Staples is a Sell if it Stays Broken

September 03, 2013, 10:19 am ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Staples, Inc. (NASDAQ:SPLS) shares plunged over 14% after the company reported poor Q2 results, and cut its outlook for full-year. The lack of demand for products from ink and toner to computer accessories led to the disappointing report. Same-store sales declined 3 percent, compared with last year, and the company closed 54 stores in North America. Things do not look good for the office supply retailer, but after an 18% one month decline in the stock, is now the time to buy shares?

Staples is not the only company being hit by a decline in printing demand. Shares of Hewlett-Packard Company (NYSE:HPQ) plunged over 12% following a disappointing quarter. The tech giant has numerous business segments, but printing represented about 21% of HP's total revenue. Staples did say that demand for copy and print services were up. It is possible that if businesses are doing less printing themselves they might be more likely to pay Staples to do it for them.

Staples has never really recovered from its expensive international expansion, and these operations continue to be a drag on sales and earnings, as International sales fell 8 percent in the period ended Aug. 3.  In Europe, the company closed 49 stores in the 12 months through the second quarter. Staples expanded its international unit to build market share as office-supply chains lose business to companies such as Amazon.com and Wal-Mart Stores Inc. International sales peaked at $5.3 billion and fell to $4.4 billion last year, with a $21.2 million operating loss.

Staples has been showing growth in online sales and has been working to lean out its brick-and-mortar business. Over the past year, the company has closed more than 100 brick-and-mortar stores, but web sales grew just 3%, not nearly enough to offset by difficult sales trends in international businesses and weak same-store sales in North America.  Staples web business is the number two e-commerce business, behind only Amazon.com, with $10 billion in web sales. The company may be fighting a losing battle with Amazon though, as it has a 48% product overlap with Amazon and selling those goods at prices nearly 19% higher.

The pending merger with rivals OfficeMax Inc (NYSE:OMX) and Office Depot Inc (NYSE:ODP) might benefit Staples if the failing two companies merger does not go smoothly. The merger will result in stores closing and confusion for their existing customers, which might drive business to Staples.  After the merger, the combined company will have about 2000 stores, while Staples has about 1500, many competing with each other nearby.

Staples best hope is the strength of its online business, as the company sells more than Wal-Mart and Target online now. That is a clear advantage over the newly merged rival, Office Max and Office Depot. The stock has plunged over 18% in the last month, but that does not mean this is a bottom. In fact, according to the real time report offered by Stock Traders Daily, Long-term support has just broken lower, which raised sell/short signals. As long as the stock remains below long-term support, we expect shares to trade lower.

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