What's Going Wrong With Office Supply Superstores?

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Staples Launch of 3D Printing in Los Angeles
Matt Sayles/Invision/Staples/AP
This would seem to be a great time to invest in office supply superstores. Corporate America has been humming along, showing improvement in recent years. The second- and third-largest chains -- Office Depot (ODP) and OfficeMax -- merged late last year, giving the industry one less cutthroat competitor to battle.

However, reality paints a bleaker portrait. Staples (SPLS) reported quarterly results on Wednesday morning, and the country's leading office supply retailer isn't doing so well.

Sales slipped nearly 2 percent to $5.2 billion. The impact of foreign exchange rates at international locations weighed on results, but Staples' top line still would have taken a step back without the currency fluctuations. Adjusted earnings plunged 27 percent to $75 million, or 12 cents a share.

Analysts were holding out for 11 cents a share in adjusted net income and a 3 percent slide in sales, so technically this would be considered a beat. Staples had missed Wall Street's profit targets in three of the past four quarters, so this is a welcome surprise. But it just doesn't seem right to applaud results when sales and profitability are going the wrong way.

Extreme Makeover: Home Office Edition

Earlier this year Staples revealed plans to close as many as 225 of its stores. It shuttered 80 during the quarter and is planning to close another 140 later this year. It's not the first time that Staples has tried to shake things up. It announced a restructuring two years ago as weakness in Europe and the need to update its online platform to compete with Amazon.com (AMZN) pressured its operations.

With half of Staples' orders being placed online these days, it can't afford to ignore Amazon's pricing advantages, even if it's the one backed by local stores and delivery trucks to fulfill orders the next morning. And this is one area that has been a welcome success story.

The retailer announced on Wednesday that sales growth at Staples.com clocked in at 8 percent. The addition of in-store Staples.com kiosks is seeing growth through that channel grow even faster. Interestingly, customers are starting to buy more stuff online beyond office supplies. If a Staples truck is going to be pulling up to a customer's home or office the next day why not load up on items from its widening online catalog?

None of this should find Amazon breaking a sweat. Amazon's sales soared 23 percent in its latest quarter, and business overall continues to decline at Staples.

Taking Care of Business

The success that Staples is having in cyberspace is taking a toll on what's happening at the physical store level. The 8 percent uptick in online sales was more than offset by store closures and a 5 percent dive in comparable store sales.

Slipping sales at the store level isn't unique to Staples. Office Depot reported earlier this month a 3 percent decline in comparable store sales. It's processing fewer transactions, and overall sales also declined when we combine results of Office Depot and the acquired OfficeMax.

The decline in comps for the chains is made even more problematic because Office Depot and OfficeMax have been closing underperforming stores. This should increase visits to the remaining stores as customers at the closed locations drive over to them -- but they must be heading somewhere else.

The merger between Office Depot and OfficeMax should have helped the industry. It should have given remaining operators more pricing power. It hasn't played out that way. Sales fell at Staples and Office Depot last year, and revenue continues to head lower this year.

With the economy improving, are entrepreneurs and small business operators just not spending as much on office supplies as they used to? Have cloud computing, digital delivery and the growing popularity of telecommuting eaten into demand? Something is clearly keeping shoppers away from the office supply superstores, and the fact that Staples is trying to find growth away from office essentials but is still failing to grow its overall sales and profitability doesn't make this a very encouraging niche for investors.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Staples. Try any of our newsletter services free for 30 days.


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19 Comments

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simplenewz

I shop online most of the time now rather than in physical stores. It's nearly always cheaper for me, even with shipping. It's not surprising that stores are suffering....

Sara @ http://www.simplenewz.com

August 24 2014 at 1:21 AM Report abuse rate up rate down Reply
koos458

Office supply stores are not alone in this. Looks like most brick and mortar retail are in for a hard time. Unless I need something right away, I shop on line because it saves me an incredible amount of time and money. Any trip to the store costs at least another $5 for gas and the time, I'd like to think I'm worth $20/hr, so driving to Staples, or wherever, is actually costing me $35 or so in value tacked onto the price of whatever I went out to buy.

August 22 2014 at 12:25 PM Report abuse rate up rate down Reply
Iselin007

The economy stinks for the average person so the office stores gets the traffic that can pay and needs something right now faster than it can be shipped.

August 22 2014 at 11:38 AM Report abuse rate up rate down Reply
Iselin007

You save very little shifting to lower cost between stores because in order to save you money the lower wages of employees means your causing an increase in public assistance!
You pay a lower price the difference is made up by the workers getting assistance from tax payers!

August 22 2014 at 11:31 AM Report abuse rate up rate down Reply
wsplanes

Any business that has survived since 2008 has had to look at every line item. These stores are just too expensive. Yes you can order online but sometimes you just need it now. We shopped our top 25 repeat items and found that we could buy all 25 for less money somewhere else. Walmart turned out to be our best deal for 21 and the Dollar Store for pens, markers, and paper clips. Yes it may take 2 trips and an additional 15 minutes out of the office but the price difference was 26% overall. Our office supplies ran about $14K a year. We took the money and raised employee pay a bit. Pay attention Staples and Office Depot---YOUR PRICES ARE TOO HIGH, BE COMPETITIVE!!!!!!!!!

August 22 2014 at 7:52 AM Report abuse rate up rate down Reply
VincentMVNY

Netflix nixed Blockbusters, Amazon & Kindle are killing all the brick and mortar book superstores,
if you are looking at the horizon and not over it, the future is inevitable, you will be out of business. Brick and mortar retailing is going out of business.
Only the likes of Home Depot and Lowes will survive. At least until Amazon can figure out a way to send you 24 2/4's via drone delivery to your jobsite.

August 21 2014 at 10:58 PM Report abuse +1 rate up rate down Reply
Cane87

Office Depot fired me after successfully completing their management training program. Maybe it's because I wasn't the cute chick with the pierced lip in e copy center. (Sorry, Dave, you still have no prayer.) Maybe it's because I protested when cashiers gave me orders over the radio. Most likely, it's because they found out I'm diabetic and didn't want to pay for my insulin. (OD will fire store managers who schedule employees more than 26 hours, because they don't want to provide insurance for them.) Whatever is causing the loss in comp sales, I hope it accelerates and puts them out of business.

August 21 2014 at 6:36 PM Report abuse +1 rate up rate down Reply
Iselin007

The big office stores put most of the mom & pop stores out of business. Business got so gready they pushed for the trade deals. The loss of jobs constantly has destroyed generations of Americans, many of which were the descendants of original Pre-Revolutionary War settlers!

August 21 2014 at 6:04 PM Report abuse -2 rate up rate down Reply
Iselin007

The Office Stores can thank can thank the trade deals, high corporate taxes, and the importation of foreign nationals for the loss of business in their brick and mortar stores. Even the largest box stores said even the increase in employment isn't helping their business. Maybe the loss of good full time jobs and benefts has finally caught up to the economy?

August 21 2014 at 5:53 PM Report abuse -3 rate up rate down Reply
Iselin007

The companies that need office supplies get supplies by UPS after ordering them Online. The local Office Stores lost most of their walk in traffic thanks to companies cutting workers and outsourcing to consultant/ contractor firms.

August 21 2014 at 5:42 PM Report abuse +3 rate up rate down Reply