Stressed Out: Staples Earnings Makes Successful ODP Merger Even More Necessary

 | Mar 04, 2016 | 12:55 PM EST
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

The curious case of Staples' (SPLS) attempt to acquire Office Depot (ODP) may come to an unwanted conclusion if a judge approves a U.S. Federal Trade Commission effort to place an injunction on the merger.

That view came today during the Staple's fourth-quarter earnings call. The office supply chain reported a 5% decline in sames-store sales while revenue fell by 7% to $5.27 billion.

"Staples continues to struggle with a difficult sales environment in many of its key product categories, including tech-related hardware, with revenues down over $1 billion from 2014," said Charlie O'Shea, lead retail analyst at Moody's, in an email. "This magnifies the pressure on Staples to expand its product line away from some of these traditional categories, keep costs in line and retain pricing discipline in order to minimize erosion in operating profit."

Staples is certainly feeling that pressure as the company's stock has fallen 40% over the past 12 months.

"While our Q4 results came in at the lower end of our expectations, we continued to make good progress on many of our key initiatives, and we have a solid plan to get back to earnings growth in 2016," CEO Ron Sargent said in a statement.

O'Shea doesn't see these initiatives bearing fruit as of yet, however.

"These efforts during 2015 were not totally effective as operating profit actually fell once 2014's goodwill impairment is factored in, though margin held, cash grew around $200 million and debt balances were flat, which results in a fairly static credit profile. We note that Staples continues to move towards completion of its proposed acquisition of Office Depot with resistance from the FTC, and we believe this effort is taking up a meaningful amount of management resources," O'Shea said. 

Read more about the FTC's case against Office Depot and Staples.

Staples said that it is preparing for the worst while hoping for the best concerning its proposed $6.3 billion takeover of its closest competitor. The FTC sued to block the merger in December due to antitrust concerns.

The companies are the two largest office retailers in the U.S, but indeed, the office retail environment seems to be getting tougher for everyone.

Late last month, Office Depot reported that sales for the year were down 10% in 2015 after the company reported sales increases in 2013 and 2014. Profit margins for the year also fell to 24.2% from 27.6%.

Office Depot CEO Roland Smith blamed some of the lost revenue on the pending nature of the company's merger with Staples and called the FTC's anti-trust litigation on the matter an "ongoing business disruption."

"Primarily due to the impact of store closures, continuous challenging market conditions, and an ongoing business disruption from the extended regulatory approval process related to the pending acquisition by Staples. The company expects this disruption to continue through at least the first half of 2016, while the company completes the ongoing litigation."

Heller: FTC Ready to Throw SPLS/ODP Merger Into the Waste Basket

Office Depot has previously announced plans to shutter 400 stores by the end of the year while over 1,000 store closures are expected to follow if the deal is approved. Meanwhile, today Staples said that it is planning to close 50 of its over 1,600 stores this year. The company has closed 242 locations in North America over the past two years.

The very existence of one, if not both, of these companies may be contingent on their being allowed to merge. May 10 -- the date when U.S. District Judge Emmet Sullivan is scheduled to rule on the case -- is a date investors should have underlined on their calendars. 

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Office Depot's Earnings Miss, but Investors Are Down With ODP

Stressed Out: Office Depot/Staples Merger Sees Ray of Hope Following EU Approval

Stressed Out: Sprint Is Collapsing Under the Weight of Its High-Yield Debt

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