Where Will Staples Go Next?

With shares of Staples (NASDAQ:SPLS) trading around $11, is SPLS an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

T = Trends for a Stock’s Movement

Staples is an office products company that operates in three business segments: North American Stores and Online, North American Commercial, and International Operations. The company serves businesses of all sizes and consumers around the world. Business products and services are essential to consumers and producers for day-to-day operations. So long as companies and consumers continue to transact and interact, business opportunities will arise. Look for companies like Staples to see rising profits as consumers and businesses continue to grow across the globe.

Staples released disappointing fourth-quarter earnings results on Thursday morning, reporting profit and revenue that came in well below expectations for reasons ranging from a shorter, more intensive holiday season to a relative dearth of Apple (NASDAQ:AAPL) products in its stores. In an effort to stop the bleeding, the company said that it will close as many as 225 stores across North America by 2015. Staples reported $5.87 billion in fourth-quarter revenue, missing Street expectations of $5.97 billion and marking a 10.6 percent drop over the fourth quarter of 2012. Fourth-quarter operating income came in at $388 million, resulting in earnings of 33 cents per share, a 28 percent drop over the same time last year (on a non-GAAP basis) and 6 cents under the analyst consensus, which was calling for earnings of 39 cents per share.

In accounting for the sales drop, Staples noted the the fourth quarter of 2012 contained an extra week that happened to be profitable but also said that sales were impacted by the cost of store closures — there were 109 closures in the twelve months preceding 2013′s fourth quarter — as well as changes in foreign exchange rates. “I want to be clear. We are disappointed about coming up short,” Staples CFO Christine Komola said during a conference call with investors on Thursday morning, adding that the “competitive intensity during the shorter holiday season as well as unfavorable weather” resulted in sales trends that fell well short of the company’s expectations.

T = Technicals on the Stock Chart Are Weak

Staples stock has been pulling back over the last couple of months. The stock is currently trading near lows for the year and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Staples is trading below its rising key averages which signal neutral to bearish price action in the near-term.

SPLS

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Staples options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Staples options

33.80%

23%

20%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

April Options

Steep

Average

May Options

Steep

Average

As of Thursday, there is average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Staples’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Staples look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

175%

123.6%

-11.11%

-3.7%

Revenue Growth (Y-O-Y)

-10.58%

-3.79%

-3.34%

-3.5%

Earnings Reaction

-15.56%*

-1.56%

-15.32%

2.84%

*As of this writing.

Staples has seen rising earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been disappointed with Staples’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Staples stock done relative to its peers – Office Depot (NYSE:ODP), Best Buy (NYSE:BBY), and United Stationers (NASDAQ:USTR) — and sector?

Staples

Office Depot

Best Buy

United Stationers

Sector

Year-to-Date Return

-28.4%

-10.6%

-37.8%

-4.66%

-19.36%

Staples has been an average performer, year-to-date.

Conclusion

Staples provides essential business and consumer products to people operating in a large number of countries and industries. The company released disappointing fourth-quarter earnings results on Thursday morning. The stock has been pulling back over the last couple of months and is currently trading near lows for the year. Over the last four quarters, earnings have been on the rise while revenues have been decreasing. Relative to its peers and sector, Staples has been an average year-to-date performer. WAIT AND SEE what Staples does this coming quarter.

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