Is Staples Close to Death?

There is only one question that is raised by Staples (NASDAQ: SPLS) financial numbers: how is this company staying in business? The numbers at Staples now look worse than those at Sears Holdings (NASDAQ: SHLD) or SuperValu (NYSE: SVU).

From the looks of the numbers Staples seems to be losing money every time its employees unlike the doors. The financial numbers from July 31, 2016, contain every sign of the death spiral including:

• A net income of -$441 million.

 

• A quarterly profit margin of -16.12%.

 

• A free cash flow of -$345 million.

 

Okay there were a few good signs including $667 million in cash from operations and $775 million in cash and short-term investments. Yet it’s obvious that Staples is not making any money.

Why Staples Might Shut Down

Actually it might be off for investors if Staples were simply to shut down and liquidate its assets. On October 20, 2016, Staples had a market cap of $4.94 billion and an enterprise value of $5.392 billion.

It reported assets of $9.483 billion on July 31, 2016. If these figures; provided by ycharts, are accurate Staples assets its stores, intellectual property, etc., are worth more than the enterprise.

Naturally, many people will be asking why Staples simply does not shut down. My guess it is that is being sustained by sheer momentum – much like Sears. Staples reported $20.17 billion in revenues on July 31, 2016.

The logical suspicion is that the company is making just enough money to sustain its day to day to operations but nothing more. That may not continue for much longer because Staples’ revenue is in freefall. In July 2013; Staples had $24.05 billion in revenue, that fell to $22.88 billion in July 2014, $21.82 billion in July 2015 and $20.71 billion in 2016.

Staples lost around $1 billion in revenue a year, for the past three years. It might be able to keep that up for a few years, but at some time point both the stock and the company will become unsustainable.

Staples’ Dividend is Doomed

One thing that is probably doomed is Staples’ dividend. Like a lot of sick companies the office supply giant has been trying to prop up its sorry stock with a high dividend.

It was paying a dividend yield of 6.32% on October 20 2016. That sounds great until you realize that Staples shares were trading at $7.59 on the same day. Such numbers made for a dividend of 12¢ a share on September 21, 2016.

That means a person would have had to own 100 shares of Staples to receive around $12 in dividend income. Since SPLS had a return on equity of -8.49% on July 31, 2016, that’s a pretty bad deal.

What’s more bothersome is that dividend has remained the same since March 2013. That means investors are receiving even less in dividend income thanks to the rate of inflation.

Even at its low price, Staples is a really lousy stock that investors should stay away from. Shareholders were punished with a negative return on equity of -8.49% on July 31, 2016, indicating that they lost money.

The situation at Staples demonstrates why investors need to stay far away from ailing retailers such as department and office supply stores. They are losing money like crazy and have little chance of making more.

Amazon has Killed Staples, will it buy it

The reason why Staples is losing money is obvious to anybody who has shopped for office supplies online lately. Amazon (NASDAQ: AMZN), Walmart Stores Inc. (NYSE: WMT), Sams Club and Jet.com are all undercutting its prices for basic office supplies like labels and toner cartridges.

There is simply little or no incentive for the average small business person, such as me, to shop at Staples. Prices at Amazon or Jet are better and they offer convenience and free shipping.

That was the real reason for the Staples/Office Depot (NASDAQ: OD) merger attempt, the management teams were trying to get enough market share to simply survive. Now that the FTC has put the kibosh on that deal, Staples only chance for survival is acquisition.

Would Walmart Buy Staples?

Two interesting buyers would be Walmart and Amazon. Walmart would buy Staples for its brand and online market share. Amazon might be interested in Staples’ 1,600 brick and mortar locations as pickup points for merchandise. It needs such points to counter Walmart which has already opened 600 such pickup points.

Although it should be noted there would be a lot of drawbacks to those locations as click and pick up points. They lack facilities for drive up pickup and would require expensive renovations to offer groceries including the installation of freezers and refrigerators.

A better course of action for Amazon would be to make a deal with a grocer like Kroger (NYSE: KR); which is already experimenting with click and pull, or the privately held Safeway. That way it would not have the expense of buying thousands of locations and hiring hundreds of thousands of new employees.

That means even Staples’ real estate might not be worth that much. There might simply be no way to save this office supply retailer and its’ industry from the death spiral.