Staples in Bears’ Grip as Amazon Rivalry Curbs Growth

Options traders are joining analysts and short sellers predicting Staples Inc.’s best days are behind it.

Contracts that pay out should shares of the largest U.S. office-supply chain fall are the most expensive relative to bullish calls in 16 months, according to data compiled by Bloomberg. Short interest in Staples more than doubled since December, making it the seventh-most shorted stock in the Standard & Poor’s 500 Index, Markit data show. The company reports results tomorrow.

Rising competition from Inc. and sluggish demand for business supplies are making it harder to buy the company’s turnaround plans, said Brian Yarbrough, an analyst at Edward Jones & Co. in St. Louis, who has a hold rating on the shares. While Staples said in March it will shut down 225 stores to cut costs, analysts estimate sales and profit will shrink for the fifth straight quarter.

“Businesses don’t fax anymore, they don’t print a lot anymore,” Yarbrough said by telephone. “It is a positive that Staples is closing stores, shrinking the square footage of stores, but we’re talking about an industry that’s under constant pressure from Amazon, and unfortunately, there’s no value-add for Staples.”

Analysts at brokerages are more bearish on Staples than any other stock in the S&P 500 except Pepco Holdings Inc. They predict it will fall 15 percent to $11.27 in a year, according to data compiled by Bloomberg. Analysts are most bullish on Amazon, forecasting the e-commerce giant will surge 42 percent.

Short Interest

After rallying 39 percent last year, Staples has tumbled 17 percent in 2014, compared with the S&P 500’s 1.6 percent advance. Even so, bearish bets have increased. Short interest jumped to 14 percent of Staples’ outstanding shares on May 15, according to data compiled by Markit and Bloomberg. That compares with 6.2 percent in December.

Analysts project first-quarter earnings will plunge 20 percent, while sales will slide 4 percent, according to data compiled by Bloomberg. Staples said on May 6 that it will close as many as 225 stores in North America and reduce costs by as much as $500 million by the end of 2015. Last year, Staples shut 42 stores in North America.

The U.S. office-supply stores industry has witnessed an annual decline of 1.8 percent between 2009 and 2014, according to data on the website of research firm IBISWorld Inc.

Implied Volatility

Options pricing in a 5 percent decline in Staples shares cost 3.6 points more than wagers betting on a 5 percent increase, according to one-month implied-volatility data compiled by Bloomberg. That compares with the one-year average of 1.6 points. The relationship reached 4.3 points on May 15, the highest since January 2013.

Puts with an exercise price of $12 that expire in June had the biggest ownership, according to the data. Open interest for the contracts more than doubled on May 14 to 16,536.

Kirk Saville, a spokesman for Staples, didn’t respond to voice mails seeking comment on the options trading.

Staples offers investors good dividends and has strong free cash flow, according to Adam Strauss at Pekin Singer Strauss Asset Management Inc. in Chicago. The company’s dividend yield of 3.6 percent is among the top 10 percent of S&P 500 companies, data compiled by Bloomberg show. Free cash flow yield is 8.5 percent, compared with the broader measure’s average of 4.8 percent, according to the data.

Improving Pricing

Strauss said the merger between Office Depot Inc. and OfficeMax Inc. should also help by improving pricing, and he said he likes the commercial-delivery business of Staples, which accounted for about 35 percent of sales last year.

“You have almost a 4 percent dividend, so you’re paid to wait for management to turnaround the company,” Strauss, co-manager of the $300 million Appleseed Fund, which holds Staples shares, said by phone. “A lot of the short selling is related to the fact that Staples is a retailer. There are investors who think retail is in a secular decline because of competition online, but that’s only a part of Staples’ business.”

Shares tumbled 15 percent on March 6 after the company’s profit forecast trailed analysts’ estimates. Options are implying a one-day move of 7.7 percent in Staples shares after it reports earnings tomorrow. In the last eight quarters, the stock rose or declined 8.1 percent on average after the results.

The Chicago Board Options Exchange Volatility Index, the gauge of U.S. stock volatility known as the VIX, climbed 1.3 percent to 12.60 at 10:20 a.m. in New York today. Its European counterpart, the VStoxx Index, gained 2 percent to 16.11.

“The macro environment continues to pressure the formation of small and medium businesses, which is a growth driver for Staples,” Joe Feldman, a New York-based analyst at Telsey Advisory Group, said by phone. He predicts shares will fall to $12 each in a year. “You need to see sales improve for this stock to work. They can do cost-cutting initiatives, efficiency initiatives, but you can’t cost cut your way to growth.”

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