Staples Shares Plummet Due To Dull Q4 Earnings Report

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Mar 10, 2015

Staples Inc. (SPLS, Financial) revealed a 6% year-over-year loss in earnings for the fourth quarter of fiscal 2014 on the back of negative foreign currency headwinds and store closures. Although the company reported adjusted EPS of 31 cents, a shade better than consensus estimates, Staples ended the fourth quarter with a loss of 41 cents a share from continuing operations, inclusive of one-time items and a $410 million pre-tax impairment fee, compared to the prior-year quarter’s earnings of 33 cents a share. Staples shares were down 2.4% in early trading following the results.

Revenues decline across North America and Europe

Staples reported a 3.7% fall in overall sales for Q4 2014 to $56.56 billion, with revenues inching up a mere 0.8% compared to the prior-year quarter. The company saw its adjusted operating income declining 15.1% to $286.6 million, while adjusted operating margin shrank 69 basis points to 5.1%. Consequently, the retailer posted operating loss of $197 million, excluding the impact of restructuring and other associated charges, versus a profit of $338 million in the year-ago quarter.

Segmentwise, Staples saw an overall 6.9% decline to $26.99 billion in online sales and sales across its outlets in Canada and the U.S. during the fourth quarter. A drop in sales of technology accessories and business machines dragged down revenues from higher sales of copy and print services and breakroom supplies. The retailer also saw a 4% decline in comparable-store sales, owing to a 4% drop in average order size and 1% drop in traffic compared to the year-ago quarter.

However, online sales through Staples.com grew 9% compared to the prior-year quarter on the back of enduring customer conversion and greater inventory in segments other than office supplies. While operating income fell 23.3% year-over-year to $135 million, operating margin shrank 108 basis points to 5%, reflecting the company’s growing investment in its online business as well as greater incentive compensation. The company also saw a 4.9% growth to $20.59 billion in sales in its contract operations in the region.

Staples’ international operations continued its downward trend with a 11.1% decline in revenues to $898 million owing to reduced online sales in the European market. Comparable-store sales in the region also witnessed 2% year-over-year decline. However, higher product margins and extensive cost-cutting efforts drove operating income in the region to a 42.9% growth to $20 million, with a 84 basis point increase in operating margin to 2.2%.

For the full-fiscal 2014, Staples reported adjusted EPS of 96 cents a share, indicating a 17% fall compared to the previous fiscal. Revenues also missed the consensus estimate figure of $225.32 billion and fell 2.7% to $224.92 billion for 2014. While the company logged a 1.4% decline in gross profit to $14.86 billion, gross margin expanded around 60 basis points and stood at 26.3%.

Staples also reported an expenditure of $496 million during the fiscal in share buybacks and dividend payouts, with a cash dividend on its common stock of $0.12 per share for the last quarter.

The year ahead

Staples, which shut down around 169 stores during FY2014, announced plans to close 225 more stores across North America during FY2015. Moreover, the company also plans to improve its $250 million in annual savings in fiscal 2014 to $500 million by the end of 2015. The company is also set to acquire rival office supplies retailer Office Depot Inc. (ODP) by the end of fiscal 2015 in a $6.3 billion stock and cash deal, subject to regulatory approvals.

Staples faces increasing competition from online giants such as Amazon.com Inc. (AMZN, Financial) and the foray of mass merchandisers such as Walmart Stores Inc. (WMT, Financial) into the office supplies market. As the company grapples with near-term challenges, including the reducing demand for traditional office supplies items in the age of advancing technology, Staples projected lower sales for Q1 2015 compared to the year-ago quarter. The company also foresees adjusted EPS for the quarter of 16-18 cents a share, while it projected free cash flow of $600 million for the full fiscal 2015.

Final thoughts

Staples reported a bleak performance in Q4 and full fiscal 2014 followed by a flat outlook for 2015. Despite cost-saving efforts, the company faces industry-level challenges of decreasing demand for traditional office supplies as well as increasing penetration of online and mass-merchandising rivals into its market segment. Although experts project a negative long term growth of around -0.6% over the next five years in Staples’ average annual earnings rate, the company’s impending acquisition of rival Office Depot could tilt the balance in its favor. Consequently, the Staples stock carries a ‘hold’ guidance for the short to mid-term.