After Restructuring, Can Staples Keep Its Crown As King Of Office Supplies?
While Staples Inc. is restructuring amid declining sales, business analysts said the office supply retailer's core client base — business customers — probably isn't going anywhere. And no matter how successful the restructuring is, the company will likely remain the leader in the retail office supply market.
Staples, headquartered in Framingham, announced the restructuring Sept. 25, though it came as no surprise: it had been a topic of conversation in conference calls with investors for months, according to Boston-based analyst R. Scott Tilghman of Caris & Company.
Faced with quarterly sales and net income declines over the last year, Staples said it will close 75 stores — 30 in the U.S. and 45 in Europe — reduce the square footage at another 30 stores, combine its U.S. retail and Staples.com businesses into one unit, expand offerings beyond office supplies (though the company didn't say what those additional offerings would be), and restructure its European operations. The goal, the company said, is to cut $250 million in costs by the end of its 2015 fiscal year.
Anthony Chukumba, senior analyst for BB&T Capital Markets in New York, said some have questioned whether these measures are aggressive enough to counteract dropping revenue, but he said the restructuring signals a palpable change in tone, which is important.
Chukumba said that, until this point, Staples — which raked in $25 billion in revenue in 2011—has made only minor changes in its cost structure to deal with dropping revenue.
"I think that Staples … what they announced, is a step in the right direction. I think that the market doesn't think they're doing enough, and they'd like to see more."
Indeed, the company's stock price has tumbled this summer and fall after peaking around late March, and there's been no uptick after the restructuring announcement. But Chukumba said Staples can always get more aggressive with its restructuring later on, if necessary.
A spokesman for Staples declined to comment on the restructuring plans.
The European Problem
Perhaps the biggest factor Staples has to contend with is the European market. The company has a sizeable presence on the continent.
As Europe's economy weakens, it will be difficult for Staples to achieve adequate cost savings there, Chukumba said. That's because employment regulations are strict and it's not easy to lay off workers. The 45 planned store closures in Europe are "a drop in the bucket," he said. Meanwhile, competitor Office Depot is dealing with similar challenges there, according to Chukumba.
"OfficeMax feels like they dodged a bullet by not having the exposure to Europe that Office Depot and Staples do," Chukumba said.
Speaking of its main competitors, there is an idea floating around the market that Staples should merge operations with Office Depot or a European competitor to cut costs, according to both Chukumba and Tilghman. But neither company has indicated plans to do that.
"I think what people miss is where the inefficiencies lie," Tilghman said. "And a big opportunity would be for Staples to combine European assets with somebody else."
As for reducing square footage in its U.S. stores, Tilghman, the Caris and Company analyst, said Staples is accommodating the changed computer market. Today, people want laptops, Apple iPads and other tablets, which don't require the floor space desktops do.
Eventually, consumers will want desktop computers again as they look to upgrade older models, but until then Staples will rely on other types of products to attract customer.
"I think we're seeing a bit of that not having as many entry-point products in the stores—focusing on something more mid-level that a business customer would be interested in," Tilghman said.
Tilghman was referring to the expanded offerings Staples announced as part of its restructuring, though he wasn't able to shed much light on what those will be. He said the company will either increase inventory of its current product line for business customers, or add new items.
A Loyal Business Base
How effective the planned restructuring will be may be arguable, but Tilghman said there's "no question of survival" for the company in the long run.
Part of the reason Staples has security is that its business customers – which Tilghman said account for about 80 percent of its business – are unlikely to jump ship because the company has a superior ordering system and strong relationships with business consumers.
This is especially important considering that e-commerce companies are nipping at the heels of many retail stores.
E-commerce sites are competing for Staples customers, Tilghman said, but they're only likely to attract consumers, who account for a much smaller portion of Staples' revenue.
Chukumba, of BB&T, agreed, saying Staples will maintain its position as the market leader, no matter what.
"However this ends up playing out, they're going to end up on top," Chukumba said.
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