Why Staples Stock Has Plummeted 30% This Year

So far, 2014 has not been a good year for Staples (NASDAQ: SPLS  ) investors. Staples stock fell more than 15% just in January, and it fell further after releasing a weak Q4 earnings report and Q1 guidance in March. Halfway through the year, Staples stock is down about 30% from where it ended 2013.

SPLS Chart

Staples Stock YTD Price Chart, data by YCharts.

It's not hard to understand Staples' problems. Staples and fellow office-supply giant Office Depot (NASDAQ: ODP  ) are under pressure due to the secular decline of some categories like PCs, ink, and paper as well as growing competition from online competitors. However, Staples has not restructured as aggressively. As a result, its earnings are falling, driving the big drop in Staples stock.

Earnings under pressure
In 2013, Staples' adjusted EPS fell 17%, from $1.39 to $1.16. The majority of the annual decline came during Q4, when adjusted EPS dropped from $0.46 to $0.33. While some of Staples' profit decline could be attributed to one-time factors such as severe winter weather in the Northeast and a shift in the retail calendar, the biggest issue was simply weak core sales trends.

Office Depot has taken dramatic action to cut costs and boost its earnings.

Office Depot also posted weak results last year -- indeed, it broke even on a full-year basis. However, Office Depot investors can look forward to the benefits of its merger with OfficeMax in the next few years. By the end of 2016, Office Depot expects to generate annual synergies of at least $675 million, which will dramatically boost the company's earnings power.

Meanwhile, in response to the trend of stagnant to declining sales and falling earnings, Staples rolled out plans to shrink its retail footprint. First, it will close up to 225 stores by the end of 2015. Second, Staples announced that it would downsize most of its stores over time to a 12,000-square-foot floor plan. (For comparison, a typical Staples store today is 25,000 square feet.)

The smaller stores are much cheaper to operate but generate nearly the same sales volume as Staples' 25,000-square-foot stores. This plan seemed very promising in its potential to boost EPS -- so much so that I recommended Staples stock back in March.

Not much progress yet
Unfortunately, Staples hasn't gotten very far in its turnaround yet. In Q1, adjusted EPS declined sharply once again, falling from $0.26 to $0.18. Staples also projected further declines in sales and earnings for Q2.

So far, Staples hasn't made much progress on its turnaround plan.

Most disturbingly, while Staples' store closures are proceeding at a good pace, the company did not make much progress on its downsizing initiative. Staples is having trouble convincing its landlords to reconfigure their properties in order to shrink the Staples "boxes." As a result, Staples expects to downsize just 25 stores to the smaller format this year.

Looking for a sense of urgency
The problem with Staples stock is thus fairly straightforward. Revenue trends are unfavorable, and show no signs of reversing. Staples does have a fairly credible plan to cut its costs -- but it is not moving very quickly toward implementing that plan. As a result, it's hard to know whether Staples' earnings are close to a bottom or whether they will continue to fall.

By contrast, Office Depot is in the midst of rapidly delivering synergies from its merger with OfficeMax. New Chief Executive Officer Roland Smith has already implemented massive job cuts at the corporate headquarters, including cutting half of the senior management roster. The company is also closing about 20% of its North American stores in just 30 months.

Investors are rewarding Office Depot for its decisive turnaround-related actions. For Staples stock to recover, Staples management will also have to become more aggressive. If the cost cuts can be accelerated, then Staples should be able to return to earnings growth even if sales remain weak. On the flip side, if there is no visible progress on cost cuts, Staples stock will continue to struggle in the second half of 2014.

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  • Report this Comment On July 13, 2014, at 1:53 PM, rsinj wrote:

    There is no comparison between Office Depot and Staples - Staples is far better. You make far too positive a story out of ODP.

    Even with languishing sales/profits Staples is turning in performance that is better than what is forecast for ODP a year or two out. Further, if we look at the balance sheets, again, no comparison, Staples is far better.

    Staples is still posting respectable profit, ODP losses

    Staples has less debt than ODP with almost twice as much sales

    Staples is paying almost 5% dividend and there is sufficent cash and cash flow securing it - ODP has very negative cash flow

    Staples shares are likely a buy at this time. However, as this market is extremely polarized, shares may well fall further as the problems at Staples are over-dramatized. I'm trying to stake out my buy price. Will probably buy a little and then nibble more as/if it continues lower.

  • Report this Comment On July 14, 2014, at 11:06 AM, TMFGemHunter wrote:

    @rsinj: To be fair ODP is on track to make money this year, excluding merger integration costs, which are really temporary.

    Second, it is absolutely clear that Staples is a far better company than ODP. That is why its market cap is approximately 2.6 times higher than ODP's. The relevant question for investors is whether Staples will be 2.6 times more valuable than ODP in a couple of years, when both companies will have had time to restructure. I don't believe that's the case.

    ODP has a clear plan to cut at least $675 million of costs -- and I think that number could be revised higher eventually. It will still probably have a lower profit margin than Staples, but I expect it to be solidly profitable and EPS could be approaching $1 by 2017.

    I still think Staples is an intriguing value stock, but I just can't justify buying it until it starts moving earnings in the right direction.

    Adam

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