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

Source: Wikimedia Commons

The past three years haven't been terribly kind to Staples (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 (ODP 1.82%), 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.

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.

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.