When Staples (SPLS) was founded in 1986, having a one-stop shop for every conceivable office supply was a great idea because it offered convenience and value that was hard to beat. But in the more than three decades since then the world has changed quite a bit. But SPLS and its rival Office Depot (ODP), haven’t changed — and that’s proving to be a huge problem.
SPLS today reported a horrendous quarter and gave an earnings forecast that was far worse than what the most pessimistic of bears had forecast. Net income plunged 77% to $96 million, or 15 cents per share. Sales fell 2.8% to $5.65 billion even as SPLS shuttered 16 underperforming stores in North America and readies plans to close even more in the coming quarters. Comparable store sales fell a depressing 4%, indicating that CEO Ron Sargent’s efforts to overhaul merchandising haven’t yielded much for the beleaguered retailer’s bottom line.
As for the guidance, SPLS said profit in the July quarter will be in the range of nine cents to 14 cents per share. Even at the higher range, that’s two cents below Wall Street’s consensus of 16 cents per share. Sargent, though, is trying to put a positive on the situation. In the earnings press release, he noted: “Despite a slow start to the first quarter, our results were in line with our expectations and we expect to build momentum throughout 2014.”
Judging from the sharp selloff in Staples stock, few people agree are buying Sargent’s optimistic view of the company’s prospects. I see no hope that Staples stock, which fell about 13% today, will recover There just isn’t anything special about SPLS.
When the company was founded in the 1980s (y’know … back when dinosaurs ruled the earth), if someone needed a box of copier paper the last place they would have looked was in a grocery store. But walk into any Kroger (KR), Safeway (SFY), a CVS (CVS) or Walgreen (WAG) and you will find a small section of office supplies. Office supplies are also one click away at Amazon (AMZN), and other commerce sites that are too numerous to mention. There is absolutely no reason for most consumers to ever set foot in a Staples.
Office supplies are about as commoditized as imaginable, which means customers care about one thing: Price. Any loyalty to brands evaporates, and as embattled retailers such as SPLS and Radio Shack (RSH) try and win business, markings get crushed. The latest quarter proved that: Total operating income plummeted 209 basis points to 2.81% from 4.9%.
The company generated $360 million in cash flow in the most recent quarter, so it’s not going to fade away tomorrow. Perhaps, SPLS might even attract a private equity player on the hunt for well-known brands that generate cash. If that happens, SPLS would close even more stores and lay off even more employees. But SPLS has a tough road ahead, even under the most optimistic of scenarios. I wouldn’t buy Staples stock in the hopes of a buyout occurring, because the retailer could muddle along for years before that happens (if that happens).
Indeed, the future is bleak unless by some miracle the chain can convince customers that SPLS is the only place they need to buy office supplies — or if it finally made a working “Easy” button. Until then, stay far away.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.