Staples, Inc. Earnings: Can Office Retail Survive?

Staples faces threats to its very existence, but it's also fighting hard on multiple fronts.

May 16, 2014 at 12:36PM

Next Tuesday, Staples (NASDAQ:SPLS) will release its quarterly report, and shareholders haven't been certain whether the office-products retailer will be able to produce long-term success under tough industry conditions. Even as it deals with brick-and-mortar rival Office Depot (NASDAQ:ODP) and its efforts to restructure itself to become more efficient, Staples has had to work hard to bolster its online presence to fight poaching from Amazon.com (NASDAQ:AMZN) and other online-retail competition.

Staples has a long history of catering to business professionals with vast offerings of different types of office equipment, ranging from expensive technology and office furniture to everyday items like paper and pens. Yet the move toward online retail has left Staples working hard to build up its e-commerce presence even as Office Depot and other big-box rivals work to shore up their own competitive failings. Let's take an early look at what's been happening with Staples over the past quarter and what we're likely to see in its report.

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Source: Wikimedia Commons, courtesy Anthony92931.

Stats on Staples

Analyst EPS Estimate

$0.21

Change From Year-Ago EPS

(19.2%)

Revenue Estimate

$5.62 billion

Change From Year-Ago Revenue

(3.4%)

Earnings Beats in Past 4 Quarters

0

Source: Yahoo! Finance.

Can Staples' earnings recover?
Investors have gotten a lot less excited about Staples' earnings in recent months, cutting their views for the fiscal first quarter and the full year by about 20%. The stock has responded negatively as well, falling about 2% since mid-February.

Staples stock plunged after the company released its fiscal fourth-quarter results in March. Revenue plunged 12% on a 7% drop in same-store sales, as reduced traffic and lower amounts of spending from customers combined to disappoint shareholders. Staples CEO Ron Sargent said that customers were using fewer office supplies and migrating to online shopping, reducing the ability to sell add-on items and making them more value-conscious. In response, Staples will close about 225 stores by 2015, with expectations to cut costs by $500 million as a result.

Spls Small

Source: Nicholas Eckhart on Flickr.

The biggest threat to Staples comes from e-commerce, as Amazon unleashes its power to seek out and capture business customers. Fortunately, Staples already has a considerable online presence, and it plans to boost its online product availability fivefold by the end of this year compared to two years ago. Online sales jumped 10% in the fourth quarter, showing just how badly the physical stores are doing.

Yet Office Depot is also a sore point for Staples investors, as the rival office-products retailer seeks to boost its margins and integrate its merger with OfficeMax. Just last week, Office Depot shares soared when its first-quarter results showed better-than-expected earnings. Falling sales remain a problem for Office Depot, but cost savings from the merger have already started to appear. As Office Depot closes stores, Staples could see temporary bumps in business in those areas -- but there's no assurance that they'll prove to be long-term havens of customer activity even if Staples has exclusive access to them.

One interesting area for Staples involves the opportunity to have in-store post offices in conjunction with the U.S. Postal Service. The Staples deal with the USPS would utilize its physical-store presence and draw more customers into stores. The move has drawn the ire of labor groups, who don't want their jobs endangered by a shift away from government-owned post offices, but with massive losses at the USPS, the trend might well continue and help to boost Staples' flagging sales.

In the Staples earnings report, compare the performance of online and conventional-retail sales figures to see if the move toward e-commerce continues. To succeed, Staples will have to find ways to use its stores efficiently while also beating Amazon.com at its own e-commerce game.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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