Fitch Downgrades Staples to Junk on Weak Sales

Fitch Ratings said Friday it had downgraded Staples’ credit ratings to junk, citing increased competition for contract customers and the continuing threat of digital technology to the company’s core office supply business.

As a standalone company, Staples has “limited ability to reverse declines in sales and EBITDA over the forecast horizon,” Fitch said in downgrading its long-term issuer default rating to BB+ from BBB- and the short-term IDR to B from F3.

The rating agency is keeping Staples on a negative watch due to the “uncertain outcome” of its proposed $6.3 billion acquisition of Office Depot. The U.S. Federal Trade Commission sued in December to block the deal as anti-competitive.

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“Should the acquisition close, Fitch would expect to rate Staples within the mid to high ‘BB’ category, depending on asset dispositions and updated views on timing of synergies and debt reduction,” the rating agency said.

While Staples has streamlined operations and cut expenses in the past several years, its sales and EBITDA have declined each year from their respective peaks in 2011 of $25 billion and $2.3 billion. In 2015, sales of $21 billion and EBITDA of $1.4 billion were both 6% below 2014 levels.

In its downgrade notice, Fitch noted that the digitalization of the workplace has hurt sales of core office supplies, ink/toner and paper, which represent around half of Staples volume, while sales of technology products have been weak due to a slowing replacement cycle and saturation of key products such as laptops and tablets.

With the shift toward online sales, moreover, new competitors such as Amazon have emerged, pressuring Staples’ in-store sales, according to Fitch.

Since 2012, Staples’ North American retail sales are down approximately 25% and margins of the combined retail and businesses have contracted from 8.3% to 4.5%.

Assuming the Office Depot deal does not close, Fitch expects flattish annual sales for Staples of around $20 billion over the forecast horizon, with EBITDA ranging between $1.2 billion and $1.4 billion on modest margin declines. If the deal goes through, it estimates pro forma sales of $35 billion.