Office Supply Stocks: The End of an Era?

Advertisement

Best Buy (NYSE:BBY), the nation’s biggest consumer electronics chain, might suffer from showrooming — where folks visit stores to check out gadgets before ultimately buying them online — but at least that gets customers in the door.

The nation’s big-box office supply chains don’t even enjoy the courtesy visits.

Competition from Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN) is hurting Staples (NASDAQ:SPLS), Office Depot (NYSE:ODP) and OfficeMax (NYSE:OMX) in much the same way it’s crippling Best Buy. But the awful economy both here and abroad — and massive losses of government jobs at the local, state and federal level — make the big-box office supply business look poised to circle to the drain.

Shares in the big three office-supply retailers have fallen far and hard. Some might argue there’s deep value to be found in these names. But sometimes stocks are cheap for a reason, and given the economic backdrop, SPLS, ODP and OMX ain’t value stocks — they’re value traps.

Staples posted a 32% drop in second-quarter earnings Wednesday amid a 5.5% decline in sales. Profit and revenue missed Wall Street estimates and the retailer cut its outlook. Weakness in North America, southern Europe and Australia were to blame, and the company doesn’t expect respite anytime soon.

Shares are off 15% just this week and down 45% during the past three years. Heck, SPLS stock is trading at levels last seen in 2003!

With a forward price-to-earnings (P/E) multiple of 7.4, the stock looks cheap compared with its own five-year average and the broader market — but it’s hard to have faith in these profit estimates. Analysts slashed forecasts heading into the report and Staples still missed by a wide margin.

Office Depot, the No. 2 chain after Staples, fared even worse in the second quarter. Weakness in Europe and the U.S. pushed the company to a wider-than-expected loss. Meanwhile, the stock has plunged 60% since March — to $1.54 — and it still looks extremely pricey. With a forward P/E of 19, it’s nearly 50% more expensive than the broader market despite having worse growth prospects.

Earnings actually have shrunk at an annual rate of 35% during the past five years, making a forecast rebound of 10% look like a Hail Mary at best — especially when revenue is struggling to stay positive and margins are contracting.

No. 3 chain OfficeMax swung to a second-quarter profit, but only because it took a hefty restructuring charge in the prior-year period. To the give the company credit, it has stabilized enough to reinstate its dividend, which it suspended back at the end of 2008.

But that doesn’t mean the chain is poised for growth any more than its bigger rivals. Management said third-quarter and full-year sales will be about flat against last year’s figures — and even that might be a reach. OfficeMax has missed Street revenue estimates in four of the past eight quarters.

That’s a coin flip. The stock is a dud.

Rampant unemployment and government austerity programs would be sufficient problems for any office supply chain. Throw in pressure from discounters, warehouse clubs and online merchants, and there’s little to like in big-box retail stocks.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2012/08/office-supply-stocks-the-end-of-an-era/.

©2024 InvestorPlace Media, LLC