Cleveland Research: FTC Blocking Staples/Office Depot Merger 'Most Probable Outcome'

In a report published Thursday, Cleveland Research Company analyst Daryl Boehringer detailed why he is taking a "cautious view" on the Office Products sector with a particular focus on Office Depot Inc ODP.

Boehringer started off by stating that he remains "skeptical" that the pending Staples, Inc. SPLS-Office Depot merger will gain FTC approval without significant divestiture in the chancel given the "high degree" of market share the combined entity will hold in the space. As such, the analyst stated that the blocked merger is the "most probable outcome."

The analyst also noted that Office Depot in its current state is losing market share due to ongoing employee turnover and "uncertainty" over the proposed merger. On the other hand, Staples has been gaining market share through its BOSS initiatives.

What To Expect From Staples' Q2

Staples will report its second quarter results on August 19 before market open.

Boehringer is modeling the company's North American retail sales to decline 9 percent consisting of a 4 percent comp decline, a 2.6 percent currency headwind from Canada, and a 250 basis point headwind from closed stores.

North American commercial revenue is modeled to increase 3.2 percent with core growth up 4 percent with an 80 basis headwind from foreign exchange.

Finally, the company is projected to earn $0.11 in the quarter, a penny below the consensus estimate and at the low end of the company's $0.11 to $0.13 per share guidance

Shares remain Neutral rated.

What To Expect From Office Depot's Q2

Office Depot will report its second quarter results on August 4 before market open.

Boehringer is modeling the company's North American retail comp to fall 3 percent with NAR revenue declining 9.7 percent driven by the combination of negative comp trends and store closures.

North American BSD revenue is expected to soften sequentially and read 5.2 percent lower driven by unfavorable currency, market share losses and headwinds due to an inability to attract and retain accounts due to the merger overhang.

Finally, the company is projected to earn $0.06 per share in the quarter, which is in-line with the consensus estimate.

Shares also remain Neutral rated.