A Second Wind
Staples' renewed focus on home-office and business needs is proving a good fit
The change is more than merely cosmetic. The retailer is also branching out, literally and figuratively. Staples will soon invade the Chicago market, where competitors OfficeMax and Office Depot are well positioned. This year, it expects to add about 100 stores in the United States to its more than 1,100 existing outlets. Then there is expansion overseas in Europe and in China, where Staples recently formed a joint venture with OA365, one of that country's largest office-supply chains.
Staples is also moving into new lines of business and getting more out of existing ones. Many of its stores now sport new copy centers, which bring in about $300,000 yearly on average. It is putting a great emphasis on its delivery business, both for home-office and consumer customers, as well as a contract business that supplies major companies with all their office needs. For example, it recently signed a five-year, $275 million deal with Bank of America. "It's probably the fastest-growing part of our business right now," says Chief Operating Officer Michael Miles. "It's a very symbiotic business. When the stores open up, delivery picks up."
The new business plan has drawn favorable reviews on Wall Street, where Staples stock has been outperforming the broad market by a comfortable margin. "Staples continues to set itself apart as the leader in the office products space," Deutsche Bank analyst Michael Baker wrote following the company's third-quarter results. "The company is in a better financial, strategic, and competitive position than in recent history."
Improvements in inventory management, supplier relationships, and a focus on high-profit products like printer ink cartridges and digital photography supplies have enabled Staples to boost its operating margins from less than 5 percent in 2000 to nearly 8 percent in 2004. Meanwhile, the company has reduced its annual capital expenditures and increased its overall return on assets. All of which has yielded a growing hoard of cash--more than $700 million a year--when five years ago, the company had negative cash flow. It's all part of a strategy that is aimed at broadening the company's investment appeal, convincing mutual funds and other institutional investors that Staples is more than the prototypical growth company. That explains the dividend.
One place the cash won't be spent is on fancy digs for corporate officers. Sargent has a modest office, hardly larger than any other manager would command. He sits behind a desk that looks like (and probably is, Sargent says) a castoff from one of his stores. When a visitor asks for a copy of some financials, Sargent is quick to get it himself.
Gordon Marchand of Sustainable Growth Advisers, who along with partner George Fraise co-manages the John Hancock U.S. Global Leaders Growth Fund, says he owns Staples shares because of the company's repeat customer base, global presence, and ability to dictate prices in the market. "Staples, like a Dell or a Wal-Mart, is among the most efficient competitors. They can compete on price. Their execution is flawless."
With all its recent success, the question begs: What could go wrong?
Rivalry. Absent an economic downturn, the biggest threat is increased competition from the likes of Office Depot and OfficeMax, both of which are moving in the same direction as Staples. Right now, though, OfficeMax seems preoccupied with an accounting scandal that has already claimed its chief financial officer, who resigned following revelations that the company had uncovered wrongdoing in the way it accounted for some rebates. Then there's the perennial fear of all retailers--that Wal-Mart will lock its radar onto them. That could happen, as the giant discounter already stocks many office products. But so far, it hasn't been one of Wal-Mart's top priorities. As for the others, Miles says, "Staples has been able to be profitable in three-player markets."
Future lifestyle trends bode well for the company, too. Most demographers and labor experts predict more employees will work at home. Who really expects anyone to become less technology-tethered or less likely to take work home in the years to come? And where the workers go, the office supplies usually follow.
Staples at a glance
Founded: May 1986, Brighton, Mass.
CEO: Ron Sargent
Annual sales: $13 billion
Net 2004 income: $457 million (through October 30)
Number of stores: 1,662 (1,406 in North America, 256 in Europe)
Employees: 60,000
Most popular products: Printer cartridges, paper
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