Selling office supplies hasn’t been a very smart business decision these days. Shares of Staples (SPLS) may have popped nearly 7 percent higher after the company posted a larger-than-expected profit a few days ago, but it’s still in a bit of a funk.
Quarterly sales fell for the seventh quarter in a row. Profitability improved, but largely on the closure of 127 underperforming stores, with another 43 or so to go before the year is over. Yes, fewer stores will naturally hold back overall sales growth, but it’s important to point out that comparable-store sales at Staples in North America still fell a problematic 4 percent during the period.
There’s no “Easy” button to escape what the trend is telling investors.
Business Before Pleasure
This should be a great time for a superstore selling office supplies. The economy’s improving. Unemployment rates are heading lower. Interest rates are low, making it easier for entrepreneurs to finance new ventures.
The climate of the industry itself should also be faring well. Office Depot (ODP) completed the merger with OfficeMax, combining the industry’s second- and third-largest players to give everybody else one fewer price-slashing competitor to worry about.
Unfortunately, it wasn’t just the cutthroat ways of Office Depot and OfficeMax holding Staples back. Amazon.com (AMZN) continues to become a retail juggernaut, and the popularity of speedy, reliable and cost-effective Prime deliveries to corporations of all sizes is on the rise. There’s also the challenge of traditional big-box discount department store chains that are loading up on business essentials. Let’s also not forget the telecommuting and contractor trends that translate into companies not having to stock as many supplies as they used to.
Calling in Sick to Work
Wall Street pros know that this isn’t going to be a near-term turnaround. They see sales and earnings declining this holiday quarter relative to last year’s showing. They see sales declining slightly next year, too, and every year after that through at least 2018.
Growing profitability will also be a challenge. Closing underperforming stores can only do so much, and it’s hard to grow the bottom line when the top line isn’t cooperating. Analysts don’t see Staples coming close to what it earned last year in any of the next few years.
Staples is expanding its product offerings, and that includes offering more merchandise as well as new services — including postal services and 3-D printing. It’s putting more muscle into its online platform and local warehousing infrastructure, and that makes sense, since half of its orders are being placed online these days.
It’s still hard to be optimistic. The European restructuring that Staples announced two years ago is finally having a positive impact on Staples’ bottom line, but the overall company itself is slipping. Digital delivery, cloud computing, and telecommuting are trends that are eating away at the replenishment levels of office supplies, and if Staples continues to find itself at the wrong end of sales growth, even its beefy 3.4 percent yield may be endangered.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and owns shares of Amazon.com and Staples. Try any of our Foolish newsletter services free for 30 days. Want a great stock? Check out The Motley Fool’s one great stock to buy for 2015 and beyond.