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Costco and Staples Fall on Earnings, Safeway Goes Private

By Jeremy Bowman – Mar 6, 2014 at 10:00PM

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The S&P 500 hit another record, but retailers including Costco and Staples struggled. After hours, Safeway said it had been bought for $9 billion.

Stocks crept higher once again today as investors reacted to promising jobs data and the European Central Bank's decision to hold interest rates steady. The Dow Jones Industrial Average (^DJI 0.73%) finished up 62 points, or 0.4%, while the S&P 500 set another record at 1,877, gaining 0.2%.

Investors were encouraged by a drop in initial unemployment claims, which fell to 323,000 from 349,000, and beat estimates of 338,000. The numbers were particularly heartening with the official February jobs report coming out tomorrow morning from the Department of Labor. Analysts expect the report to say 163,000 jobs were added last month, though poor weather could have affected job growth. Meanwhile, the European Central Bank kept its benchmark interest rate at 0.25%, as investors had widely expected, and President Mario Draghi said the European recovery was on track, adding that recent news has been "by and large on the positive side."

Shares of Staples (SPLS) got hammered, falling 15% after posting a dismal fourth quarter, and saying it would close 225 stores, or more than 10% of its total, by next year. With nearly half of its sales coming online now, the nation's No. 1 office retailer said the store closures made sense, and would help cut costs by $500 million. Sales in the quarter fell 3.8%, to $5.87 billion, after adjusting for the extra week in 2012, below estimates of $5.97 billion, while its $0.33 per-share profit also missed estimates at $0.39. Online sales were up 10%, indicating that there may be hope for its e-commerce strategy, though same-store sales fell 7% at North American locations. First-quarter guidance was also weak as the company expects a profit of $0.17-$0.22 against estimates of $0.27. Staples' report makes clear that office retail is fundamentally changing and, while it may find success as an online retailer, I wouldn't expect it to have the same advantages it does as a bricks-and-mortar store.

Costco (COST 0.07%) was also suffering today as the warehouse retailer fell 3% after reporting its quarterly earnings. Deep discounting was again the culprit, as profits dropped from $1.10 a share to $1.05, missing estimates at $1.17. Sales were also off the mark, up 6%, to $25.8 billion, but below estimates at $26.7 billion. Comps were solid, improving 3% or 5% when fuel and foreign-exchange effects are excluded, and new membership sign-ups rose 13%. Like many retailers, Costco cited bad weather as part of the reason for the slow quarter, and the report should remind investors that even the strongest retailers aren't impervious to industry trends such as the deep discounting during the holidays. At a P/E of 24, the stock is also much pricier than its peers.

Finally, Safeway (NYSE: SWY) fell 3.6% after hours after it agreed to be bought by Cerebrus Capital Management for about $9 billion. The deal will unite Safeway with Albertson's, making for a powerful presence in the West. Safeway shareholders will receive $32.50 in cash, and could get as much as $40 after add-ons, but the stock slipped after closing at $39.47 today as investors had expected a deal was coming.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale and Staples. 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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