Staples' Uphill Battle Continues, Even With Pending Office Depot Merger

NEW YORK (TheStreet) -- There are many places where you can buy pens, paper clips, sticky notes and all the other items needed to run your office. Staples (SPLS), the largest retailer of office products and services in the U.S., would have ranked on any short list of places to get these things. 

However, despite the company's "Easy" slogan, there's nothing easy about Staples' ability to grow sales, and that hasn't been good for its stock. The Framingham, Mass.-based company has posted 17 consecutive quarters of revenue declines.

But Staples wants to get shoppers back into its stores, which is why its pending merger with rival Office Depot (ODP) is so important. However, that's not likely to work. Like Staples, Office Depot, is also struggling, with revenue declines for two straight quarters and 8% year over year on average.

Sure, analysts have grown more optimistic about their future together. But that's mostly from the standpoint of cutting costs and how much money the combined company stands to save annually in merger synergies. But that still doesn't address how competitive the new company will be against Amazon's (AMZN) dominant e-commerce platform.

All told, there are still too many unknowns about the future of the combined company, especially with Wal-Mart (WMT) now entering the fray with unlimited shipping. Do you suppose Wal-Mart, the price leader, won't find a way to ship reams of paper and manilla envelopes at lower prices to undercut Staples? Sure it will.

So ahead of Staples' first-quarter earnings results Wednesday, the stock -- despite being up 22% in six months -- is not a good bet. For that matter, even when looking forward to the next 12 months, there's nothing about Staples' stock that screams value. At $16.50, shares are down over 9% for the year to date and trade at a price to earnings ratio of 78, or four times the S&P 500.

For the quarter that ended April, Staples is expected to deliver 17 cents in earnings per share, down 5.5% year over year, on revenue of $45.47 billion, down 3.2%. For the full year, ending in January, earnings per share of 93 cents is expected to fall 3% year over year, while full-year revenue of $21.97 billion calls for a 2.3% decline.

Business customers who once valued the cost-savings from large bulk purchases no longer care about such things, making the prospect for Staples beating revenue target Wednesday less likely. In fact, you would have to go all the way back to the fourth quarter of 2012 to find the last time Staples posted a quarter where revenue actually climbed.

So investors should stay away. Combined with last week's report showing U.S. retail sales flat-lined in April, now's not a good time to be in retail stocks, much less one of the worst revenue performers over the past two years.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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