Staples prepares Plan B as merger stalls, sales sink

Staples prepares Plan B as merger stalls, sales sink

Mar 8, 2016

Staples chief executive says the retailer still hopes to overcome a government lawsuit blocking its takeover of rival Office Depot, even as the company prepares contingency plans to go it alone.

“We’ve been working on Plan B for several months at this point,” CEO Ron Sargent said in a conference call with analysts Friday, though he didn’t say how it might differ from Staples’ existing plan to close stores and expand its customer base. He says the office-supplies retailer is planning specific changes to improve its stand-alone performance “despite the fact that we’re focusing all our energies and efforts on getting this acquisition behind us.”

The assessment came after Staples reported fourth-quarter results that Sargent says fell short of management’s expectations. The company’s retail sales in North America dropped 5%, excluding newly opened and closed stores, as fewer shoppers visited its big-box stores. The chain has more than 1,900 locations around the world.

Sargent says the company has a plan to resume earnings growth this year after core earnings declined in 2015, though executives warned that sales will likely decline again in the current quarter.

Shares of Staples, which slid 2.7% to $9.60 on Friday, have fallen more than 40% over 12 months.

Staples has struggled with years of declining revenue as demand wanes for traditional office basics like folders and filing cabinets and as shoppers seek cheaper deals online. Managers last year pinned their hopes for a turnaround on a $6,3-billion combination with Office Depot designed to save on the operating costs from stores, distribution centres and executive offices. The cash-and-stock deal would be valued at about $5.2 billion at current prices.

The Federal Trade Commission in December sued to block the tie-up, saying it would result in higher prices and fewer options for big companies that buy office supplies in bulk. European officials signed off on the deal last month on the condition that Office Depot sheds its contract supply business and all its Swedish operations.

Staples in February also agreed to sell certain wholesale contracts, representing more than $550-million of annual sales, to Essendant Inc. for about $22,5-million if its Office Depot deal closes. The FTC has rejected Staples’ divestiture proposals.

The FTC in 1997 rejected Staples’ first attempt to buy Office Depot. But in 2013, the agency unconditionally approved Office Depot’s merger with OfficeMax, a move Sargent says should bolster the case for its new deal.

“Since 2013, competition has materially intensified, not lessened,” he says.

Even as it tries to add about 1 700 stores with the merger, Staples has been closing locations. In North America, the company closed 12 stores in the latest quarter, among 73 total closures last year. Staples says it expects to close about 50 North American stores in 2016.

Staples earned $86-million in the holiday quarter compared with a year-earlier loss of $260-million triggered by a write-down of the value of some of its international businesses. Overall revenue slipped 6,9% to $5,27-billion.

By Drew Fitzgerald and Joshua Jamerson for www.wsj.com