Staples (SPLS) and Dick's (DKS) Slip as Box Stores Continue to Disappoint

Meng Meng |

The soft economy and sluggish consumer activities have biten deeper into earnings of big box stores this quarter.

Staples Inc. (SPLS) declined 13 percent to $11.64 a share after reporting earnings that missed analysts’ estimates on Tuesday. Home Depot (HD) also reported a less-than-expected profit growth, while Dick’s Sporting (DKS) ended the first quarter with a sharp decline in golf and hunting revenues.

The woes of stock market also reflected in major exchange traded funds, where investors remained bearish on retailers’ ability to turn around.

SPDR S&P Retail ETF (XRT) , which closely follows the retail block of S&P, was down 2.56 percent to $81.71 Tuesday, compared with 0.76 percent decline of the S&P 500. The Merrill Lynch Retail HOLDRS ETF (RTH) , another barometer of the market, fell 1.39 percent to $57.54 per share that same day.

Staples Resorts to Cost Saving

Two month ago, Staples announced plans to close roughly 12 percent of North American stores and cut $500 million expenses as competitions from Amazon (AMZN) weighs on sales.

This effort has not stemmed the plunging profits as traditional supplies like paper and toner lost favor among a new generation of workers.  

Profit was $96.2 million, or 15 cents a share in the period ended March 31, compared with $169.9 million, or 26 cents a share from the year-earlier period.

Staples is aware that cost-saving strategy alone will not reverse the losses. The company said it expected to step-up investments in online sales and overhaul inventories by increasing electronic supplies such as tablets. 

For the next quarter, the company forecasted earnings between 9 to 14 cents, compared with analysts’ prediction of 21 cents a share.

Home Depot Raises Outlook

Like most retailers, Home Depot disappointed Wall Street last quarter. But warmer weather has already boosted its May sales.

The company is expecting the spring construction season to revive the stagnate home shopping market, but analysts remained skeptical about whether it is going to meet a 4.8 percent revenue growth goal this year.

The U.S. housing market reveals more troubling numbers that could negatively impact Home Depot’s profitability. According to the Wall Street Journal, nearly 10 million homes are worth less than their mortgages. Sales of both previously owned and new homes are on the decline, which sent the homebuilder sentiment to its lowest levels in 12 months.  

Despite the downbeat statistics, Home Depot raised its earnings forecast to $4.42 from $4.38 per share.

Growth is Hard to Come By

As many retailers counts on warmer days to bring back sales, analysts say pent-up inventories has not consume inventories as fast as expected.

Apparel markers such as The Gap (GPS) and Victoria’s Secret suffered high levels of unsold goods. Meanwhile the soft retail good sector in general reported an 8 percent inventory growth.The excess supplies will lead to longer promotions, which might pressure profit margins for the next season.

Adding to these challenges, the whole sector has been trapped in a low price to earning ratio, as many struggle to find a new growth point. For Staples, whose P/E was 100 at its peak in 2001, the indictor of future growth is only 11.7 and is trending lower and lower each year.

Business like Staples could lose more share value if they insist on holding on to their identity as a brick-and-mortar store. When Amazon slams the rest of the industry, experts noted that the only winners in the games are sportswear companies who put an emphasis on their brand names.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
SPLS Staples Inc. 9.64 -0.03 -0.31 5,542,243
AMZN Amazon.com Inc. 740.34 -3.31 -0.45 3,561,307
GPS Gap Inc. (The) 24.30 -0.75 -2.99 7,738,868
HD Home Depot Inc. (The) 129.87 0.40 0.31 3,738,338
DKS Dick\'s Sporting Goods Inc 58.86 -0.26 -0.44 1,552,766
SEMUF Siem Industries Inc. 60.00 1.00 1.69 130

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