Staples: The Sears Problem

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

In my opinion, Staples (NASDAQ: SPLS) is undervalued about 30%. The stock is at 16.50, with a 52-week range of 11.98 to 21.50.  Some reasons for this are obvious.

The Street is down on the office supply sector. Staples’ two main competitors, Office Depot and OfficeMax, are viewed as takeover targets. In fact, the speculation is that Staples could likely be the company doing the taking over. There’s investor concern about the U.S. recovery, where 60% of Staples’ sales come from. That has become critical because in its International segment Europe and Australia haven’t rebounded.  Also, there’s more competition. Brick and mortar low-end general retailers such as Wal-Mart, Target, and Costco are chasing the office supply product dollar. Online, is doing the same.  That's because the roller-coaster economy is creating more entrepreneurs.  According to U.S. Census figures, there are about 38 million home businesses.  Research firm IDC adds that there are also at least 34 million households with home offices.  

Less obvious is that Staples, just like Sears (NASDAQ: SHLD), has a confused identity. And that’s hobbling both. The good news is that, for both, the fix could be simple.  In FORBES, retail expert Laura Heller argues that Sears could survive and thrive if it pruned back to its roots in hard goods, ranging from tools to tires. That’s where its core competence was. That's where it should be now. What Staples has to prune is its non-electronics past in terms of its merchandise. Otherwise it's not going to do the job that needs to get done to develop its core competence in high tech products and services customized for small business.

In 1986, Staples started with the innovative concept of serving small business. Corporate America was downsizing. Many of those pushed out formed small businesses. Staples also developed a second line of business, North American Delivery which primarily serves mid-sized companies and the Fortune 1000.  That segment is separate from North American retail and more stable.

Early merchandise ranged from high end stationary appropriate for commercial correspondence to shredders.  Soon enough came faxes, printers and cartridges.  Then some brandname PCs were stocked. Only recently has the company embraced electronics products such as tablets and introduced services analogous to Best Buy’s (NYSE: BBY) Geek Squad.  In select locations it set up a mobile phone store-within-a-store by partnering with Wireless Advocates. Both the actual smartphone and wireless plans are sold. In the store layout, those are all in the front. So far so good. Customers get the message that Staples is there for their electronics business needs. But then the transmission picks up static.

For example, as Best Buy’s executives hammered in their 4Q Earnings Conference Call, connectivity among the devices is the new game. That’s why it’s in its second phase of testing out its "Connected Stores." Apple anticipated this when it stocked retail only with whatever could work together seamlessly.  Staples communicates this online, for example, when it discusses how it goes about connectivity with tablets. Yet go beyond the tablet aisle in Staples and there it is: Merchandise that is a relic of another era.  Why is Staples still giving space to a variety of sizes of mailing envelopes and of pens with different colors of ink? Unlike copy paper for printers, mouse pads, and tables for laptops these have no direct link to being connected.

Puzzling is the recent partnership with Martha Stewart. Through it come about 300 non digital home business organization products such as brightly colored accordian files and post-it-notes. They are available both in the store and online. Early reports were that sales were good. However, this undercuts high tech branding. Also, is the Martha Stewart brand compatible with solutions for small businesses?

And why isn't there a more consistent commitment to mobile? Wireless salespeople for AT&T (NYSE: T) have a month of in-person training.  Those for Wireless Advocates have about a week of actual classroom instruction. Verizon Wireless (NYSE: VZ) retail provides after-purchase training for buyers of smartphones. Wireless Advocates doesn’t. Both AT&T and Verizon corporate wireless stores have mulitiple salespeople always on duty.  Staples has only one.  Yet, at the same time, Staples has launched an ecommerce site which optimizes shopping on a tablet. This has received media attention.  In an interview with MARKETING VOX on Staples' focus on tablet design, its Vice President of e-commerce and business development Brian Tilzer oberves how mobile is really a game changer. It sure is. But Staples has to deliver an unambiguous signal that it is totally in the game.

Heller notes that Sears might be taking the first step in pruning.  It is shopping around its Lands End, another one of its softlines which didn’t flourish.  Staples could take the first step by selling its own softlines items only online.  No vestige of all that should remain in brick and mortar.  What will be stocked in stores will only be what's directly related to small business solutions in a digital age.  Staples could run a contest for videos depicting what kinds of items should be on its shelves for those and only those. My hunch is that paper clips won't be part of the picture. Such a laser-like focus on the now of business reinforces the retailer's roots as the best friend of small business.  It also differentiates it from general electronics retailers.  Staples will be back to being about small business.  Leave the paper clips to Wal-Mart.  Leave the consumer electronics to Best Buy.

Motley Fool newsletter services recommend Staples. The Motley Fool owns shares of Best Buy and Staples. janegenova has no positions in the stocks mentioned above. 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.

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