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Two Office Suppliers on a Dismal Run

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The office supplies industry is grappling with secular as well as cyclical headwinds. Demand for office products has been curbed by the latest technological advancements. Smartphones, tablets and laptops are fast emerging as viable substitutes to paper-based office supplies.

The recent global meltdown and deteriorating credit markets have resulted in lower business and consumer spending, and in turn a prolonged weakness in the office products’ sector. As big-ticket items face declining demand, top line bears the brunt. We foresee this softness in the sector to leave a near-term impact.

Additionally, heightened competition from discount department stores, warehouse clubs and online giants such as Inc. (AMZN - Free Report) has squeezed out a large share of profits from office supply retailers.

The sector is still to tide over these challenges that have prevailed over the past few years. The analysts are compelled to be less constructive on the future of Office Depot, Inc. (ODP - Free Report) and Staples, Inc. . Investors are clearly losing confidence in these office supply retailers. If we look at the past performances of these two stocks a dismal run is revealed. Both the stocks hold a Zacks Rank #5 (Strong Sell). 

Shares of Office Depot have crashed 23.5% year-to-date. Looking at the company’s performance in the trailing four quarters, it has missed the Zacks Consensus Estimate by an average of 122.2%. In the most recent quarter, earnings fell short of the estimate by 200%. As a result, the Zacks Consensus Estimate has been portraying a downward movement. For 2014, it has plunged 56% to 11 cents, while for 2015 it has plummeted 42.1% to 33 cents in the last 60 days.

Staples has also seen a downslide, with shares falling 22.1% so far in the year. The company registered negative earnings surprises over the trailing four quarters with an average miss of 8.2%. In the last concluded quarter, Staples missed the Zacks expectation by 15.4%. Consequently, estimates for Staples have shown a downtrend since it posted the results. For 2014, the Zacks Consensus Estimate has fallen 16.8% to $1.09, while for 2015 it has dropped 18.9% to $1.07 in the past 60 days.

Both companies are taking a rational approach for returning to the growth trajectory. Their focus on cost containment, underperforming store closures, store space optimization, introduction of smaller format stores, bringing more products under their ambit and e-Commerce initiatives should reap results over time. Until then, we abstain from being constructive on the two stocks.

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