Staples, Inc. (NASDAQ:SPLS) Feels Pain Of Failed Attempt To Swallow Rival

Staples, Inc. (NASDAQ:SPLS) swung to a loss of $766 million in 2Q2016, with payment of its breakup fee relating to the failed acquisition of Office Depot Inc (NASDAQ:ODP) contributing to the loss.

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A $340 million burden

Staples was looking to bulk up its scale to boost its competitiveness in the office supplies business by acquiring rival Office Depot. It agreed to acquire the rival for $6.3 billion, but regulators would not allow the deal to go through as they cited antitrust issues.

With the death of the merger, Staples not only missed the opportunity to enhance its competitive advantage, but was also left with a bill to foot in the form of a merger termination fee.

The company paid $250 million in breakup fees to Office Depot in 2Q2016. But the cost of attempting to acquire Office Depot is running to $340 because there is another $90 million that Staples paid to finance the merger.

Staples’ plan B

After failing to snap up Office Depot, Staples has drawn another plan to increase free cash flow and part of that plan hinges on cost-cutting. The retailer is looking to save $300 million in costs by 2018 and it is closing nonperforming stores to achieve that target.

The company shut five stores in 2Q2016 and is on track to close 50 stores in North America before the end of this year. It has already shut 19 stores in North America so far this year and more stores could be shut in the coming three years as lease agreements expire.

Staples’ interim CEO Shira Goodman also said that they are in the process of shifting their business strategy. For instance, Staples is moving away from product focus so that it focuses more on customers. Additionally, the company is shifting away from retail culture to what the management calls delivery culture.

2Q2016 results

Staples posted an EPS loss of $1.18 in 2Q2016, because of the nearly $1 billion charge the company faced in the quarter. Adjusting for certain one-time items, adjusted EPS was $0.12, flat from a year ago and in-line with the company’s internal guidance of $0.11 to $0.13. Revenue of $4.75 billion fell 4% YoY and missed the consensus estimate of $4.77 billion.

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