Staples' Desperate Back To School Deals

Aug.14.14 | About: Staples, Inc. (SPLS)

Summary

Deep discounting on school supplies indicate that Staples now views Wal-Mart and Amazon.com as its primary competitors.

Staples seems to be financing deep discounting by reducing its operational footprint.

Staples might lack the resources and revenue needed to compete directly with Amazon.com or Wal-Mart.

Staples might need to transform itself into an online retailer to survive.

Staples (NASDAQ:SPLS) is proving what a desperate situation it is in these days with a new back to school deal. The office supplier is offering a 110% price match guarantee on school supplies.

Staples is not only promising to match any competitor's prices on school supplies as the school year opens but it is offering an additional 10% off. That's right; Staples is running a massive promotion that seems guaranteed to lose money. The retailer is admitting that the only way that it can get customers in the door is to practically give some of its products away.

The latest move by Staples seems to verify a thesis I put forward a while back that Staples is being squeezed by larger competitors. The 110% offer in particular seems to be designed to counter deep discounting by two of those competitors: Amazon.com Inc. (NASDAQ:AMZN) and Wal-Mart Stores Inc. (NYSE:WMT). Both Wal-Mart and Amazon.com are using office supplies as a loss leader to attract additional customers.

In particular, Staples needs to kick start both its online and brick and mortar sales because of escalating revenue losses. As I noted in my last article, Staples' TTM revenue fell from $24.17 billion in April 2013 to $22.95 billion in April 2014. I have to wonder how much of that revenue loss is caused by the discounting Staples is doing to keep up with Wal-Mart and Amazon.com.

Nor are Wal-Mart and Amazon.com the only retailers that are practically giving school supplies away this year. The Arizona Republic uncovered some incredible school supply deals, including:

· OfficeMax (now owned by Office Depot (NASDAQ:ODP)) is selling one subject spiral notebooks for just 1¢ a piece to parents that buy $5 worth of school supplies.

· Walgreen (WAG) is selling pocket folders for 10¢ to holders of its balance reward cards.

· CVS Caremark Inc. (NYSE:CVS) is offering 25% on a wide variety of school supplies, including Crayola crayons.

It looks like the battle for Americans' school supply dollars is turning into a bloodbath. The competition is getting fierce because the stakes are so high; companies like Staples are heavily dependent on back to school.

Does Staples Have the Resources to Survive?

The situation is worse for Staples because it doesn't have lines like clothing, groceries, or pharmacy to fall back upon. The lack of diversity also limits the resources that Staples has to fight back against Wal-Mart and Amazon.com.

Staples had a market capitalization of $7.426 billion on Aug. 11, 2014. On the same day, Amazon.com had a market cap of $146.36 billion, and Wal-Mart had a market cap of $239.74 billion. This means that Wal-Mart and Amazon are both in a position to give deep discounts on school supplies for a long, long, time.

The only way Staples can afford to continue such discounting would be to reduce its operations and reinvest the capital to cover the costs of the discounting. Staples is already doing that; it announced the closure of 225 stores in March.

Part of the reason for the closures is that Staples now does around 45% of its business online. The problem there is that Staples' online business has only grown by around 1% in the last year, according to The Wall Street Journal. Apple Inc. (NASDAQ:AAPL) recently took Staples' position as the number two online retailer.

Will Staples Become a Pure Online Retailer?

Judging from an online retail point of view, the 110% price match makes a lot of sense. It seems to indicate that Staples is slowly transitioning to a purely online retailer. Yet even that strategy might not work because of the explosive growth of Wal-Mart and Amazon.com. Internet Retailer reported that Wal-Mart's online sales grew by 30% in 2013 and Amazon's grew by 20% during the same period.

Staples finds itself in the unenviable situation of having to reinvent its business model as its revenues are collapsing and its sales growth has slowed. Wal-Mart faces a similar situation, but the retail giant still has vast resources to tap.

What's really interesting is that Staples is in good shape when compared to Office Depot/OfficeMax. Office Depot reported a market cap of $2.66 billion on August 11, 2014, and a TTM revenue figure of $14.30 billion on June 30, 2014.

My prediction is that both Office Depot and Staples are going to have a tough time surviving the next year. Staples might survive as an online retailer, but Office Depot will have a serious struggle just to stay in business. Either of these office supply retailers could implode if the deep discounting of school supplies doesn't work out.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I conduct some online retail sales through Amazon.com.