Staples (NASDAQ: SPLS), a seller of office supplies and a competitor of chains such as Office Depot (NYSE: ODP), OfficeMax (NYSE: OMX), and Wal-Mart (NYSE: WMT), reported Q2 earnings on Tuesday. Although they weren't that great, I can't say I felt they were a total disaster, either. I think the quarter was lackluster and indicative of the immense work ahead for management in terms of getting people into their stores and increasing sales per transaction.

According to the press release, total sales increased 9% and adjusted earnings per share declined 24% to 16 cents. That's a steep drop, but they did match analyst expectations. Staples used the increase it saw in free cash flow in a smart way: debt reduction. I approve of that move, to be sure.

Staples (NASDAQ: SPLS) shares are falling today after the European Commission approved SPLS's $2.7 billion acquisition of Dutch office supply company Corporate Express NV. The transaction has already received regulatory approval in the U.S. and Canada. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on SPLS.

After hitting a one-year low of $19.69 in November, the stock hit a one-year high of $25.85 on Monday. This morning, SPLS opened at $24.76. So far today the stock has hit a low of $24.44 and a high of $24.98. As of 11:00, SPLS is trading at $24.54, down $0.57 (-2.3%). The chart for SPLS looks bullish and steady, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.

For a bearish hedged play on this stock, I would consider a September bear-call credit spread above the $27.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 16.3% return in three months as long as SPLS is below $27.50 at September expiration. Staples would have to rise by more than 11% before we would start to lose money. Learn more about this type of trade here.

After some tough fighting, Staples, Inc. (NASDAQ: SPLS) has won its bid for Corporate Express N.V., one of the world's largest suppliers of office products to businesses and institutions. The deal comes to about $2.6 billion in an all cash transaction. What's more, Corporate Express has agreed to abandon its purchase of rival Lyreco (which was really a defensive ploy anyway).

To get to this point, Staples had to increase its bid several times, from 7.25 euros to 9.25 euros. But, it was probably worth it. After all, the core retail business is lagging.

Basically, Corporate Express will provide a strong distribution platform in North America, Canada and Europe. Moreover, the business is growing and there should be some cost savings because of overlap and economies of scale, although these haven't been estimated yet.

Staples, Inc. (NASDAQ: SPLS) wants to buy the largest global supplier of office supplies to enhance its most profitable division. That company, Corporate Express, doesn't seem interested in Staples' offer, calling the U.S. retailer's $3.6 billion unsolicited offer inadequate and "significantly undervalues the company."

Corporate Express, based in Amsterdam, saw its shares trading above Staples' offer price once the bid was announced, signaling that investors expect a much larger offer price for the office supply company.

Although Staples knows all too well that U.S. regulators would probably not approve the acquisition of a U.S.-based retailer (its attempt to buy Office Depot in 1997 failed), Corporate Express is a smart move. The company does half its business in the U.S. already, and acquiring it would give Staples a much-improved delivery business in the U.S.

Sanford & Bernstein analyst Colin McGranahan said "the potential synergies could make this very accretive" to earnings. McGranahan then indicated that Staples' management team is conservative and smart, and that a higher office price could make things more difficult. Reading between the lines, then, Staples may not up its offer even though it's been rebuffed by Corporate Express.

MOST NOTEWORTHY: NutriSystem, Endo Pharmaceuticals, Corporate Express NV, Aventine Renewable Energy Holdings and BioFuel Energy were today's noteworthy downgrades:

• NutriSystem (NASDAQ: NTRI) was downgraded to Hold from Buy at Lazard and to Buy from Strong Buy at Broadpoint following its lowered Q3 guidance.
  
• Jefferies downgraded shares of Endo Pharmaceuticals (NASDAQ: ENDP) to Hold from Buy after Impax Laboratories (NASDAQ: IPXL) filed a Paragraph IV challenge against Opana ER yesterday to reflect the potential for a generic version of Opana ER arriving as early as 2010 and the possibility of a similar threat against Lidoderm.
  
• Corporate Express (NYSE: CXP) was downgraded to Hold from Buy at ING, as they believe the new CEO's long-term targets are overly ambitious.
  
• JP Morgan downgraded Aventine Renewable (NYSE: AVR) and BioFuel Energy (NASDAQ: BIOF) to Neutral from Overweight, citing weaker fundamentals in ethanol pricing.

OTHER DOWNGRADES:

• JP Morgan downgraded Charlotte Russe (NASDAQ: CHIC) and The Wet Seal (NASDAQ: WTSLA) to Neutral from Overweight.
  
• Goldman downgraded Monolithic Power Systems (NASDAQ: MPWR) and Hansen Natural (NASDAQ: HANS) to Neutral from Buy; Goldman removed National Semiconductor (NYSE: NSM) from its Conviction Buy List.