Staples, Inc. (SPLS) continues to reel under persistent weakness in the office supplies sector as it grapples with secular headwinds. Advancing technology has resulted in deteriorating trends for traditional core office-supply items like paper, toner, ink. Moreover, a decline in business and consumer spending, given the global meltdown and deterioration of credit markets has resulted in sluggish demand for big-ticket items, thereby negatively impacting revenues.
Adding to the woes is the stiff competition from online giants like Amazon Inc. (AMZN) as well mass merchandisers such as Wal-Mart Stores Inc. (WMT), accompanied by waning international sales (particularly Europe).
The sector’s dismal run has significantly impacted Staples’ performance, which missed the Zacks Consensus Estimate in the trailing four quarters by an average of 14.8%. Though in the most recent quarter (second quarter of fiscal 2014), Staples’ adjusted earnings of 12 cents per share came in line with the Zacks Consensus Estimate but fell 25% year over year.
Revenues also decreased roughly 2% in spite of beating expectations. Gross and operating margins disappointed contracting 50 and 316 basis points (bps), respectively.
To beat the odds, Staples has resorted to a powerful turnaround strategy that includes expansion of e-commerce and aggressive store rationalization apart from initiating a cost reduction program. Earlier, two other retailers in the sector namely Office Depot Inc (ODP) and Office Max merged to fight depleting revenues.
Staples plans to close nearly 225 stores across North America by 2015. In the second quarter of 2014, the company closed 80 stores and downsized/relocated another 8 outlets to the 12,000 square foot store format. Also, it initiated a cost reduction program to achieve pre-tax cost savings of about $500 million annually by fiscal 2015, with majority of savings expected to come from retail store closures, supply chain, labor optimization and customer service.
Staples achieved annualized cost reduction of $150 million and is on track to obtain $250 million in reductions for 2014. Additionally, the company is focusing on the delivery business, which requires less capital and generates higher margins.
We believe Staples has undertaken significant endeavors but these will take time to pay off as turnaround strategies often are time consuming affairs. Hence, things at Staples will get a little difficult before starting to get better.
Moreover, market is abuzz with a possible merger of Staples with Office Depot with anticipated synergies to boost performance of the both the retailers. Speculation resulted in a surge in stock prices of the retailers. Staples gained 8.1% whereas Office Depot increased 6.3%.
Currently, Staples is Zacks Rank #3 (Hold) stock.
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