Can Staples Find Some Mojo by Partnering With Steelcase?

Source: Staples.

Nothing has been working in office supply giant Staples' (NASDAQ: SPLS  ) favor lately, as evidenced by consistent declines in sales and operating profit, a trend that has also negatively affected other industry players, including Office Depot (NASDAQ: ODP  ) . The company's latest financial update revealed another poor performance, highlighted by a sharp drop in adjusted operating income, which led to a subsequent double-digit decline in Staples' struggling share price.

Despite the challenges, though, management continues to try out new ideas in a bid to turn things around, most recently partnering with furniture giant Steelcase (NYSE: SCS  ) to offer a greater selection of office furniture in its stores. So, after shares plumbing a 52-week low, is now the time for investors to bet on Staples?

What's the value?
With more than 1,500 domestic stores, Staples has long been a leader in the office supply space. While online and mass-merchandising competitors have anecdotally stolen market share away from the company in the traditional office supplies categories, Staples has limited its overall sales declines by broadening its inventory selection, including newer forays into furniture and breakroom supplies areas. Unfortunately, the gross margin on those categories doesn't seem to be any better than the margin on traditional office supplies, as evidenced by a general downward trajectory in the company's overall gross margin over the past five years.

In its latest fiscal year, Staples' business continued its recent negative trajectory, highlighted by a 5.2% top-line decline that was a function of sales decreases across the company's major segments. Just as important, Staples' gross margin continued to be pressured by a highly promotional selling environment, which conspired to produce a double-digit decline in its operating income.

On the upside, though, Staples' commercial segment, home to its Staples Advantage and Quills brands, bucked the negative trend, generating a slight increase for the period. In addition, Staples benefited from its introduction of various cost savings initiatives, including the proposed closure of approximately 225 stores, which are cumulatively expected to save the company up to $500 million per year. The net result for Staples was a continuation of solid operating cash flow, easily funding its capital expenditures and enabling the company to engage in shareholder-friendly activities, like share repurchases.

Going forward, Staples will also undoubtedly be helped by Office Depot's 2013 acquisition of OfficeMax, a transaction that eliminated the No. 3 industry player. While Office Depot is still in the process of integrating the two companies' operations, its management team has indicated that it plans to close at least 400 stores across the country, an action that could potentially be a boon for Staples' traffic and sales in those affected areas.

Looking for growth anywhere
Of course, cost cuts can only take Staples so far, which is why management is focused on bulking up its inventory assortment, hoping that the strategy will bring greater volumes of customers through the doors. A big part of that strategy seems to be an enhanced presence in the furniture category, a key product area that already accounts for roughly 6% of its total sales. If that is the case, Staples seems to have hit the jackpot by partnering with Steelcase, one of the country's largest manufacturers of office furniture and the owner of a diversified portfolio of popular brands, including Steelcase, Coalesse, and Turnstone.

The bottom line
Mr. Market doesn't seem to be too impressed with Staples' recent business changes, pushing the company's share price down near its 52-week low. While the changes, including a reduction in the company's overhead cost structure and the size of its store footprint, will likely lead to a more profitable enterprise, there seems to be little faith in Staples' ability to arrest its continuing decline in sales. This view seems to be corroborated by Staples' financial performance in its latest fiscal quarter. As such, rather than trying to catch a falling knife, investors might want to take a pass on Staples in favor of Steelcase, which has been enjoying a profit lift lately thanks to improved product pricing, and should benefit from the greater distribution and sales opportunities within Staples' network of stores.

These dividend stocks are solid portfolio staples
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2989794, ~/Articles/ArticleHandler.aspx, 11/23/2014 12:45:36 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement