Staples Q4 2014 earnings: Sales keep falling. Office Depot merger is needed.

Why Staples’ Terrible Sales Might Be a Godsend for the Company

Why Staples’ Terrible Sales Might Be a Godsend for the Company

Moneybox
A blog about business and economics.
March 6 2015 1:29 PM

Why Staples’ Terrible Sales Might Be a Godsend for the Company

55816539TB008_Staples_Begin
Who still shops here?

Photo by Tim Boyle/Getty Images

Staples has been having a rough day. The office-supplies company posted its eighth-straight decline in quarterly sales. It also said that when sales tallies for the current quarter come in they likely won’t look much better. Shares are down a little more than 2.5 percent to just over $16 in midday trading. And strangely enough, these sour results might be just what Staples needs.

Early last month, Staples inked a deal to buy Office Depot for $6.3 billion. If approved, the merger would combine the two companies into a formidable office supplier with roughly 4,000 stores and more than $35 billion in annual sales. When the same merger was proposed in the late 1990s, antitrust regulators successfully shot it down. To get the merger past regulators this time around, Staples needs to prove that things have changed—which is where weak sales come in.

Advertisement

The main argument for allowing the Staples–Office Depot merger to go forward is that the office-supplies retailing landscape in 2015 is fundamentally different than it was in the late 1990s. Today, we have Amazon. We have Walmart. We have Target. We have Costco and BJ’s and Sam’s Club. When Office Depot merged with OfficeMax in 2013, the Federal Trade Commission wrote in its review that “the current competitive dynamics are very different” from when the Staples–Office Depot merger was proposed in the late 1990s, and that “today’s market for the sale of consumable office supplies is broader.”

Despite those arguments, the FTC is expected to closely scrutinize the latest deal. Even with those other retailers—both in the physical world and online—there are only so many places where companies can place their bulk office-supplies orders. As Bloomberg noted in February, mergers often lead to price increases for consumers, and “letting No. 1 Staples eat its combined competition might leave it with excess pricing power.”

Staples, on the other hand, would like regulators to believe that a merger will not hinder competition, but help it. The logic here is something like Staples is no longer equipped to compete with the big-box retailers and the e-commerce giants of the world, and that once it merges with Office Depot it will be more of a competitive force to reckoned with, thus helping consumers. This may or may not be true, but continually weak sales are certainly a good way to help sell it. “One of the biggest takeaways from Staples’ earnings is the importance of a merger with Office Depot to get this company back to underlying EBIT (earnings before interest and tax) growth,” Credit Suisse analyst Seth Sigman wrote in a note Friday morning.

For Staples' shareholders, two years of declining shares may hurt. But if the FTC approves the merger, they also might have been worth it.

Alison Griswold is a Slate staff writer covering business and economics.