Staples' Merger With Office Depot Failed -- Should Its Investors Celebrate?

Editor's Note: This article was originally published on Real Money at 2:30 p.m. on May 18.

After more than a year of uncertainty, Staples (SPLS) investors should be celebrating a return to normalcy as the company's stock performance is no longer tied to a failed merger with Office Depot (ODP) - Get Report .

Staples' stock is back to trading on its own merits, and after its latest quarterly earnings beat, shares were higher in Wednesday morning trading. But weak North American same-store sales that fell 4% in the quarter and lackluster online sales that rose just 1% weighed on the stock in afternoon trading.

"We delivered a solid first quarter and we made good progress on our critical priorities," CEO Ron Sargent said in the earnings release. "We grew sales in key categories beyond office supplies, drove growth in our mid-market contract business, and improved customer conversion in stores and online. We plan to build on our momentum as we pursue our strategic plan to enhance long-term value."

Year to date, Staples shares are down about 12%, while over the past 12 months the stock has fallen more than 45%.

Staples saw first-quarter operating expenses fall 8.3% to $1.15 billion, while revenue also fell to $5.1 billion from $5.26 billion. The company also reported adjusted earnings per share of 17 cents. Analysts on average were expecting the company to report earnings of 16 cents per share on revenue of $5.09 billion.

"These results demonstrate management kept its eye on the ball during the prolonged Office Depot merger review process -- which we believe positions Staples well to take market share from its dazed and confused primary rival," BB&T analyst Anthony Chukumba wrote in a note today.

While the company's latest quarter showed signs of promise, sector headwinds and increased competition -- though not necessarily from Office Depot -- could hinder the company's return to normalcy.

Now that it is officially competing against Office Depot once again, Staples is confident in the market share lead over its rival. Customer acquisition and retention have been strong, according to the company, while mid-market growth and categories outside office supplies are integral aspects of Staples' growth with which Office Depot can't compete.

During the conference call following the earnings release, Staples executives detailed the shortfalls in the Federal Trade Commission's case against the merger, but maintained that they would not appeal the judge's decision. Instead the company said that it would pay the $250 million breakup fee due to Office Depot as part of their agreement.

Staples is planning to close 50 stores this year as it looks to optimize its retail network. Half of Office Depot stores are within a mile of a Staples store, while about 70% of Office Depot stores were within 10 miles of a Staples store, company executives said during today's earnings call. Staples identified density as an industry-wide problem that needs to be corrected going forward.

This is yet another reason why Growth Seeker holding Amazon (AMZN) - Get Report presents such a danger to both companies. The online retailer does not have to worry about store density or spacing stores at appropriate distances.

"Without the benefit of synergies, both Staples and Office Depot have less appealing profit outlooks," Jefferies analyst Daniel Bindersaid in a note last week following the judge's decision. "They will continue to face secular declines, and each company's business is vulnerable to competition from online and nonoffice supply retailers."

Office Depot currently has about $1.47 billion in debt with $879 million in cash, plus the $250 million it is set to receive from Staples tomorrow. Staples on the other hand has $2 billion in liquidity, including $946 million in cash.

Former Office Depot CEO Steve Odland, who still owns shares in the company, told CNBC last week that Office Depot's failure to merge with Staples could spell the end of the company. "They have nowhere to go now. I think that they're going to have to try to sell the company off in pieces in order to recoup the value," Odland said.