The office supply industry in the U.S. is in the midst of dramatic change brought on by increasingly stiff competition and the decline of traditionally higher margin product and service offerings.
The increase in online purchases has forced bricks-and-mortar retailers like Staples (SPLS) to compete on price with internet giants like Amazon (AMZN). The expansion of office product categories at major discounters like Walmart (WMT) and Target (TGT) has also worked to cut into Staples’ sales. As the digital age continues to push forward, Staples has also seen a decline in print and paper sales as most office work today is performed on a computer.
To help mitigate losses, Staples plans to close 140 underperforming stores this year. In addition, Staples will continue to spend heavily on advertising to get people into stores and has expanded its product offerings to include break-room supplies, maintenance repair and operational items, mail and ship assortments, medical supplies, gifts and cards for office parties, early education toys and learning aids, retail supplies and organizational accessories.
Staples is not alone in feeling the pain of increased competition, fellow office supply retailer Office Depot (ODP), which acquired Office Max last year, recently announced an increase in the number of its store closures from 150 to 165. With the store closures included in the merger that bring the total to 500 locations.
SPLS: Sales and Profits Continue to Decline
In Staples’ second quarter, sales decreased 2% to $5.2 billion from the prior year beating analyst estimates of $5.16 billion. Profits declined to $82 million from $103 million in the same period the prior year.
North American same-store sales declined 5.8% in the second quarter, but online sales increased 8%. Staples’ first quarter profit was down 43% to $96.2 million from $169.9 million year over year due to softer sales and less store traffic. Staples continued its cost-cutting initiatives securing $150 million in year-to-date annualized cost savings as part of its two-year plan to eliminate $500 million of annualized costs.
SPLS: Downward Spiral
Staples stock has dropped from close $16 per share in January to its current level of about $12.5 per share, which is up slightly from an $11 trading range over the last three months as Staples beat analyst second quarter sales and earnings expectations.
Staples has been in bad shape for some time. The best hope for management may be to try to capture market share away from Office Depot during its integration of Office Max. Staples has also shown good progress expanding its commercial business which grew nearly 3% last quarter . Staples’ internet sales at staples.com continues to expand, which may leave Staples as a sole survivor of a declining business niche.
In addition, the Staples board approved the payment to management of a “special cash bonus” last year even though they did not reach their targets. I think paying cash bonuses to staff to help retain good employees during this difficult time is a good idea, but any bonus that executives receive during a turnaround should be restricted to stock or stock options in order to ensure that management and investor interests are aligned. So, the decision to distribute special cash bonuses last year leads me to question the competency of Staples’ board.
Investors should avoid SPLS stock until the fate of office products industry and Staples is sealed.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
