In recent years the office supply sector has been the stock market's equivalent to watching paint dry. Office supply chains Staples (Nasdaq: SPLS ) , OfficeMax (NYSE: OMX ) , and Office Depot (NYSE: ODP ) rely on steady global growth and strong domestic small business growth to drive their businesses. With the ongoing European debt crisis and China's slowing GDP growth, it's no wonder that growth is stagnant.
Today, I suggest we take a closer look at this sector to determine which of these three companies represents the best value to investors when the global economy actually does recover.
Let's start with a side-by-side comparison of these retail chains to get to know them better and then we'll dive into their potential opportunities and pitfalls.
|5-Year Revenue CAGR||6.6%||(4.5%)||(5.2%)|
Source: Morningstar, Yahoo! Finance, and author's calculations. Yields are projected. CAGR = compound annual growth rate.
The tale above is practically night-and-day. Whereas OfficeMax and Office Depot are both struggling through a four-year streak of revenue contraction, Staples has managed to grow (albeit slowly) in even the toughest retail environments -- as well as pay the only dividend of the three. Debt is also a huge differentiating factor, with OfficeMax heavily burdened by debt. Two aspects all three do share is relative cheapness in comparison to the market indexes in general, and weakness stemming from a slowdown in European orders in particular.
There's not a lot office supply chains can do to innovate, but that doesn't mean there aren't avenues of growth available. One move that would make a lot of sense would be for OfficeMax and Office Depot to consider merging. As stand-alone entities, OfficeMax's debt and Office Depot's weak global performance are a liability to their future growth. Together, cost synergies could drive a stronger marketing effort that just may be able to eat into some of Staples' commanding market share.
Another move that makes a lot sense is opening smaller stores. Staples introduced a plan last year to build smaller, high-margin focused stores that would also carry cell phones. If this sounds familiar, that's because struggling big-box retailer Best Buy (NYSE: BBY ) outlined a similar plan recently to open 100 smaller locations that would focus on tablets in exchange for closing 50 larger locations. These retailers are realizing that keeping expenses under control is key in a slow-growth environment.
The biggest threat for these retail chains remains weak global growth. Office Depot reported a North American sales dive of 8% in its latest quarter while Staples noted its international sales fell 8%. Although Staples has fared better until recently, that's no guarantee that any company will be spared from a continuing global slowdown.
Larger competitors and online discounters also present a serious threat to office supply stores. Wal-Mart can use its pricing power essentially to undercut competing retailers, while Amazon.com (Nasdaq: AMZN ) acts as an online launching ground where small business customers are winding up to buy their products at a discount after using these office supply stores as a showroom floor (again, very reminiscent to the troubles Best Buy is currently facing).
And the better buy is...
At such depressed levels, Office Depot or OfficeMax seem like the logical choice to give investors the biggest bang for their buck when the economy does rebound, but I feel fairly certain that Staples will give investors the best long-term return.
The biggest factor that scares me away from OfficeMax is its $1.24 billion in net debt. The company has aggressively been closing underperforming locations and has reduced its total stores by 45 to 958 as of the first quarter, but hasn't yet addressed how it will pay down its debt. High exposure to international markets is the biggest factor that makes me steer clear of Office Depot. With a very sustainable 3.5% yield and push toward manageably smaller and higher-margin stores, Staples is my choice as "best buy" among the office supply retailers.
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