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"Once we rid ourselves of traditional thinking, we can get on with creating the future."
-- James Bertrand
Running a business is all about innovation. Whether it's a biotechnology upstart, a cutting-edge technology company, or a large-scale retailer, innovation is paramount to success. Without innovation, companies run the risk of getting complacent, being outflanked by competitors, or, even worse, folding up shop altogether, the way Circuit City did a couple of years ago.
No company gets a free pass when it comes to adapting its business plan, so when push comes to shove we need to ask ourselves: Will this company innovate or die?
Today, let's take a closer look at Staples (Nasdaq: SPLS ) to determine whether the company can adapt to rapidly changing consumer demands or whether it will be pushed into the background.
What's wrong with Staples?
The problem with Staples is that it showed up to a gunfight with two sticks and a rock. While the world is transitioning to a digital mode of communication and commerce, Staples is stuck with a store full of formerly high-margin paper products that are becoming antiquated. If you've been into a Staples recently, the store almost has a museum quality to it.
Staples isn't alone. Rivals Office Depot (NYSE: ODP ) and OfficeMax (NYSE: OMX ) , which have both posted brutally dismal results over the past few years, share the same worries. To add insult to injury, even Wal-Mart (NYSE: WMT ) has ventured into the office-supplies space and has been stealing market share with its ability to undercut Staples' (and its rivals') price points.
Getting Staples back on track
I'm not the CEO of Staples, but for a moment let's pretend I am. As I see it, Staples needs to focus on three aspects of its business to turn things around:
- Think internationally: Staples isn't going to win in a low-margin war against Office Depot, OfficeMax, and Wal-Mart, but it can lay the groundwork for successful stores outside the United States without any major competition. As long as the company keeps its stores small and filled with high-interest, not necessarily high-margin products, it should be fine.
- Court Cupertino: Staples' U.S. locations carry Amazon.com's Kindle, Research In Motion's (Nasdaq: RIMM ) BlackBerry PlayBook, and Motorola Mobility's (NYSE: MMI ) Xoom, but nothing would be better than landing Apple's (Nasdaq: AAPL ) iPad.
- Differentiate: I honestly couldn't tell you the differences between Staples, Office Depot, and OfficeMax if I walked inside one of their stores, so it's more important than ever that Staples differentiate itself from its rivals. The primary area of focus should be its online presence. It needs to focus on high-interest items that will eventually get consumers back in its stores.
What's the verdict?
It's a darn good thing that Staples' operating margins of 5.6% remain leaps and bounds ahead of those of rivals Office Depot and OfficeMax, because there's no room for complacency in this sector. Staples is going to have to do more than just rely on its gross-margin advantage to keep its position as the office-supplies leader. However, I'm not ready to throw in the towel on Staples just yet, especially with the company's plan to reduce the size of its stores and to focus on the growth of its Web business. Time will tell whether Staples can execute, but if the company can succeed, at just 9.6 times forward earnings, this could represent a nice value.
What's your take on the matter? Are you beating the door down to get to Staples' Easy Button, or are you rushing for the exit? Share your opinion in the comments section below, and consider tracking Staples with our free and easy-to-use Watchlist service.