Seeking Alpha
Tech, banks, long/short equity, value
Profile| Send Message|
( followers)

Summary

  • You can't cut your way towards prosperity. What about growth?
  • With the stock trading at around $13, which is the highest analyst target, I don't see anywhere for this stock to go but down.
  • Absent a clear growth strategy there is no compelling reason for optimism here. Staples is not a buy until it reaches single digits.
  • $9 seems like excellent value.

With better-than-expected results coming out from retailers J.C. Penney (NYSE:JCP) and Whole Foods (NASDAQ:WFM) there is now pressure on Staples (NASDAQ:SPLS) to follow suit. The stock closed Friday at $13.24, up 1.69%. But the shares are down 15% year to date. And expand the horizon to five years, and the beleaguered office retailer has seen its valuation plummet by close to 50%.

Staples is suffering from the same issues affecting other big box retailers. In a world now dominated by Amazon (NASDAQ:AMZN), Staples is seen as a dinosaur. And unfortunately, its image has been the least of its worries. With ongoing lack of leverage, management recently cut the company's fiscal first quarter outlook and the full year guidance by roughly 20%.

The glass-half-full view suggests that management deserves credit that Staples is still around. Rival Office Depot (NASDAQ:ODP), which picked off Office Max, has arguably gotten the worst of their respective existence. But is mere survival enough? On Tuesday, investors that are still holding this stock will want some confirmation that management deserves more time to turn this ship around. But absent a clear internet strategy to grow long-term margins, this ship has sailed. And it's only a matter of time before it sinks for good.

The Street will be looking for 21 cents in earnings per share, which represents a year-over-year decline of 19%. Full year earnings is projected at $1.08 per share, down 7% from last year's mark of $1.16. And this is where management's restructuring efforts to bring in efficiency become important. Amazon, as well as other online retailers has eaten a significant chunk of Staples market share.

Staples is now dealing with a rapid shift. Business customers no longer care about the various offerings the company once used to create separation from, say, Walmart (NYSE:WMT). The cost-savings, which came with bulk purchases, is now standard for most expensive technology and office furniture at most online retailers.

Unfortunately, Staples is being left behind by Walmart and Best Buy (NYSE:BBY), which have quickly developed their online presence to fend off Amazon. More than anything, Staples' lack of e-commerce presence has been company's biggest obstacle. And this is what management must outline on Tuesday to ensure to investors that it has a comprehensive plan in place to return to growth.

Revenue, meanwhile, is projected at $5.62 billion, down 3.4% year over year. For the full-year, revenue is projected to be $22.5 billion, down roughly 3% year over year, missing last year's mark of $23.11 billion. The company is suffering from lack of interest and store traffic.

In the March quarter, for instance, the company posted a 12% decline in revenue, which was due to a 7% plunge in same-store-sales. CEO Ron Sargent confirmed what investors already knew, saying that customers were moving their shopping online. Not to mention, they were using fewer office supplies.

With a combination of reduced store traffic and lack of purchases, Staples was unable to grow revenue and margins with the typical in-store add-ons. Investors applauded the news that the company will close about 225 stores by 2015. Management expects the store reduction to cut almost half a billion in operating expenses. It's logical response by management.

But the question remains about growth. You can't cut your way towards prosperity. With the stock trading at around $13, which is the highest analyst target, I don't see anywhere for this stock to go but down. The expense reduction should help grow the bottom line, but absent a clear growth strategy there is no compelling reason for optimism here. Staples is not a buy until it reaches single digits. And $9 seems like excellent value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's retail sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.

Source: Sell Staples Ahead Of Earnings, Buy At $9