Compare And Contrast: Staples Vs. Office Depot

Anthony Chukumba of Loop Capital expects Staples, Inc. SPLS’s earnings in line — with an EPS outlook for fiscal 2017 above consensus — when it reports fourth-quarter results March 9.

What To Expect From Staples Earnings

Chukumba expects fourth-quarter 2016 and fiscal 2017 EPS of $0.26 and $0.95, which are in line with and $0.04 above consensus, respectively. The analyst, who maintained his Hold rating on the stock, assumes continued weakness in the North American retail sector, comparable sales and a slightly lower operating margin year-over-year.

“We expect investor focus to primarily be on NA Retail and NA Commercial top-line growth and profitability trends, NA Retail store closings, and management's ongoing expense reduction initiative,” Chukumba wrote in a note.

Chukumba said he'd become more positive on the stock if Staples shows sequential improvement in comps and profitability in its North American retail and commercial lines, and delivered increased stockholder returns, including a quarterly cash dividend increase and/or a resumption of share repurchase.

Office Depot's Strategic Plan

Rival Office Depot Inc ODP reported an EPS beat for the fourth quarter, while sales slightly lagged behind the street view.

Office Depot’s new CEO Gerry Smith said he's developed a three-year strategic plan that includes "profitability improvements" and "a commitment to shareholder returns." The company said it expects to close 75 locations during fiscal 2017.

Chukumba, who has a Hold rating on Office Depot shares, said he's impressed by Smith's background, which includes 10 years at Lenovo Group Limited (ADR) LNVGY, and his clear direction on how to improve the company's performance.

Smith will mainly focus on supply chain improvement opportunities and the potential to leverage the retail footprint, the analyst said.

“All that said, we believe the proof will be in the pudding, and note Office Depot continues to face significant secular and competitive headwinds, including the rapid emergence of Amazon.com, Inc.AMZN in the delivery business,” Chukumba said in the Loop Capital note.

For context, Amazon recently won the large U.S. Communities contract, and perennial industry leader Staples is also intently focused on growing its B2B segment. Office Depot and Staples called off a merger in May 2016 following antitrust concerns.

Chukumba has a price target of $10 on Staples and $5 on Office Depot shares.

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