Staples Earnings Take Back Seat to Office Depot Acquisition

On a GAAP basis, Staples posted a net loss of $260 million ($0.41 per share) in the fourth quarter, due primarily to a $410 million goodwill impairment in Australia, China and South America and $74 million in pretax charges for restructuring and other items.

For the full year, adjusted EPS totaled $0.96, compared with EPS of $1.16 in 2013. Revenues totaled $22.49 billion in 2014, compared with $23.11 billion in 2014. Analysts were looking for EPS of $0.96 on revenues of $22.57 billion.

In its outlook statement for the first quarter of 2015, Staples said it expects sales to decrease by 5% compared with the first quarter of 2014. Adjusted EPS is forecast in a range of $0.16 to $0.18 for the quarter. Consensus estimates call for EPS of $0.17 and revenues of $5.53 billion. The revenue expectation is about 2% below last year’s first quarter revenues of $5.65 billion.

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Guidance does not include any costs related to Staples’ acquisition of Office Depot. Staples expects to take pretax charges of $15 million to $40 million for restructuring and other related activities in the first quarter.

Staples reported that it has closed 169 stores of a planned 225 closures in North America by the end of 2015.

When activist investor Starboard Value released a statement following the announcement that Staples was acquiring Office Depot, the private equity firm said that management’s current cost-benefit assessment of post-merger synergies is conservative. Starboard believes those synergies could be over $2 billion, and Staples could ultimately be worth $32 to $37 per share once the Office Depot acquisition has closed and once those synergies can be realized.

Staples shares have risen more than 50% from its 12-month lows. Office Depot is now up close to 150% from its lows. Is it reasonable to expect another doubling of the share price for the combined company? It seems more than aggressive to us.

Staples — and Starboard — have put all their eggs in the acquisition basket. If it does not work out, there is no plan B.

Staples shares traded up about 0.6% in Friday’s premarket to $16.60, in a 52-week range of $10.70 to $19.40. Thomson Reuters had a consensus analyst price target of around $17.40 before the results were announced.

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