Although the pending merger between leading office supply companies Staples, Inc. (NASDAQ:SPLS) and Office Depot Inc (NASDAQ:ODP) is presumed to help investors of SPLS stock, it’s only postponing the inevitable. The brick-and-mortar concept is dead.
As such, any investments SPLS continues to make, pursuing any growth by “revitalizing stores” is throwing good money after bad. Ask RadioShack Corp. (OTC:RSHCQ) and Sears Holdings Corporation (NASDAQ:SHLD) how their “investments” are working out for them.
SPLS investors must come to terms with this reality ahead of the company’s first-quarter earnings results Wednesday. Hedging your bets ahead of the results would be a good strategy.
Too Many Risks to Count
For the most recent quarter, analysts are looking for earnings of 17 cents per share on revenue of $5.47 billion, marking year-over-year declines of 5.6% and 3.2%, respectively. For the full year, expected earnings per share of 93 cents call for a 3% year-over-year decline, while revenue is expected to be down 2.3% year-over-year to $21.97 billion.
Meanwhile, SPLS stock has been one of the better performers in the S&P 500. Sure, SPLS stock is down 9.7% for the year-to-date, trailing the SPDR S&P Retail ETF (NYSE:XRT), which is up almost 3%. But SPLS has seen its stock surge 18% just in the past six months.
Why? Obviously there’s the pending merger with ODP, which the market seems to think is a slam-dunk deal. During the past six months, ODP stock has been even more impressive, skyrocketing 73%. But it’s important to note that federal regulators still have a say in whether SPLS and ODP can sign their nuptials and live happily ever after.
But as we’ve seen with the M&A deals involving Comcast Corporation (NASDAQ:CMCSA) and Time Warner Cable Inc. (NYSE:TWC), federal regulators have a way of saying, “over my dead body.” And that power only heightens the risk presented by the six-month gains in both stocks.
In the case of SPLS, the stock now trades at 80 times earnings. Not only is that more than three times the multiple of the S&P 500, it’s four-times the P/E of the XRT — home to prominent retailers like The Home Depot, Inc. (NYSE:HD) (P/E of 24) and Wal-Mart Stores Inc. (NYSE:WMT) (P/E pf 15).
In other words, the market is already pricing in a turnaround for SPLS. But when is that actually going to take effect? Even assuming regulators give a thumbs-up to the merger with ODP, SPLS still has to address the commoditization of their products.
You want pens, notebooks and sticky notes? Pretty soon you can get them online at Walmart with free three-day shipping — and, likely at a cheaper price. For SPLS, where’s the value proposition? It’s certainly not in ODP, which is facing the same struggles. Two heads aren’t always better than one, not if they think exactly alike.
Bottom Line for SPLS Stock
All told, until SPLS figures out its e-commerce strategy — to the point where its online sales become the breadwinner in annual revenue — SPLS stock will remain a speculative investment, regardless of what its earnings results reveal Wednesday.
Now’s the time to take profits in SPLS stock, given the market assumption that its merger with ODP is signed and sealed.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
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