Staples, Inc.: One Quarter Won’t Reverse the Slow Bleed (SPLS)

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Staples, Inc. (SPLS) stock has had a rough go of it recently. It was chugging along nicely in 2016, up 9% through May 10, until last week when the company announced that it would abandon its merger with Office Depot Inc (ODP) after the Federal Trade Commission rejected the proposed merger.

Staples, Inc.: One Quarter Won't Reverse the Slow Bleed (SPLS)

The two office supply companies had announced their intent to combine last year in the wake of increasing competition from the likes of Amazon.com, Inc. (AMZN), which has slowly eroded business at both chains.

SPLS stock swiftly fell about 20% last week on the news of the abandoned merger.

Today brings some small dose of optimism for SPLS stock investors, as first-quarter results were slightly better than expected. But the fact that Staples shares are no longer higher on the news (as of early afternoon trading) doesn’t surprise me. Here’s why.

SPLS Stock: Still Caught Between a Rock and a Hard Place

Analysts expected the office supply leader to post earnings per share of 16 cents on revenue of $5.08 billion in Q1. Instead, Staples earned 17 cents per share on revenue of $5.10 billion. A modest beat, sure, but nothing to really write home about.

Guidance was even more tempered: Staples said it expects revenue to fall year-over-year in the second quarter (pretty vague), while it sees non-GAAP EPS between 11 cents and 13 cents, right in line with the 12 cents per share that analysts expect.

So, all in all, the report’s a net positive, right? Wall Street is all about expectations, and with Staples beating those expectations, however modestly, we should expect SPLS stock to rise, shouldn’t we? The short answer is, yes, we should. And that’s what happened Wednesday morning after the announcement, only for profit-takers to bring SPLS back in the red mere hours later.

That’s because the longer-term outlook for Staples doesn’t look so rosy, especially after the merger with ODP fell through. And while I expected the FTC to reject the merger, I don’t necessarily believe that it should’ve been rejected. I do think that over time, companies like Amazon will spell the slow demise of Staples and Office Depot. Any company that expects to close 50 North American stores in 2016 isn’t exactly a company I’d be trying to invest in.

Take a look at some of the categories where SPLS stock owners saw lower revenue, and ask yourself if you see these categories reversing course anytime soon:

  • Business machines
  • Technology accessories
  • Computers and mobility
  • Ink and toner

And then let’s look at the few categories that saw growth. Are these long-term catalysts for SPLS stock?

  • Furniture
  • Office supplies
  • Facilities supplies
  • Copy and print

I mean, it’s great that Staples is seeing some growth in office supplies sales — that’s sort of its thing — but you wonder why there hasn’t been a greater mix shift away from business machines and ink and toner and into office and facilities supplies.

You also wonder if such a shift would even make much of a difference in the long run. With SPLS dishing out a 5.8% dividend and its revenue reliably slipping year-after-year, I wouldn’t be surprised if we saw a dividend cut a few years down the road.

With store closures likely to continue as well unless the assault from online retailers stops, I’d be careful betting on SPLS stock, even after a solid quarter like this one.

As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/spls-stock-staples-inc-earnings/.

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