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Staples Plunges in One of Its Worst Sessions Ever

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A post-earnings sell-off in Staples (SPLS) had the office-supplies retailer's stock in line to record one of the ugliest days in its 24-year history as a public company.

Following a weak earnings report and a lethargic forecast, Staples slumped 14.9% to $14.33 on Wednesday, with volume reaching triple the average of a normal day two hours into the trading session. Staples had its initial public offering in 1989, and since then, it's only twice had a larger percentage decline than the current pullback. According to FactSet, the worst single performance was March 2, 2000, when it fell 17.8%.

Staples chart

More recently, Staples slumped 14.6% last Aug. 15, also in the wake of earnings that investors didn't like, and closed at $11.49. That was what is now the fourth-steepest drop for Staples during a market day. The stock did turn around in the months afterward, and from that point through Tuesday's close it was up 46.5%, nearly three times the increase of the S&P 500, as the chart above shows.

But back to the present. The latest plunge came after Staples posted second-quarter sales of $5.31 billion, down 2% from a year ago, and earnings of 16 cents a share. Analysts were calling for revenue of $5.37 billion and a profit of 18 cents. With the quarter weaker than expected, the company lowered its forecast, saying it now foresees earnings of $1.21 to $1.25 a share for the full fiscal year. Staples earlier had projected $1.30 to $1.35, while analysts had been looking for $1.32.

Staples' valuation was bumping up against or exceeding its five-year averages in several measures, including its forward price-to-earnings ratio, coming into the day. Adding in the fact that the stock closed the prior session at $16.84, which was $1.40 above Wall Street's average target, and that, as previously noted, it's gained nearly 50% in the past 12 months, the mix was right for a fall if it were to stumble. Shorts had taken some degree of notice already, building a position that totals 9.3% of the float. At 61.7 million shares short as of July 31, that's up 3.4% from the previous month.

Staples valuation table

Beyond Staples, a number of retailers have posted poor earnings this quarter, signaling that consumers are being cautious with their spending. Staples noted that same-store sales in its North American stores fell 3%, from a combined decrease in traffic and order sizes, and that overseas operations underperformed, though it's hardly alone in having to explain away a miss. Broader retailer Target (TGT) also said this morning that its full-year profit would be sluggish, sending its stock down 3.5%.

[Staples added that changes in technology were affecting its core business. The transcript of the conference call that followed the earnings report can be accessed here.]

There were some notable exceptions to retailer earnings this week, including Best Buy (BBY), Home Depot (HD) and Lowe's (LOW), which all beat analyst expectations and saw at least an initial pop in shares.

Retailers as a whole, measured by the SPDR S&P Retail (XRT) exchange-traded fund, are 31% ahead of where they were last year at this time. However, the downbeat earnings have weighed on the group this month, pushing the ETF to a loss of 3.4% going back to Aug. 1.

What's next for Staples? Will it rally again from here? Or is it, and the rest of retail, going to struggle to attract shoppers?