By Jeff Bailey
A co-worker, easily 20 years my junior, stopped by my desk the other day to borrow my stapler, which was sitting next to a tape dispenser and amid piles of paper, and it occurred to me: the other desks in the office, all with young people sitting behind them, don't look like this.
They've got a laptop open, and maybe a cup of coffee going, and that's about it, and that seems awfully bad news for Staples (NASDAQ:SPLS), which is already being hounded by the Suicide Bomber of Retail, Amazon (NASDAQ:AMZN). Amazon slashes prices with such zeal that it is ruining profit margins at other retailers, even at the cost of ruining its own profit margins.
AMZN Revenue TTM data by YCharts
Customers certainly like the Amazon approach and so do investors, so far.
Mark Miller, a very hard-working retail industry analyst at William Blair & Co. in Chicago, along with some colleagues, gathers data each month - product overlap between Amazon and other retailers, price differences, and whether the competing retailer's store environment is compelling enough to overcome the first two factors - and concludes which companies are most vulnerable to Amazon.
YCharts believes Miller's work is unusually value-added. In addition to the two links to coverage above, we have reported on Miller's view of Ulta's (NASDAQ:ULTA) vulnerability; eBay's (NASDAQ:EBAY) credible efforts to compete against Amazon; and, encouragingly, the remarkable success of late by retailers that have an Amazon-resistant business model.
Sadly for Staples, it does not appear to be among those most Amazon-resistant. With 48% product overlap with Amazon and selling those goods at prices nearly 19% higher than Amazon, Staples is among the highly vulnerable on Miller's list. The company is not as exposed as Best Buy (NYSE:BBY) - 72% overlap and about 17% price disadvantage - but it's plenty exposed. And all one need do is Google (NASDAQ:GOOG) an office product by brand name and deeply discounted prices from other online merchants pop up.
Those Uni-ball Gel Grip pens you love? $17.99 per dozen on the Staples site as I write this - but $13.99 on Amazon and, eeesh, $10.99 on a site called newegg.com.
So, Staples has severe pricing vulnerability. What it offers is breadth of merchandise (if, say, you're the office manager and don't want to Google every damned item you're ordering), and some 1,500 stores in the U.S. Convenience, then. (It's North American commercial business, delivering larger orders to medium and large-sized business customers, is almost as big as the retail operation - first quarter revenue of $2.0 billion for commercial vs. $2.8 billion for North American stores. Foreign operations generated $1.0 billion in the first quarter and lost money).
Staples has 85,000 employees, and an extensive system of 66 warehouses to enable quick delivery to its commercial customers, and four giant distribution centers to supply its stores. That network made sense in the years after Staples began in 1986, but seems a bit costly today. Staples began a restructuring in 2012 designed to increase sales growth and streamline operations. It took a massive charge to write down struggling foreign operations. So let's concede that Staples will continue to capture a decent market share, albeit a shrinking one, of the office products business, but likely suffer from narrowing margins as online price competition continues.
SPLS Revenue TTM data by YCharts
That may be the good news, however, because the changing nature of work suggests that demand for traditional office supplies may wane. These younger people I work with just don't buy paper tablets, copier paper, binder clips, yellow Post-It notes, yellow highlighters and all the other paper-related items that fill aisles at Staples stores. And it seems doubtful that Staples can increase sales of office machines, computers, desk chairs and other stuff enough to make up for that.
Perhaps I'm wrong, and all these younger workers, as they age will grow fond of hard copies. But somehow I doubt it.
SPLS Cash and ST Investments data by YCharts
For now, Staples has nice cash flow, and it pays out a good deal of that money in dividends - the dividend yield is 3.2% and the payout was recently increased - and stock buybacks. The buybacks have helped reduce shares outstanding by about 10% over the last decade, but with the steep decline in stock price, one wonders whether there wasn't a better use of those funds.
SPLS Shares Outstanding data by YCharts
If you're old enough to be looking for income-producing investments, such as dividend-paying common stocks, you might also be a big user of paper and all the stuff that goes with it. But before buying Staples, which trades at a tempting PE ratio of below 10, have a look at how younger people are working.
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times.