Office Supply: That Wasn't Easy

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As an overall sector, retail is intensely competitive. In recent years, margins decreased for even the largest behemoths, such as Wal-Mart, Costco, and Target. Unfortunately, these losses were even more widespread in the office supply sub-sector. In light of these (recent) developments, analysts predict sector consolidation. Recently, Office Depot (NYSE: ODP) and OfficeMax (NYSE: OMX) announced their merger intentions. To be blunt, office supply struggled since the beginning of the recession and is currently fighting for its life. Assuming the merger is approved, one direct competitor, Staples (NASDAQ: SPLS), will compete in a less diversified retail office supply niche.  Let's look at some specifics.

The recent recession decimated Staples:  The last 1-2 years cut its approximately 6% healthy margins below costs, to -0.02%. Office Depot margins suffered even greater losses, weighing in at -0.72%. Upon initial glance, OfficeMax appears the most profitable of the three, sporting a 6.02% profit margin; however this data alone paints an incomplete financial picture. Therefore, let's examine strength of balance sheet of each company respectively:

<table> <tbody> <tr> <td>Company</td> <td>Total Liabilities to Assets Ratio</td> </tr> <tr> <td>Staples</td> <td> 0.48</td> </tr> <tr> <td>Office Depot</td> <td> 0.73</td> </tr> <tr> <td>Office Max</td> <td> 0.71</td> </tr> </tbody> </table>

Lastly, another key aspect to consider: Is the (respective) company big and strong enough to absorb the turbulence of a down market? In brief, Staples is arguably the best positioned to do so, with an $8.75 billion market cap, while Office Depot and OfficeMax are much smaller weighing in at $1.14 billion and $1.04 billion, respectfully. Arguably, given these key metrics Staples seems best poised to survive long-term. However, not without a fight. Moreover, the intensely competitive retail landscape means even keeping afloat long-term will be challenging.

So, what's the net takeaway? As mentioned earlier, expect larger retailers (e.g. Wal-Mart, Costco, Target), those with even larger economies of scale to bury their small office supply competitors on price and they are even begin to compete on selection, product, and inventory. For consumers this trend is a positive development, but for office supply it is not. In brief, attractive "back to school" merchandising and one-stop shopping store sections with lower price points and broader offerings will erode small office supply stocks once mini-monopolies. In sum, given the uncertain economy, high unemployment, decreased consumer confidence, and shrinking disposable income, what was once "easy," as Staples often advertised, could indeed become increasingly difficult. Which leaves the critical question: Will office supply's ink bleed red or finally output in the black? Only time will tell, but my gut has me betting results will remain lackluster if not worse, only the strong will survive--count this sector out.

Analyze Carefully

Scrutinize all (potential) investments. There are wide range of opportunities in the market, including (but not limited to) retail stocks. While, no stock is a panacea, each one has its pros and cons so perform your due diligence prior and during investment. That being said, some stocks are a lot better quality than others. Examining each carefully will pay dividends toward improving your investing acumen and positive ROI. In doing so investors will successfully discern the most attractive investments, office supply, retail, or otherwise, from the broader financial market.


dmercer1 has no position in any stocks mentioned. The Motley Fool owns shares of Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus