Office Depot blames Q1 earnings miss on uncertainty over Staples merger

Dive Brief:

Office Depot Chairman and CEO Roland Smith on Tuesday blamed the office supplies retailer's disappointing first-quarter 2016 results on uncertainty around its proposed acquisition by rival Staples.
Office Depot’s North American retail sales fell 8.9% to $1.51 billion in Q1, compared to $1.7 billion in the year-ago quarter, due in part to store closures. North American same-store sales declined 1%. First-quarter international sales also dropped 10% year over year to $700 million on the strong dollar, store closures required by European regulators over the Office Depot/Staples deal and market pressures overseas.
Overall Office Depot earned $46 million during the first quarter of 2016, compared with $45 million a year earlier. Earnings were flat at 8 cents, and revenue fell 9% to $3.54 billion. Thomson Reuters analysts expected per-share earnings of 12 cents on revenue of $3.62 billion, according to the Wall Street Journal.

Dive Insight:

The proposed merger between Staples and Office Depot has undergone a series of ups and downs, with certainty and doubt coming into play intermittently since Staples made its $6.3 billion overture last year. European regulators seemed to look askance at the deal until the rivals agreed to shed stores and portions of their business-contracts segments, and the deal finally garnered European Union approval in February.

The U.S. Federal Trade Commission has been adamant that the combined Staples/Office Depot's resulting dominance in the business contracts space would impede competition. But last month, an exchange between U.S. District Court Judge Emmet Sullivan in the District of Columbia and an Amazon Business executive seemed to put the FTC’s antitrust argument in jeopardy, because Amazon’s business supplies unit has made greater strides into the space than the FTC has maintained, and therefore poses a significant threat to Staples' and Office Depot’s business contracts efforts.

During last week’s closing arguments, FTC attorney Tara Reinhart cited evidence indicating that both Staples and Office Depot consider the other its biggest rival. While the FTC successfully blocked a proposed merger between Staples and Office Depot in 1997, pointing to evidence then that prices of office supplies were lower in areas where both companies operated stores, many believed that increased competition from online retailers and general merchandisers like Wal-Mart would smooth things this time around, as it did when the FTC allowed Office Depot to acquire rival Office Max in 2013.

Business contracts, rather than the actual retail business, have emerged as the major sticking point in the Staples/Office Depot matter. Antitrust watchdog advocates raised the issue over the summer, urging the FTC to take a close look, and in December, after the FTC filed the federal complaint now being heard, Staples offered to divest itself of a chunk of that business.

In all, the case is expected to be decided by the court next month, and experts say it is simply too close to call. In its investor materials Tuesday, Office Depot maintained confidence in the proposed merger but said the ongoing legal wrangling is undermining its bottom line.

“The protracted regulatory review of the pending Staples acquisition continues to have a substantial disruptive impact on our business,” Office Depot's Smith said in a press release announcing the company's Q1 earnings. “Our North American Business Solutions Division and International Division are more impacted by this disruption and accordingly, both failed to meet our sales and profit expectations this quarter. In spite of the uncertainty surrounding the acquisition, our associates around the world continue to demonstrate focus, drive and dedication as we finalize this process.”