By Lisa Beilfuss – May 20, 2015
Staples Inc. reported a 39% decline in first-quarter profit, as sales continued to decline and store traffic dwindled, deepening the chain’s challenges as it awaits regulatory approval for its takeover of rival Office Depot Inc.
Shares fell 1.9% in morning trading. Year-to-date, shares have dropped 11.7%.
Chief Executive Ron Sargent said results were in line with the company’s expectations. “We grew sales in our North American delivery businesses and stabilized profitability across the company, which reflects continued progress on our strategic reinvention,” Mr. Sargent added.
For the current quarter, Staples expects to earn 11 cents to 13 cents a share and said sales will fall by an unspecified amount. The guidance excludes expected merger-related costs. Analysts are looking for 11 cents in per-share profit on $5.1 billion in revenues. Analysts’ revenue estimate translates to a 2.6% expected decline from a year earlier.
Earlier this year, Staples agreed to buy Office Depot for $6.3 billion. Staples has been hit by shifts in office needs where basics like paper folders and printer toner are no longer in high demand and where discounters and Web retailers have invaded their turf. Both chains have suffered from declining sales for nearly a decade and Staples has faced pressure from activist investor Starboard Value LP, which pushed for the Office Depot deal.
The merger, if approved, would take the U.S. down to one chain of office-supply superstores from three in just a couple of years; in 2013, Office Depot acquired OfficeMax. Regulators blocked a proposed tie-up of Staples and Office Depot in 1997, but the companies point to a competitive landscape that has since changed.
On a call with analysts Wednesday, Mr. Sargent said Staples completed the syndication of debt financing for the deal. Strong demand from the lender community and favorable market conditions resulted in better-than-expected pricing, Mr. Sargent said.
In March, Staples received a second request for information from the Federal Trade Commission and is working to gather the information, a process Mr. Sargent expects to take at least a few months.
“Our acquisition plans are on track,” Mr. Sargent commented.
Meanwhile, in North America, Staples suffered a 5% sales drop at stores open at least a year, excluding the effect of currency-exchange rates, its 12th straight quarter of sales declines. Total North American sales dropped 10%. The company said sales were hurt by store closures and currency rates. Store traffic fell 2%, and the average order size declined 3%. Online sales grew 3% on a constant-currency basis, but that wasn’t enough to offset the declines in the chain’s store base.
A 7% decline in European same-store sales helped drive a 19% drop in the company’s international revenue.
At Staples, “retail is still seeing pressure from store closures and we expect FX pressures as well as still-weak technology sales to temper top-line performance, consistent with recent trends and other company reports,” analysts at B. Riley said in a research note this week.
On the earnings call, Mr. Sargent said Staples closed 28 stores in North America during the first quarter and plans to shut an additional 60 this year. The closures are part of the company’s cost-reduction and restructuring efforts. During the period, Staples eliminated about $100 million of annualized costs, and the company is on track to cut $250 million in costs this year, according to the CEO.
In all for the first quarter, Staples reported a profit of $59 million, or nine cents a share, down from $96 million, or 15 cents, a year earlier.
Excluding certain items, like charges stemming from the Office Depot acquisition and other restructuring charges, per-share profit fell to 17 cents from 18 cents.
Revenue slid 6.9% to $5.3 billion.
Analysts projected 17 cents in earnings per share and $5.5 billion in sales.