The Exchange

Staples Earnings: Investors Should Heed These 3 Points

The Exchange

By Marek Fuchs

Staples (SPLS) gives good call. And they’re going to have to when they take to the phone lines at 8 a.m. Wednesday after reporting their fiscal fourth quarter and full-year 2012 earnings. It’s not the earnings, which will be lukewarm at best, that figure to stand as a crucial topic of conversation.

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Traders at NYSE: Credit Reuters

Rather, Staples made a series of bumptious claims on their conference call back in November when they reported earnings that were pretty much in line with expectations on markedly disappointing sales.

Thanks to the happy talk and high promises of the conference call, however, traders forgave Staples for the sin and transgression of a terrible top line. They trusted the company, granting them the benefit of a significant level of potential doubt.

Fair enough. After all, if Staples holds to those high promises, everything will be copasetic.

Promises made

But in order to determine if all the November forgiveness was warranted and stands a chance of holding through March and beyond, let’s remember, as we bear down on their fourth-quarter call, just what it is Staples claimed and promised.

And take caution: After all, the recently announced merger of OfficeMax (OMX) and Office Depot (ODP) will be a big topic of conversation on the conference call, quite possibly obscuring memories of those old promises. The nearly $1 billion merger will transform the competitive landscape by creating a team of Staples rivals, who may pool purchasing power and save costs or, quite possibly, unravel under the cumbersome weight of expectations and duplications. Staples will probably speak at length about the opportunities and challenges the defining merger will bring about. But for your purposes, that’s long-term and a bit theoretical.

The company has more pressing concerns – and promises to keep. With its free shipping, Amazon (AMZN) has been running the office super stores through the veritable ringer. Costco (COST) is no friend either. Business from strapped government customers is down and traditional items – such as paper and, well, staples – are being replaced by digital alternatives. And Europe? Don’t ask.

Staples is getting squeezed from all sides (see: those 3rd quarter sales, which were down 1.4% versus the previous 3rd quarter, on a constant currency basis.) But – and here’s the key – Staples defied expectations by holding to earnings estimates for the fourth quarter of about .45 cents on revenues of $6.72 billion in sales. And they talked that pretty big game. Now is time to hold their promises up to the light of fourth-quarter results. Pay particular attention to:

1) Windows

On the third quarter call in November, Chief Executive Officer Ron Sargent said he had a good hunch about Microsoft’s (MSFT) Windows 8. Although Windows 8 was only available in the last two days of the third quarter, Sargent claimed that indications were giving him good vibes. "The early response from our customers has been positive," he said, adding: "We look forward to continued momentum from Windows 8 throughout the holiday season.” Bend your ear toward any less enthusiastic mention of Windows 8. If Sargent fails to mention Windows altogether, that’s a particularly bad sign.

2) The European Campaign of Cost Savings

Also in November, Staples said that they were in the early stages of a yearlong campaign to close stores and cut costs by firing employees in Europe, where business has all the charm of a claw hammer. Nearly 50 stores were on the chopping block, so make certain a meaningful number have already been chopped. If the costs aren’t getting cut a decent clip, traders could turn. Presumably, European business is getting no better, so cutting costs to ribbons is their only chance. They promised. Now see what, if anything, they deliver.

3) Hurricane Sandy

If Staples has the temerity to blame a surprise under-performance on any lingering effects on Hurricane Sandy, just remember that Chief Financial Officer Christine Komola promised it wouldn’t happen. She termed the potential disruptions "modest” and promised they were already reflected in forecasts. There’s not a great chance that Staples will try to lay trouble at the feet of Sandy, but keep an eye half-peeled, just in case.

4) The Expectations Game

Traders were so relieved Staples held fast to expectations last go round that veering from that on Wednesday will prove extra disappointing. Stay alert for a heightened, pent-up reaction to any tweaking of first quarter or 2013 numbers. Traders who give the benefit of the doubt once tend to react with a vengeance when asked to again.

Make no mistake about it: Staples does give good call. But calls, over the long-haul, can only be as good as the underlying business. And Staples’ business is troubled.

Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.

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