Is There Light at the End of the Tunnel for Staples and Office Depot?

In recent years, both Staples and Office Depot have faced serious trouble. Despite their falling sales, though, it's beginning to look like both companies have a chance to not just survive, but thrive, if management can place greater emphasis on a couple of different, but vital, areas of operation.

Jul 23, 2014 at 9:00AM


Source: Wikimedia Commons

The past three years haven't been terribly kind to Staples (NASDAQ:SPLS). On top of the company's revenue falling 6% from $24.7 billion to $23.1 billion and net income declining 37% from $984.7 million to $620.1 million, shares of the office supply company have plummeted 46% since the start of 2011. In light of these developments, it might be easy for the Foolish investor to discard the retailer, as well as rival Office Depot (NASDAQ:ODP), but could there be a light at the end of the tunnel for both companies?

Business has been terrible... in certain areas!
While looking at sales is a good way to gauge a business' success over a time-frame of a few years, it's more important to look at the source of those sales. If its products and services are all on the decline, then that's a sign that trouble's brewing. However, if certain areas of business are performing well, then it could signal an opportunity for the company in question to reinvent itself.

( in billions) 2013 2012 2011 Change
Revenue $23.11 $24.38 $24.66 -6%
Core Office Supplies $6.36 $6.85 $7.25 -12%
Ink and Toner $4.67 $4.80 $4.81 -3%
Business Technology $3.51 $4.05 $4.44 -21%
Paper $2.08 $2.19 $2.22 -6%
Facilities and Breakroom $2.01 $1.80 $1.60 +26%
Computers and Mobility $1.59 $1.68 $1.68 -5%
Services $1.59 $1.63 $1.41 +13%
Office Furniture $1.29 $1.37 $1.26 +2%

Source: Staples SEC Filings

Fortunately, the latter case appears to be what's happening with Staples. Since 2011, revenue has declined, but not for every aspect of the company. The biggest offenders under Staples' belt have been the retailer's Core Office Supplies and Business Technology categories. Over the past three years, sales for the company's Core Office Supplies category dropped a whopping 12% from $7.25 billion to $6.36 billion. Business Technology has fared even worse, free-falling 21% from $4.44 billion to $3.51 billion.

In these areas, it's difficult to tell how Office Depot has done just because the company releases vaguer disclosures. In all, the company's Supplies category grew 2% from $5.12 billion in 2011 to $5.24 billion by the end of its 2013 fiscal year. Comparing this set of operations to its rival's Core Office Supplies category, however, is impossible because Office Depot's Supplies category also includes paper and other products that Staples includes in separate categories in its financial statements.

(billions) 2013 2012 2011 Change
Revenue $11.24 $10.70 $11.49 -2%
Supplies $5.24 $4.90 $5.12 +2%
Technology $4.56 $4.47 $5.00 -9%
Furniture and Other $1.44 $1.33 $1.37 +5%

Business Technology, on the other hand, is a little easier to reconcile. Based on each company's most recent annual report, Staples' Business Technology is most comparable to Office Depot's Technology category after you add in Staples' Ink and Toner category and its Computers and Mobility category. Over the past three years, sales for these combined operations declined 11% from $10.93 billion to $9.77 billion while sales for Office Depot's Technology category fell 9% from $5 billion to $4.56 billion.

But there's hope if you look in the right spots!
Although most of Staples' categories are seeing their sales fall, three have been on the rise. Between 2011 and 2013, the company's Office Furniture operations inched up 2% from $1.26 billion to $1.29 billion, while Services jumped 13% from $1.41 billion to $1.59 billion and its Facilities and Breakroom revenue soared 26% from $1.6 billion to $2.01 billion.


Source: Staples

In aggregate, these categories made up just 17% of the revenue reported by Staples in 2011, but as sales in the business's other five categories declined, the total share of revenue derived from these operations increased to 21%.

Because of the difference in reporting practices, Office Depot's operations cannot be compared evenly with those of Staples, but its Furniture and Other category, which likely draws sales from the same sources as Staples' three categories, also did well in recent years with a 5% rise from $1.37 billion to $1.44 billion.

Foolish takeaway
There's no denying that the situation Staples and Office Depot find themselves in is anything but great. Both companies are seeing their sales fall and their profitability fails to leave a good impression. Moving forward, times will likely get harder for both retailers as consumers move toward e-commerce for their home, office, and school supply needs. But if management can manage to capitalize on their strongest operations, it's possible both Office Depot and Staples could not only survive, but thrive in the years to come.

Will Staples and Office Depot become obsolete no matter what?
Currently, Apple is working on a device the company and analysts believe could surpass the iPod, iPhone, and the iPad in terms of impact and could end up selling a jaw-dropping 485 million units per year!  With this new project coming to fruition, will the need for Staples and Office Depot vanish completely or can the companies find some way to survive?  While these are things to think over, a better way to play this upcoming trend might be to invest in the one small company that makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Daniel Jones has no position in any stocks mentioned. The Motley Fool owns shares of 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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 has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information