How Does the Future Look for Staples and Office Depot?

One will rise, one will fall, at least in the short term.

Mar 20, 2014 at 10:00AM

It's rarely good news when a retailer decides to close a large number of stores. On the one hand, closing underperforming stores can save the company money and improve profits. On the other hand, the company may just be delaying the inevitable closure of the concept.

In the office-supply industry, there are two companies that made a recent list of retailers closing the most stores, and both Office Depot (NASDAQ:ODP) and Staples (NASDAQ:SPLS) have the dubious distinction of making the list.

What's the problem?
As an investor, there might not be anything more important than making sure the company you invest in has a "moat" of some type. In business terms, a moat simply means that there is something about the business that is unique or proprietary that will protect the company from its competitors.

Office-supply companies like Office Depot and Staples used to have a built-in advantage of convenience. Businesses could visit one of their hundreds of locations and get what they needed to get back to work. But the ability to buy items online has eliminated the convenience issue as the products are shipped directly to the company's front door.

According to Hoover's, the office-supply store industry gets more than 60% of sales from the categories of software and supplies, paper, stationery, and furniture. This puts Office Depot and Staples in direct competition with retailers ranging from Amazon.com (NASDAQ:AMZN) to Best Buy, Wal-Mart, and Target.

Another key characteristic of this industry is the need for greater size to obtain cost efficiencies. Office Depot's recent quarterly sales were about $3.5 billion, Staples generated about $5.9 billion, and Amazon sold more than $25 billion. In an industry where size matters, it's obvious who wins.

The merger won't work
The merger last year between Office Depot and OfficeMax created a company with more than 1,900 retail stores. Since this merger, 22 stores have been closed, and the fact that the company referred to becoming a lean organization multiple times indicates that many more stores will likely be shuttered.

The big problem facing Office Depot is the fact that the company is losing out to its competition across the board. From North American retail sales declining 4%, to business solutions declining nearly 2%, there isn't much for investors to cheer about.

Amazon's domestic sales increased by 26% last quarter, and almost 70% of this was from electronics and general merchandise. It's not hard to believe that a certain portion of this was office supply orders that would have gone to Office Depot or Staples years ago.

In addition, Office Depot only generated about $50 million in core free cash flow over the last 12 months. Compared to more than $650 million of free cash flow at Staples, or more than $300 million in just the last three months from Amazon, clearly scale is not on Office Depot's side by this measure either.

Staples' plan only works in the short term
Relative to Office Depot, Staples looks like it operates in a different industry. The company plans on closing 225 stores by 2015 to focus on its online sales. With nearly half of the company's sales coming from the online channel, and this division growing by 10%, this seems like a sensible move.

Staples was also able to grow its commercial sales by 2%, compared to a decline in Office Depot. With significant free cash flow, in the short term Staples looks like the much safer investment. But the company's size is still a problem relative to its larger competition.

Staples noted that it ended the year with 500,000 products on Staples.com versus 100,000 a year ago. While this is an impressive achievement, Amazon Supply boasts more than 1.2 million items on its site.

You're dead to me
Unfortunately for both Office Depot and Staples, you can almost hear Kevin O'Leary from ABC's Shark Tank saying, "You're dead to me." O'Leary is famous for being tough on business owners and asking what is proprietary about their business. When he determines that anyone can make their product or provide their service, he usually launches has famous catchphrase.

The bottom line is, Office Depot and Staples offer products that many other retailers can offer, and Amazon in particular has the size to offer better deals. In the short term, Staples seems the much safer option. Longer term, if things continue as they are, neither Office Depot nor Staples seems to have a chance to survive.

Staples and Office Depot are in trouble, but here are 3 stocks you'll want to own
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers