Staples (SPLS) Stock Q4 Earnings Preview: It Won’t Be Pretty

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Staples, Inc. (NASDAQ:SPLS), the leading office supplies company in the U.S., will announce fourth-quarter and full-year results this Friday, March 6. And investors have a right to know something important: SPLS earnings won’t be pretty.

staples inc spls stock 4q earnings previewLong-term Staples shareholders know the feeling. Although Staples stock and its 30% return nearly doubled the performance of the S&P 500 in the last year, the 5- and 10-year returns are less rosy: SPLS fell 13% in the past five years and is flat over the past 10. (Meanwhile, the S&P doubled.)

And while I won’t venture to guess whether SPLS comes in above or below analyst estimates for the quarter (equivalent to betting on black or red), Wall Street’s forecasts in and of themselves set the bar low for Staples stock.

What to Expect

Consensus estimates call for earnings per share to fall 9% to 30 cents in the fourth quarter. Revenues will also slump, says Wall Street, falling 2% year-over-year to $5.76 billion.

What plagues SPLS stock is what plagues all old-school brick-and-mortar retailers today: e-commerce. With the popularity and rapid growth of Amazon.com, Inc. (NASDAQ:AMZN), many specialty retailers like Staples face the commoditization of their products. For the rather pedestrian items like pens, notebooks, and the eponymous staplers than Staples traffics in, it all comes down to price.

Shareholders should expect SPLS earnings results to look awfully similar to the third-quarter as far as trends go. Overall sales fell 2%, driven by a 6% drop in North American/Online sales, in the third-quarter of 2014.

With online sales actually growing by 9% in the third quarter, the drop-off really resulted from a languishing North American division, where the closure of 127 underperforming stores between January and September hit revenue. Shocking, right? SPLS said it planned on shuttering another 43 stores in the fourth-quarter.

Expect things to get worse before they get better for SPLS, which is also fighting unfavorable exchange rates as the strong dollar dilutes foreign revenues.

Office Depot Cannot Save You

Of course, the biggest recent news for anyone who owns SPLS stock is the proposed merger with Office Depot Inc (NASDAQ:ODP), the last remaining brick-and-mortar competitor to Staples.

ODP just reported fourth-quarter earnings itself; the office supplies chain posted EPS of 7 cents, topping the 4-cent estimate and swinging to a profit from the year before. In what bodes well for those who favor the Staples-ODP buyout, the earnings beat resulted largely from Office Depot’s own acquisition of former competitor Office Max.

Of course, the SPLS-ODP deal won’t be reflected in the fourth-quarter results because, well, it’s not approved by the FTC yet. In fact, I happen to have at least five compelling reasons I think the deal will fall flat, and I’m not the only one who’s skeptical.

Given the unusual arbitrage opportunities available — specifically the one exploiting the ODP stock price today vs. what the ODP stock price would be once the SPLS deal is formally approved — Wall Street is skeptical, too. ODP stock currently trades at a 15% discount to what it’d be worth upon the deal’s completion, representing what Market Realist calls “major deal risk.”

In short, I wouldn’t expect a blowout quarter from Staples stock. Continued store closings coupled with foreign exchange pressures will hit earnings. And in the longer term, the Office Depot deal is no sure thing either.

As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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