Staples: Store Closings Part of an Ugly Trend

March 11th, 2014
in contributors

Money Morning Article of the Week

by David Zeiler, Associate Editor, Money Morning

The news that Staples Inc. (NASDAQ:SPLS) plans to close 225 stores illustrates a grim trend in retail that will accelerate over the next couple of years.

Follow up:

The store closings are expected to save Staples $500 million by the end of 2015 and represent 12% of the office supply chain's 1,846 North American stores.

Staples Chief Executive Officer Ronald Sargent said,

"Our customers are using less office supplies, they're shopping less often in our stores and more online, and their focus on value has made the marketplace even more competitive".

The announcement on store closings came amid a disappointing Q4 earnings report. The company's earnings per share of $0.33 were well below expectations of $0.39. Revenue slipped 11% to $5.87 billion, which also missed expectations.

Guidance was poor as well, with Staples warning of lower profits and revenue for the current quarter.

Investors punished Staples stock, which slumped 15% to $11.30 in mid-day trading. So far in 2014, SPLS is down nearly 28%.

Staples' woes are just the latest example of how retail stocks are struggling with the rise of e-commerce, which is often both more convenient and cheaper.

Note: We've a lot of market volatility this year - but that doesn't have to be a bad thing. Investors can make it work for them. Here's how to trade the market's most powerful index...

While retailers have made the move online - half of Staples' sales come from its website - the costs of maintaining a large number of physical stores that are generating less and less revenue has become a growing burden.

The office supply subcategory has already been hit hard. Shrinking sales forced rivals Office Depot Inc. (NYSE:ODP) and Office Max Inc. to merge last year.

Analysts had little sympathy for Staples.

While cutting their rating from "buy" to "neutral, Janney Capital Markets analysts said in a note to clients that,

"The company had years to close and shrink the store base and stuck to its guns, and that decision is likely to impact them for the foreseeable future. This is too little, too late".

Staples Inc. (NASDAQ:SPLS) Not Suffering Alone

The Staples store closings come on the same day that Children's Place Retail Stores (NYSE:PLCE) announced it would close 85 more stores through 2016 in addition to the 41 it shuttered last year.

And RadioShack Corp. (NYSE:RSH) said on Tuesday that it planned to close 1,100 of its approximately 5,200 U.S. stores.

It's all part of a wave of closings, consolidation, and layoffs hitting brick-and-mortar retailers of all stripes as their customers migrate online to merchants like (NASDAQ:AMZN).

Earlier this year, JCPenney Inc. (NYSE:JCP) said it would be closing 33 stores and cutting 2,000 jobs, while Macy's announced plans to close five stores and lay off 2,500.

Wells Fargo analyst Paul Lejuez told CNBC that,

"There is often a mismatch between the number of stores retailers operate today compared to how many they would choose to operate if they had to do it all over again".

Store closings like we're seeing at Staples are becoming increasingly common as retailers desperately try to adjust.

Michael Burden, a principal with Excess Space Retail Services, told CNBC that,

"I believe we're going to hear a lot more announcements in the coming months. It's "an indication that there is a shift in the retail environment and it's one that will continue."

Another source of pressure on retailers is the drive to raise the minimum wage to $10.10, an issue that the Democrats have put front-and-center for the November mid-term elections. Here are the top 10 U.S. companies with the most minimum wage workers...

Related Links:

  1. Bloomberg News:
    Staples to Shut 225 Stores to Trim $500 Million in Costs
  2. CNBC:
    A 'Tsunami' of Store Closings Expected to Hit Retail

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