Staples: Restructuring Charges, Online Competition Threaten Shareholder Returns

Nov.19.12 | About: Staples, Inc. (SPLS)

Shares of Staples (SPLS) ended the past trading week with gains of over 5%. The office products company reported its third quarter results on Wednesday.

Third Quarter Results

Staples reported third quarter revenues of $6.35 billion, down 2.0% on the year. The effect of a strong US dollar impacted revenues by a percent. Revenues fell short of analysts expectations of $6.46 billion.

Staples reported non-GAAP operating income of $500 million, down 5.5% on the year. Non-GAAP earnings per share came in at $0.46 per share, beating analysts consensus by a penny.

The company reported a GAAP operating loss of $357 million. Net losses added up to $596.3 million, or $0.89 per share. Staples took impairment, restructuring and amortization charges of approximately $882 million.

During the quarter, Staples repurchased 9.4 million shares for a total consideration of $111 million. So far in 2012, Staples repurchased 27.4 million shares for $362 million in total.

CEO Ron Sargent commented on the results,

During the quarter we launched a new strategic plan to become the product authority for business, restructured our organization, and generated solid earnings excluding charges. Going forward, we are in a much strong position to pursue our best growth opportunities.

Detailed Information

North American Delivery

Sales for the unit increased 1% to $2.6 billion. Growth of facilities and breakroom supplies was offset by the loss of two large contract customers last year. Operating income fell 76 basis points to 8.73% on lower product margins and investments to drive growth in Staples.com

North American Retail

Sales for the North American Retail business came in flat at $2.6 billion. Comparable store sales fell 1% on the back of a 2% decrease in traffic. Computer and software sales fell, partially offset by copy and print services. Operating income rose 9 basis points to 10.79% on increased efficiency.

International Operations

Revenues for the international operations fell 12% to $1.1 billion. Sales fell 8% in local currencies on the back of weakness in Europe and Australia. Operating income fell by 302 basis points for an operating loss of 0.15%, partially driven by a $16 million amortization charge in Australia.

Outlook

Staples assumes full year sales to be flat compared to 2011. This excludes the impact of foreign currency exchange rates and the impact of 53 working weeks.

Non-GAAP diluted earnings per share are expected to increase in the low single-digits compared to 2011s full year earnings of $1.37 per share.

Valuation

Staples ended its third quarter with $1.02 billion in cash and equivalents. The company operates with $1.66 billion in short and long term debt, for a modest net debt position of roughly $640 million.

For the first nine months of the year, Staples generated revenues of $17.8 billion. The company net lost $288.7 million, or $0.43 per diluted share for the period. Full year revenues could reach $24.3 billion, with non-GAAP earnings per share coming in around $1.40 per share.

The market currently values Staples at $7.9 billion. This values Staples at 0.3 times annual revenues and 8-9 times non-GAAP earnings. The company will post a net loss for the full year on a GAAP basis.

Staples currently pays a quarterly dividend of $0.11 per share, for an annual dividend yield of 3.8%.

Investment Thesis

Year to date, shares of Staples have lost roughly 15% of their value. Shares advanced from $14 in January to peak at $17 in March. Shares hit lows of $11 in August after the company lowered its full year outlook. Shares of Staples are currently exchanging hands at $11.73

Early in 2010, shares of Staples were testing all time highs set around $27 back in 2006 and 2007. From that point in time, shares have lost over half of their value. Revenues consolidated between $23.1 billion in 2008 to an estimated $24.3 billion this year. The company has been profitable each year over the past years, but is expected to post a large net loss in 2012.

While the company has been consistently profitable over the past years, restructuring and impairment charges returned this year. Staples took $882 million in special charges during the quarter, with another $160-$200 million in charges to be expected in the final quarter, exceeding the $1 billion mark for the year.

I remain on the sidelines as charges in the third and fourth quarter exceed annual profits in 2011 alone. The company furthermore announced to close 30 stores in North America and another 45 in Europe. The company is building online sales and mobile commerce channels to combat increasing competition from the likes of Amazon.com (AMZN). This is fairly late, in my opinion.

I stay on the sidelines. Lack of revenue growth, increase online competition and the return of one-time charges make me wary to invest.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.