Staples Is Not Dead Yet

Staples Is Not Dead Yet

Most people were aware that Staples' core business was under attack by intense industry disruption and the downfall of big-box retailers, but the recent earnings report shocked the market nonetheless and caused a major stock sell-off in Thursday's trading. As the second major retailer to announce large-scale store closures, Staples can't shift away from its brick-and-mortar business fast enough to focus on what is still a compelling e-commerce play. The news is undoubtedly bad, but there are some interesting components at work here. As Staples downsizes and generates hundreds of millions in operating efficiencies, the e-commerce cash flow could see the light of day. Is there a silver lining to Staples?

Out of ink
Sales dipped down more than 12% to $2.9 billion for Staples' fiscal fourth quarter. Analysts had been expecting roughly twice as much at nearly $5.9 billion, giving the market an immediate signal to sell, sell, sell. Same-store sales dipped down 7%. The cause was a double-header of lower traffic and lower average tickets.

At this point, there should be little doubt that Staples' brick-and-mortar business is headed for the grave. The company is convinced as well, having closed more than 50 stores last year, in addition to releasing a fresh announcement that it would board up more than 10% of its outstanding store count by 2015. With 225 fewer stores, among other cost-saving measures, the company expects to save $500 million in annualized efficiencies by the end of the same year.

Beyond store closures, the savings will likely come in the form of layoffs and inventory enhancement.

For those looking to make any forecast of Staples' future business, the story is a mix of e-commerce and the cash it can free up by operating as a slimmer business. Online sales continue to increase for Staples -- up 10% in the just ended quarter. The company is quickly increasing its SKU count on the Internet sales platform as well -- going from 100,000 at the beginning of 2013 to 500,000 at year's end.

A bright spot?
The store closures should have happened earlier than now, but better late than never. As the company heads toward some huge cost savings (and lower sales, at least in the short term), free cash flow should receive more attention. For 2014, Staples management expects $600 million in free cash. Investors can expect a continued dividend payment and more and more capital deployed to e-commerce and inventory management operations.

In the near-term, investors won't see much positivity in the way of sales or other headline figures. Still, the company is trading quite cheap on an EV/EBITDA basis (around 5 times). As sales continue to fall at the stores and increase online, there should be stabilization in the foreseeable future. Do not expect a quick turnaround, but don't think that this is a business headed for the dumpster. There is still value here, it's just a matter of how quickly and effectively management can bring it to light.

A great stock to add to your portfolio this year
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

The article Staples Is Not Dead Yet originally appeared on

Michael Lewis has no position in any stocks mentioned. The Motley Fool owns shares of Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published