At some point, the stress from Office Depot's (ODP) proposed merger with rival Staples (SPLS) will be too much to bear. Office Depot reported a disappointing quarter exacerbated by losses attributable to the regulatory hurdles placed by the Federal Trade Commission.
However, the company's stock didn't plunge after today's weak earnings release, as the market awaits the court decision from its FTC antitrust case. Office Depot was only down 0.5% on weak volume midday.
The office supplies retailer reported net income of $46 million, or $0.10 per share on an adjusted basis. Analysts on average anticipated the company to report earnings of $0.12 per share. Revenue of $3.54 billion was down 9% from a year ago, also just missing Wall Street's forecast of $3.62 billion.
Office Depot reported that international sales fell 6% due to its ongoing merger as well as the proposed divestitures the company made in Europe in order to get regulatory approval from the EU. Meanwhile, the company's North American Business Solutions Division reported revenue of $1.4 billion in the quarter, down 7% year over year on a constant currency basis. The company said the decline was due to "customer attrition and lower customer additions, primarily due to the substantial business disruption related to the pending acquisition by Staples."
"The protracted regulatory review of the pending Staples acquisition continues to have a substantial disruptive impact on our business," said Roland Smith, chairman and chief executive officer for Office Depot. "Our North American Business Solutions Division and International Division are more impacted by this disruption, and accordingly, both failed to meet our sales and profit expectations this quarter. In spite of the uncertainty surrounding the acquisition, our associates around the world continue to demonstrate focus, drive and dedication as we finalize this process."
That process could be finalized within the next two weeks.
About 10 months after the two companies first announced their merger, the FTC announced its intention to block the merger on antitrust grounds. After closing arguments in the injunction hearing were heard last week, Office Depot said it expects to have a decision from the judge presiding over the case by May 10. The deadline for the merger is May 16.
In 2014, Office Depot announced it would be closing 400 stores following its approved merger with Office Max. With 50 stores slated to be closed this year, the company said the closures in addition to challenging market conditions caused it to provide a downside earnings forecast for 2016 compared to 2015. For 2016, the company expects to incur about $30 million in charges related to the Staples merger.
To hear analysts tell it, Office Depot may not be able to survive on its own if the merger doesn't go through.
"While there is an upside on an approved deal, we don't see much outcome control for Office Depot if the deal is blocked," Goldman Sachs said in a March note. "This is the management team's best exit in light of the company's sliding competition positioning."
Offiice Depot's stock remains up 8% year to date, but took a dive from its YTD high of $7.73 since the start of April, as the merger injunction hearing brought by the FTC has played out.