Staples Struggles to Survive
Running an old fashioned category killer is a great way to lose a lot of money in the age of Amazon.com (NASDAQ: AMZN) and Costco Wholesale (NASDAQ: COST). Case in point: Staples (NASDAQ: SPLS), the office supply retailer that just cannot seem to catch a break these days.
Staples’ TTM revenue fell by $1.1 billion between October 2013 and October 2014, despite the closure of 127 stores, and Staples plans to close as many as 170 more next year. Staples reported a TTM revenue of $23.81 billion on Oct. 31, 2013; that figure fell to $22.71 billion in October 2014.
In contrast, Office Depot (NASDAQ: ODP) saw its TTM revenue rise by $5.37 billion during the same period. Office Depot reported a TTM revenue of $10.38 billion in September 2013 that rose $15.75 billion on Sept. 30, 2014.
To be fair, Office Depot did acquire Office Max during this period, but it also announced plans to close around 400 stores. It looks as if Office Depot’s strategy of massive store closures is working, while Staples’ strategy is not.
Office Depot’s recent success proves that the office supply retail business is not dead yet. There’s still a huge market for the direct retail sale of office supplies, and the market seems to be growing. It simply is not growing at Staples, possibly because of intense competition from club stores like Costco and Walmart Stores Inc.’s (NYSE: WMT) Sam’s Club subsidiary.
Rising Online and Commercial Sales not Helping Staples
It is also easy to see why Staples is shuttering so many stores; same-store sales fell by 4% in North America in the third quarter of 2014. Yet there’s a bit of a mystery here. The decline in same-store sales was more than offset by increasing sales at Staples.com in the third quarter. Staples’ online sales rose by 9% during that period.
Those figures might indicate that online sales are not as profitable as same-store sales. Delivery and other costs might be eating up the profits from the additional online sales. Another reason for the revenue losses might mean that Staples is having to engage in deep discounting to match prices at Amazon.com and Costco.
Staples also reported a 3.3% increase in commercial sales in the third quarter of 2014, yet that increase was not reflected in the revenues either. As with the online sales, Staples might be hurt by having to offer deep discounts to compete.
Will Staples Survive?
My answer to the above question is that, yes, Staples will survive, but possibly not as a brick and mortar retailer. Staples.com was still the No. 3 online retailer as of May 6, 2014; it had been No. 2, but it lost that position to Apple Inc. (NASDAQ: AAPL).
Staples reported online sales of $10.4 billion in 2013, making it a very profitable online retailer. Unfortunately, it is a very profitable online retailer that is saddled with a very unprofitable chain of brick and mortar stores.
It’s also an online retailer in a very uncomfortable position, facing aggressive competition from both Amazon.com and Walmart stores, both of which seem to regard office supplies as a loss leader for their other merchandise. Walmart.com, in particular, is growing fast; its online sales grew from $7.7 billion in 2012 to $10 billion in 2013.
Walmart’s online sales are close to what Staples are, and it could overtake Staples in online sales volume this year. Part of that sales growth is obviously office supplies, which both Walmart and its Sam’s Club subsidiary sell at very low prices. Walmart’s CFO Charles Holley thinks that his company could increase its online sales by 25% to $12.5 billion by 2016.
Walmart’s online offensive is also heating up. The retail giant now plans to invest between $1.2 and $1.5 billion in digital infrastructure and e-commerce next year. That’s on top of $1 billion it spent on digital infrastructure last year; obviously part of that growth will come at the expense of Staples.
