stores in North America this year to boost profits and focus on its online business.

"We think the company is taking the right steps, including aggressively closing stores this year ... ," Deutsche Bank Markets Research analyst Mike Baker wrote in a note.

But not all analysts were optimistic.

"While sales were better than expectations, profitability remains a question mark within the retail business ... " Janney Capital Markets analyst David Strasser wrote in a note.

Staples' operating margins in its North American retail and online business fell to 3.5 percent in the first quarter ended May 3 from 6.2 percent a year earlier, as marketing expense and online investments rose and sales declined.

Gross margins fell to 24.94 percent from 25.98 percent due to discounting, increased competition and higher paper prices, Chief Financial Officer Christine Komola said on a post-earnings call.

Investment in e-commerce, marketing and recruitment for sales will weigh on profit in the current quarter, a company executive said on the call.

Staples forecast earnings of 9-14 cents per share for the second quarter ending August 3. Analysts on average were expecting 15 cents per share, according to Thomson Reuters I/B/E/S.

Staples said store closures and weak demand for office supplies, computers and technology accessories would hurt quarterly sales.

First-quarter sales fell nearly 3 percent to $5.65 billion. North America sales rose just 1 percent as a fall in sales of core office supplies offset most of the benefit of a rise in sales of breakroom supplies and furniture.

International sales fell 4 percent.

Net income fell 44 percent to $96 million, or 15 cents per share.

Staples took a pretax charge of $46 million related to the closure of 16 stores in the first quarter and the planned closure of about 80 stores in the current quarter.

Excluding items, the company earned 18 cents per share.

Analysts on average had expected earnings of 21 cents per share on sales of $5.61 billion.

Staples shares were down 10 percent at $12.02 on the Nasdaq.

(Reporting by Siddharth Cavale in Bangalore; Editing by Savio D'Souza and Kirti Pandey)

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