On the list of the largest online retailers, the number one spot unsurprisingly goes to Amazon (NASDAQ:AMZN). The number two spot, however, may be surprising to some. It belongs to Staples (NASDAQ:SPLS), the leading office supply company. Even as its retail operations are showing weakness, Staples is still growing its online business.
The threat from Amazon is very real, and Staples is taking big steps to increase its competitiveness. Recent news suggests that Staples is getting very serious about going toe to toe with the Amazon juggernaut.
Amazon has been able to grow so quickly for two reasons. First, its prices are often the lowest, and second, its website seems to always be one step ahead of the competition. Amazon is very good at selling things, using product recommendations and free shipping offers to lure customers to spend more. Its focus on efficiency has allowed it to undercut the competition, driving many competitors out of business in the process.
Earlier this month Staples announced the acquisition of Runa, a start-up which offers e-commerce personalization services. Runa will become a Staples Innovation Lab, working to improve the e-commerce channel.
Runa will allow for Staples to offer personalized, data-driven offers to its online shoppers. Staples' press release on the subject is a bit vague, with the company stating:
Staples is continuing to invest in e-commerce capabilities, creating a highly personalized shopping experience and building on its online leadership. Runa's PerfectOffer serves up automated, data-driven and personalized offers in real-time and PerfectShipping provides real-time personalized delivery estimates and free-shipping offers.
The important point is that Staples is investing in the e-commerce channel, and the company realizes that embracing technology is the key to remaining competitive. It's hard to say exactly when or if the acquisition will pay off, but it's certainly a step in the right direction.
Another initiative at Staples is price monitoring. Staples has partnered with Profitero, a company which monitors prices across thousands of e-commerce sites each day. This, combined with Runa's software, will allow Staples to adjust prices to match or beat Amazon and other retailers on the fly, or match free shipping offered by competitors.
Using the aforementioned technology, Staples will be able to completely eradicate Amazon's price advantage. A few days ago the company announced that it would match Amazon's prices both in-store and online, the first time that the stores themselves will match prices. This mirrors the move made by Best Buy (NYSE:BBY) earlier this year, and it should allow Staples to prevent Amazon from stealing more business.
Taking a dive
Back in August, shares of Staples plummeted due to weak earnings and guidance. Operations in Europe were downright terrible, and store closings caused a 2% sales decline overall. Guidance for full-year earnings was reduced, as sales of traditional office supplies have been softer than expected.
Green lines represent dates on which shares of Staples were bought for The Bargain Bin Report. Red lines represent dates on which part of my position was sold.
Is Staples a buy after the decline in price? The high end of the new earnings guidance puts the P/E ratio at about 12, which may seem reasonable. But these earnings are depressed, and margins are well below historical figures. In 2008 operating margin was 8%, and if that could be achieved today EPS would be closer to $1.75.
There are a couple things that may drive margins higher. First, the focus on online sales I talked about above. Now, certainly, price matching may reduce margins in the short-term, but growing the e-commerce channel with the help of Runa should balance this out to some degree. In the long-term, being more competitive with Amazon should allow the company to return to revenue growth, and when the European economy eventually improves Staples should benefit there as well.
Second, with Office Depot (NYSE:ODP) and Office Max (NYSE:OMX) merging, some markets with three competitors will likely become markets with only two. Furthermore, Staples may acquire divested stores, allowing the company to enter new markets by replacing a competitor. I have my doubts that a merger between two mediocre businesses will create anything but a larger mediocre business, and I think that Staples will benefit from the deal.
Staples looks reasonably attractive around $15 per share, and I'd peg the fair value at around $18-$20 per share. This is 14.5 times earnings on the low-end. Staples is definitely a long-term investment - it will likely take a few years before the company can transition its business and return to growth. But the steps which Staples is taking look promising, and I suspect that Amazon will have a tougher time in the future stealing away the company's customers.