Staples (SPLS) this week came out with a strategic plan that it believes will accelerate growth. The measures announced by the office products company are much needed, but are they enough to turnaround the struggling company? I am not very sure.
Let's see what Staples announced. The world's largest office products company said that it is planning to reduce retail square footage in North America by around 15% by the end of fiscal year 2015. To achieve this goal, SPLS is accelerating the closure of approximately 15 U.S. stores. SPLS now expects to shut down a total of 30 stores in the U.S. in fiscal year 2012.
The decision to shut down retail stores is right; however, the company is taking a significant charge in the fourth quarter to close these stores. In addition to these charges, SPLS will also record charges related to the restructuring of its international operations.
By the end of fiscal year 2012, SPLS plans to close 45 stores and a number of sub-scale delivery businesses in Europe. These actions will result in pre-tax cash charge of between $145 million and $195 million. In addition, SPLS expects to register a pre-tax non-cash charge of between $790 million and $850 million.
The planned move from SPLS is much-needed; however, I think the company is taking a too big charge upfront. The pre-tax cash charges expected to be recorded in the fourth quarter alone total between $160 million and $200 million. In addition, the U.S. store closures will continue until SPLS reaches its goal of reducing retail square footage in North America by 15%. This means more charges in the future. According to SPLS, the measures will result in annual cost savings of around $250 million. However, these cost savings will only be realized by the end of fiscal 2015.
Although the cost savings are significant, they won't be realized in the near-term and costs the company will incur upfront are very high. In addition, the company will see significant reduction in revenue as it shuts down its retail stores. Remember retail stores still account for a significant portion of SPLS's revenue so store closures will hurt SPLS's top-line. Lower revenue, coupled with costs related to the restructuring, mean that SPLS's profit will be hurt in the next few quarters. SPLS's efforts may be successful; however I would prefer to sit on the sidelines right now and watch the company's progress as it looks to focus more on online business.
The charges, however, are not the only concern for me. SPLS is implementing these measures to focus more on online sales. The company currently generates more than 40% of its revenue from online business and is the second largest Internet retailer. However, SPLS faces significant competition from Amazon.com Inc. (AMZN), the world's largest Internet retailer. My concern is that despite improving its online offering, SPLS may still lose customers to AMZN since changing an office product supplier is not very difficult for any company.
The other major issue facing SPLS is the weak economy. Of course, it is an issue for any company, but more so for SPLS since the company's fortunes are directly linked to the labor market. The unemployment rate in the U.S. has been stuck above 8% for a while now (it could be higher if you take into account workers who have left the labor force after years of unemployment). The bond buying program announced by the Federal Reserve is directly aimed at bringing down the unemployment rate, however this may take some time.
So what should you do with Staples? Compared to its smaller rivals OfficeMax Incorporated (OMX) and Office Depot (ODP), SPLS is attractively valued right now. SPLS trades on a P/E ratio of 8.64 and has a dividend yield of 3.60%. SPLS is also moving in the right direction by focusing on online business. However, the company's strategic plan is a disappointment. SPLS could have been more aggressive in scaling down its business in Europe. In the second quarter, SPLS reported an 18% drop in sales from its International operations. The decline was mainly due to weakness in Europe and Australia. No surprise then that SPLS shares fell sharply after the company announced its strategic plan.
The only reason I would have been interested in SPLS is if the company had hinted at a possible sale. Earlier this month, Fortune magazine, citing people familiar with the matter, had reported that SPLS was drawing interest from private equity firms for a possible buyout. However, by announcing the measures this week, SPLS has hinted that it is not interested in a possible sale.
I would certainly remain on the sidelines as SPLS makes the transition to online. Even if the company is successful in making the transition, there are far too many uncertainties in the medium-term.