The largest office-supply store chain in the U.S., Staples (SPLS +0.00%), is trading at new lows this week upon the release of its latest earnings. For the fifth consecutive quarter, sales are down, and investors and analysts are clearly questioning the long-term viability of the business. It's a familiar story -- a combination of technological disruption and shifting consumer preferences. Today, a shopper can buy most office-supply needs online, at a Wal-Mart, or even at a CVS. What investors and analysts aren't seeing, though, is the management team sacrificing short-term benefits to achieve long-term relevancy. Staples is making the necessary moves to guarantee its future in the retail world.
Why it's down
Top-line sales are down 4% (though up 1% in North America) and same-store sales are down the same amount. Staples is guiding for lower year-over-year sales in the current quarter as well. The company reported all of the things that Wall Street doesn't want to hear.
More important than the numbers themselves, though, are the causes. One obvious element is store closures. Staples shut down 16 stores last quarter and is shuttering an additional 80 locations in this quarter. Naturally, this points to lower sales figures and increased costs. Then there's the fact that management is rightfully focused on building out its e-commerce operations as quickly as possible -- another expensive procedure. As is often reported and seemingly quickly forgotten, Staples.com is currently the second largest e-commerce retailer on the planet (though Wal-Mart is gaining ground quickly). E-commerce revenue grew 6% in local currency this past quarter.
This is a business in transition, and management is making the right moves, even at the expense of disappointing the myopic Street expectations.
Why it's not going away
The key to Staples' long-term success is its ability to scale up its e-commerce merchandising and marketing efforts. The company has already expanded well beyond the realm of office supplies online, offering a full array of electronics (including a branded Apple section), arts and crafts supplies, cellphones, textbook rentals, and a ton more. Take a look at the website -- it's designed extremely well and is more intuitive than Amazon.com.
Investors may have a hard time seeing Staples as an e-commerce powerhouse, considering its dated image in strip malls. But when you look at where the company's capital is deployed, it's all in the online space. Right now, Staples is feeling the pains of a massive strategy shift. It won't get better next quarter, and we probably won't see much encouraging news throughout this year. This is a long-term-oriented turnaround, and it's less risky than most in its category.
At roughly 10 times forward expected earnings and an EV/EBITDA of 5.4, this is an affordable way to get in on what is still the most exciting trend in retail -- the Internet. Investors with a thick skin should take a closer look.
