3 Ways Staples, Inc. (SPLS) Just Might Nail the Office Supply Business

Staples (SPLS)With a $250 billion market capitalization, $11 billion in cash, no debt, $60 billion in revenue in 2012, and broad name recognition, Amazon.com, Inc. (NASDAQ: AMZN) dominates online retailing.  Despite experiencing declining earnings over the past two years, and even a loss in 2012, Amazon is blamed for the demise of such “bricks and mortar” stores as Circuit City, Borders, and possibly now Best Buy.  In the world of office supplies, Amazon has a worthy competitor:  Staples, Inc. (NASDAQ: SPLS).  As the world’s #2 online retailer, Staples has taken its lumps in the past, but has also positioned itself to fend off Amazon in this particular market.

What is Staples doing?

First, cost control.  Staples recently began rolling out customized packaging in 12 fulfillment centers with plans to expand this process to all of its facilities by the end of 2013.  Using Packsize International technology (a private firm to anticipate the question), Staples anticipates reducing its use of packing pillows by 60-70% and case size by 20%. Staples hopes to reduce interest expenses on its debt.  Simply stated, Staples is offering new debt to pay off its 9.75% Senior Notes due in 2014.  Lastly, Staples will be reducing floor space in North America and Europe.  Given economic realities in Europe particularly, smaller or fewer stores in The Old Country makes sense.  Apparently, offering 3-D printing in Holland and Belgium hasn’t exactly created huge revenues, yet.

Second, expansion in Japan.  Staples teamed up with the Japanese firm Jointex to offer its products in one of the world’s largest markets.  Twenty five stores and many more dealers will be offering Staples brand products in the Land of the Rising Sun.  The Japanese office supply market offers Staples a $18.7 billion opportunity to expand its revenues and worldwide footprint.  The Japanese market contracted over the past few years, but is forecast to grow in the future.  Given that competitors OfficeMax Incorporated (NYSE: OMX) and Office Depot Inc (NYSE: ODP) currently have operations there, Japan offers Staples an opportunity to further pressure its competitors’ revenues.

Third and perhaps most importantly, offering innovative products and services to small businesses.  For example, Staples recently opened its Velocity Lab, a facility dedicated to developing better online and mobile services to small businesses.  Staples also teamed up with LinkedIn to launch SUCCEED, an online forum for small businesses to connect and collaborate.  Staples will have advertising space on the webpage and hopes to attract new customers as well as connect existing customers with each other.  Lastly, Staples launched it App Center, a site where small businesses can shop for business apps previously vetted by Staples.  The idea is Staples identifies a short list of the best apps on the market.  Small businesses try or buy these best of breed apps without the hassle of researching dozens of them.  The Apps Center will allow businesses to use a variety of cloud-based apps with one login and to pay for these apps with one bill from Staples.  In contrast, searching Amazon.com for business apps turned up over 8,000 results, with the usual categories and customer reviews.  Amazon does not appear to offer the apps vetting and one stop billing Staples offers.

Other Competitors?

OfficeMax and Office Depot are declining in an overcrowded business.  24/7 Wall Street listed eight retailers that will likely close stores and OfficeMax and Office Depot were on the list.  Staples wasn’t.  OfficeMax has reportedly $1 billion in off balance sheet debt and $2 billion in asset write downs.  Earnings have surprised to the upside in the past, helping the stock to more than double in the past year.  Will this trend continue?  While OfficeMax is opening smaller stores that should help overhead costs, the strategy hasn’t worked in the past.

Office Depot stock has recovered from its summer lows, but earnings remain lean.  Sales fell 5% in 2012 and Standard and Poors projects more sales declines for 2013.  Like OfficeMax, Office Depot will focus on closing unprofitable stores and opening smaller stores to control costs.  Office Depot recently launched its Small Biz Club to help small businesses grow.  According to the website, this Club will offer guidance and coaching for starting and growing small businesses, but not provide the various cloud based apps Staples offers.  While OfficeMax and Office Depot aren’t capitulating, they face substantial headwinds in a highly competitive market.  Both companies cut costs, but that can only go so far when revenues decline.  Store closures also create expansion opportunities for Staples.

Final Foolish Thoughts

Amazon dominates online retailing in general. In the office supply niche, Staples’ combination of cost cutting, expansion into the Japanese market and innovative products and services should help the company maintain its #2 spot in online retailing.  These same initiatives will also pressure OfficeMax and Office Depot.  As a “cherry on top,” investors will like the 3.3% dividend and ongoing stock repurchasing.  To be sure, Staples must confront its own challenges.  However, the push for innovation, particularly its Apps Center, gives me confidence Staples will emerge on top of the office supply business.

The article 3 Ways Staples Just Might Nail the Office Supply Business originally appeared on Fool.com and is written by Robert Zimmerman.