Tags: Office | Chains | Merge | Staples

Some Want Office Chains to Merge as Staples Disappoints Street

Wednesday, 18 May 2011 07:58 AM

 

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Staples Inc. slashed its full-year forecast and said it would open fewer stores than it had planned after its quarterly results missed Wall Street estimates, sending its shares down nearly 16 percent.

The news also renewed talk about the need for consolidation in the office supply sector.

Smaller rivals Office Depot Inc. and OfficeMax Inc. posted weak quarterly sales last month as corporate customers and shoppers spent less on office supplies in a slowly recovering U.S. economy.

Staples' dismal numbers on Wednesday sent the company's shares to their lowest level in two years and dragged down Office Depot and OfficeMax stocks.

"We had been holding out hope that their results would show market share gains from their two weaker competitors, but the very small share gain is coming at high costs," Credit Suisse analyst Gary Balter said.

"Three players are at least one too many in this sector," Balter added. "Consolidation will be a necessity."

The office supply sector could also be growing less relevant, with businesses and shoppers increasingly opting to buy some of these products from online retailer Amazon.com or independent dealers.

Nomura analyst Aram Rubinson downgraded Staples earlier this month, despite his belief that the chain is "run by some of the best retail executives around."

"Though we think Staples is a far better operator, we believe that the issues facing Office Depot and OfficeMax are not expressly cyclical or company-specific," Rubinson said at the time. "Rather, the office sector is fighting a secular battle for relevance."

On Wednesday, Staples Chief Executive Officer Ron Sargent said the company would now open about 20 new stores in the United States and 10 in Canada, while closing about 10 in those markets. That net addition of 20 new stores in North America is half the prior outlook of 40.

Staples is also in the process of "trimming significant square footage" from its current 18,000-square-foot format, Sargent said.

TOUGH TIMES AHEAD

The company, which sees very little improvement in the U.S. economy this year, said it sees full-year net earnings of $1.35 to $1.45 a share, down from its prior view of $1.50 to $1.60.

It is less optimistic about sales as well. It forecast growth at a low single-digit percentage rate, compared with its prior outlook for an increase in the low to mid-single digits.

Some analysts have raised concerns that even recent improvements in the U.S. economy have not trickled down to a sector traditionally seen as a barometer of economic health.

Staples' net profit rose to $198.2 million, or 28 cents a share, in the first quarter ended on April 30 from $188.8 million, or 26 cents a share, a year earlier. Analysts were expecting 32 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 2 percent to $6.17 billion, missing the analysts' average estimate of $6.20 billion.

Shares of Staples were down 15.9 percent at $16.53 on Nasdaq. On the New York Stock Exchange, Office Depot fell 6.4 percent, and OfficeMax dropped 7.0 percent.

© 2014 Thomson/Reuters. All rights reserved.

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