Office Supplies Get Stapled to the Ceiling

The problem seen is that fourth-quarter sales at Staples were down 10.6% from a year earlier to $5.873 billion. That big a drop was just not expected. The company’s non-GAAP operating income was down 28% to $0.33 per share as well, also unexpected.

Staples Inc. (NASDAQ: SPLS) had a 1.45 to 1 price-to-book ratio on last look, and that will now be lower after the drop. Staples has a market cap of $7.38 billion. Its forward price-to-earnings (P/E) ratio is only 9, but analyst changes will alter this during the rest of this week. With a consensus target price of $14.50, Staples had an implied upside of about 10% prior to this news. Things went from bad to worse here. The office supply products giant saw its shares close at $13.60 on Wednesday, but they fell more than 15% to $11.30 in mid-day trading on Thursday. The company’s new 52-week trading range is $11.27 to $17.30.

Office Depot Inc. (NYSE: ODP) has a 1.26 to 1 price-to-book ratio with a market cap of $2.5 billion. Its forward P/E ratio is 12.5. With a consensus target price of $6.00, Office has an implied upside of 20.2%. Frankly, these upside expectations are likely to come down. Office Depot shares were down more than 4% to $4.70, and the 52-week trading range is $3.55 to $5.85. Thursday is actually the second or third pony show since the start of 2014. Its stock was knocked down to $4.88 from $5.35 just two weeks ago on its own.

Thursday’s news is not just weather related as so many stores have claimed. Weather does not cause you to announce that 225 stores will close. Staples also is planning to refresh about 1,600 items — about 20% of its products.

Here is where you know things are bad at the company’s stores. The year 2013 was plagued in comparable store sales and total sales because of that 53rd week in the 2012 figures. Still, calendar aberrations and cold weather do not cause store closures. Also, online sales were up 10%, but total sales were down 10.6% from the prior year’s fourth quarter. What does that tell you about the real trends in underperforming stores?

Now consider that Staples already closed 109 stores in North America and Europe in 2013. It seems possible in a back-of-the-envelope calculation and guess that some of the underperforming stores could be seeing 20% declines in their sales from a year earlier.

Staples may be dragging down Office Depot on a relative basis, but it is getting harder and harder to think about book value when the state of its trends is in such disarray.