Staples: Get More Radical
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Staples (NASDAQ: SPLS) has joined companies like Hewlett-Packard and Microsoft which started a category and now have to transition to something else. Along the way to that new Promised Land, it's too easy to get on wrong paths. That's where Staples seems to have been. The question investors should have is if can find the right one and quickly enough. The contiuned low stock price, following Jim Cramer's sell rating last spring, demonstrates their lack of confidence that the company can achieve a transformation.
Back in 1986, Staples invented the office supply superstore in 1986. The timing was just right since corporations were downsizing and many of the laid-off were starting small businesses. That category became mature and discounters like Wal-Mart (NYSE: WMT) now provide just as many specialty office items like copier paper and for less than the list prices at Staples. For example, Wal-Mart's paper begins below $3 and goes up to about $5. Staples' begins at about $5 and goes north of $7. Now and then there is a rebate of up to $2.99 per 500 sheets but that takes weeks. Where Staples remains successful in that niche is in its online B2B North American Delivery (NAD) part.
Clearly change was needed. Staples added on consumer electronics, which dominates the front of the store. That muddied its brand identity. Worse, the timing this time was exactly wrong. Evidence of that is the sorry state Best Buy (NYSE: BBY) is in. That retailer had overexpanded its brick and mortar retail in consumer electronics and was in trouble even before Apple retail ate just about everyone else's lunch. Unlike Apple's passionate staff, Best Buy's front lines on retail seem disinterested. In the North Haven, Connecticut location they are frequently bunched together, talking with each other.
Most recently, Staples has introduced one item - mobile phones - which has been promising. In addition, it has broadened its B2B NAD line of business with facilities/breakroom supplies. That also seems promising. The issue is if it can ramp out in these new directions cost efficiently, fast enough, and with decent operating margins.
Staples' Q2 earnings report showed total sales at $5.5 billion, down 6% from the comparable period a year earlier. Its revenue engine NAD, which some call the “next AMAZON (NASDAQ: AMZN),” had sales of $2.4 billion, a decline of 1%. That was primarily due to the pull-out of 2 contract customers and less buying by others including state and local government. The government piece represents depressed segments.
Of course, European exposure hurt results. It will continue to. The company has been addressing that. However, European operations aren't what are attracting negativity from stock watchers. Earnings per share (EPS) were $0.18, well below analyst expectations of $0.219.
During the Staples August 15 earnings call, Jeffries & Company analyst Daniel T. Binder observed, “ … it seems like it (changes being made) maybe needs to be a little bit more radical …” In particular, Binder, like myriad of the others participating in the call, was hammering more store closures, not just reduction of overall square footage, less space devoted to declining categories like boxed software, and re-negotiating lower leases. This mandate applies to much of distressed niches in retail like consumer electronic products. In March, Best Buy announced it would shutter 50 of its 1100 stores. Investors didn’t view that as enough. The chain, which has become a place to check out products (showcasing) before buying them online, has had losses in 8 of the past 9 quarters. Its stock is at 17+, with a 52 range of 16.25 to 28.53. It hasn't seemed to have gained from the research online/buy offline (ROBO) more recent trend.
Staples, which said it will cut space by 600,000 square feet by the end of 2012, has dug in its heels about maintaining stores which are profitable. The tone is confidence in its ability to orchestrate the Schumpeterian force of creative destruction. It reported that in Q2 it opened 6 stores and closed 5 and it would be aggressively seeking deals on lease renewals.
Yet, the growth categories like facilities/breakroom, where sales increased 20% in Q2, can be sold primarily if not totally online. Binder’s point about a little bit more radical can logically extend to bigger business issues. At the top of the list is if Staples, whose earnings and branding strength is now B2B, should remain in B2C. Once out of the latter it can significantly reduce retail space, maintaining it only for B2B services ranging from tech support to printing where big customers are located. Freed from the cost of brick and mortar retail, especially that of manpower, it can take on Amazon. Already through AmazonSupply, the company provides about 500,000 B2B items including office supplies.
Obviously, Staples is experimenting in how to compete B2B online. It has, for example, provided best customers with upfront discounts instead of the backend ones from its loyalty reward program. It has eliminated delivery charge for some. And, like Amazon, it has been sacrificing gross margins to build an online customer base. Frequent email blasts provide coupons for significant savings by ordering online. Liberated from leasing and much of manpower expense it could morph into a formidable competitor to Amazon.com.
Other moves Staples has made are encouraging in that it is approaching its business as a work in progress. For example, in fall 2011, it introduced the mobile phone store within a store in some locations, operated by Wireless Advocates and the vendor’s own employees. Staples is eliminating that middleman and staffing the business in-house. It reports sales as on an upward trajectory and more cost efficient because of the change. Another cost containment move, unlike that of Facebook and Groupon, is reducing marketing expenses. In the earnings call it notes it is shifting “away from higher-cost traditional marketing vehicles” to “around deals and special-pricing and traffic-driving offers.”
Given Staples’ strong branding in the business sector, it could convert to a or maybe even the dominant B2B enterprise which primarily operates online for products ranging from toner and breakroom furniture to services like technical troubleshooting and volume printing. None of that needs to be transacted via brick and mortar, except as a convenience gesture for markets with clusters of large customers.
These are not ordinary times, not for businesses, not for investors. Staples cannot take its time letting go of the old category and mixed model of brick and mortar and online, B2C and B2B. The company has to take radical action, now.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Best Buy, and Staples. Motley Fool newsletter services recommend Amazon.com and 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.If you have questions about this post or the Fool’s blog network, click here for information.