Staples Plunges to Loss on Failed Merger with Office Depot

Retailer to close about 50 stores in FY16

s1Staples Inc. (NASDAQ: SPLS), a leading retailer of office products and services, announced its Q2 FY16 financial results on August 17th, 2016.

The Framingham, Massachusetts-based company, together with its subsidiaries, operates office products superstores. It operates in three segments: North American Stores & Online, North American Commercial, and International Operations. The Company offers a range of office supplies, business technology products, facility and breakroom supplies, computers and mobility products, and office furniture under the Staples, Quill, and other proprietary brands. It also provides copy and print services, as well as technology services. The company sells and delivers office products and services directly to businesses and consumers through its Staples.com and Staples.ca, and Quill.com websites, as well as through retail stores, and internet and direct mail catalogs.

As of January 30th, 2016, it operated approximately 1,907 retail stores and 104 distribution and fulfillment centers in the U.S. and internationally. Read more about Staples’s financial results below.

Q2 FY16 financial highlights

Source: Staples
Source: Staples

Staples’s Q2 FY16 results have been dented by an increasingly digital workplace that has reduced the need for some categories of office products as well as charges associated with its failed merger with Office Depot Inc. (NASDAQ: ODP). Total sales for Q2 FY16 fell 4% to $4.8 billion versus the year-ago period. Excluding the negative impact foreign exchange rates, store closures, and the sale of the company’s Staples Print Solutions business, total sales in Q2 FY16 decreased 2% compared to the year-ago period.

On a GAAP basis, Staples swung to a loss of $766 million, or $1.18 per share, in Q2 FY16, compared to net profit of $36 million, or $0.06 a share, in the year-ago period. The losses were mainly due to pre-tax charges of $986 million primarily related to the impairment of European goodwill and other assets and costs associated with the termination of the Office Depot merger agreement entered into in February 2015. Excluding these charges, Staples reported non-GAAP net income of $79 million, or $0.12 per diluted share, in Q2 FY16 versus $76 million, or $0.12 per diluted share, in the year-ago period.

Segmental highlights

North American Commercial: This segment’s sales for Q2 FY16 were $2.0 billion and remained flat as compared to the year-ago period. The growth in facilities supplies, promotional products, and breakroom supplies were partially offset by declines in ink and toner, office supplies and paper. Sales were negatively impacted by about 1% due to the sale of the company’s Staples Print Solutions business during Q2 FY16.

s3Staples Business Advantage sales grew by 1% on a GAAP basis and 3% on a local currency basis after excluding a negative impact of about 2% due to the sale of the company’s Staples Print Solutions business.

The segment’s operating income expanded 40 basis points to 7.1% versus the prior year period, mainly due to lower labor costs, partially offset by lower product margins.

North American Stores and Online: This segment’s sales for Q2 FY16 fell 6% Y-o-Y to $2 billion. Sales were negatively impacted by about 1% due to store closures and by about 1% due to unfavorable foreign exchange rates. Comparable sales (which includes comparable store sales and Staples.com sales growth and excludes the impact of changes in foreign exchange rates) fell 4% versus the prior year. Sales declines in ink and toner, business machines, technology accessories and office supplies were partially offset by growth in computers. Comparable store sales decreased 5% due to declining customer traffic. s4Staples.com sales grew 1% in U.S. dollars and on a local currency basis compared to the year-ago period.

The segment’s operating income contracted 73 basis points to 0.6% versus the year-ago period, due to the negative impact of lower sales on fixed expenses in retail stores, partially offset by improved profitability in Staples.com.

International Operations: This segment’s sales for Q2 FY16 fell 7% in U.S. dollars and 4% on a local currency basis to $721 million versus the year-ago period. The fall was due to sales declines in Europe, partially offset by double-digit growth in China. The segment’s operating income improved 91 basis points to an operating loss of 1.9% versus the prior year period, due to improved profitability in Europe.

Other highlights

Failed merger with Office Depot: In February 2015, Staples agreed to buy Office Depot for about $6.3 billion. However, the U.S. Federal Trade Commission argued that the proposed merger would result in higher prices and fewer options for big companies that buy office supplies in bulk. A federal judge blocked the retailer’s attempt to acquire Office Depot in May 2016, after which CEO Ron Sargent agreed to resign. Interim Chief Executive, Shira Goodman, is making efforts to change the operating model to reposition the Company in a highly competitive office products market. Staples had to pay Office Depot a $250 million breakup fee.

Liquidity position: Staples ended Q2 FY16 with $1.7 billion in liquidity, including $775 million in cash and cash equivalents.

Corporate changes: On July 11th, 2016, Staples announced that it has named Steve Matyas, President of North American Retail. He previously had been President of Staples Canada/Bureau en Gros since July 2000, and will continue to serve as a member of the company’s executive committee.

Store closures: Staples announced that it closed 5 stores in Q2 FY16 and 19 stores year to date in North America as part of a plan to close at least 50 stores in North America during FY16.

Outlook for Q3 FY16 and full year FY16

For Q3 FY16, Staples expects sales to decrease versus Q3 FY15 and diluted non-GAAP EPS in the range of $0.32 to $0.35. The Company’s earnings guidance excludes potential charges related to strategic plans, including restructuring and related initiatives as well as the ongoing exploration of strategic alternatives for its European operations.

For the full year FY16, Staples expects to generate approximately $600 million of free cash flow excluding the after-tax impact to operating cash flow of approximately $340 million of charges associated with financing for the proposed acquisition of Office Depot and costs associated with the termination of the Office Depot merger agreement.

Stock Performance

s5Staples’ stock ended the day at $8.48, slipping 2.19%, at the close on Thursday, August 18th, 2016, having vacillated between an intraday high of $8.67 and a low of $8.27 during the session. The stock’s trading volume was at 14,815,361 for the day. The Company’s market cap was at $5.54 billion as of Thursday’s close.

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