Will Staples Innovate or Die?

"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.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Apple and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Staples, Amazon.com, Apple, and Wal-Mart, creating a diagonal call position in Wal-Mart, creating a bull call spread position in Apple, and creating a short position in Office Depot. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy has a built-in Easy Button.


Read/Post Comments (3) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 08, 2011, at 7:28 PM, john3948 wrote:

    I agree - there is very little variation from Office Depot to Staples and OfficeMax. For all practical purposes, they can be exactly the same franchise.

    Still, it is possible that when it comes to business-to-business, they may not have the same type of operation, and it may be what sets them apart.

    It does appear that there are too many of them. Some consolidation is in order, not necessarily between Staples, Office Depot, or OfficeMax, but rather that there are just too many office superstores. We do not need so many! That is like having several Starbucks all in one block. Just a waste of resources, time, and profitability.

    By the way, I was really buying some stuff from Office Depot and wanted to get free shipping and came across an interesting site for finding "fillers" for free shipping. It is at

    http://www.superfillers.com

    They have finders for both OfficeMax and Office Depot. LOL.

  • Report this Comment On June 10, 2011, at 12:06 PM, RICADDY24 wrote:

    You really should do some research about a company before writting a article. Staples is second only to Amazon in online retail. They also have an extreamly solid supply chain, that feeds their buisness direct and contract work. Point of fact, retail is less the 50% of Staples total revenue in the US market.

  • Report this Comment On June 10, 2011, at 1:49 PM, supplyseller wrote:

    I agree with RicAddy24. Not only is he correct about the size of Staples and their online offering, they are also an international company employing nearly 92,000 Associates in dozens of countries. Their presence in Europe was mostly retail until the last 24 months to my knowledge. They are just now adding their online delivery and business delivery services in those markets. In addition... have you seen a Blackberry commercial in the last few months? The only retailer listed in the early release marketing was... Staples? I think they've already begun the shift and our author is a little behind in catching that? Just sayin!

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