HW33 _4244
MIDZ_23
Staple.pdf
William J. Donoher Missouri State University
SPLS
http J/www.staples.com
Headquartered just outside Boston, Massachusetts, in the town of Farmington, Staples, Inc. is largest office supply retailer in the United States. The company's 2010 financials revealed d pointing results with only a 1.1 percent increase in sales to $24.55 billion. Staples' stock pri fell 7 percent during 2010, when most stocks were rising much higher. Despite dismal Staples' CEO's pay package for 2010 increased 41 percent to $15.1 million. CEO Ron received a base salary of $1.1 million plus a performance-based bonus of $2.4 million that was percent more than the $1.3 million performance bonus he received the prior year. He also recei in 2010 stock and option awards that totaled $11.1 million, up from $7.9 million the prior ye-. Staples, Inc. perhaps needs a new executive compensation plan and a new strategic plan.
Staples' International segment operates in 24 countries, including Australia, China, Uniea Kingdom, and Germany, although about 1,900 of Staples' 2,200 stores are located in Nufi America. In recent quarters, Staples' North American stores have had better margins than tlrefo International operations, but International stores have posted stronger revenue growth. Th future for Staples may well be outside the United States since price competition within ftfo United States is very intense, and many countries of the world have a much higher expectel growth in GDP than the USA. Staples perhaps needs to assess where in the world are their com- petitors not located, and take the high ground in those countries.
Like many retailers, Staples' fiscal year ends the end of January. Staples' quarterly net income reportedApril 30,2011 dropped 28 percent from the prior quarter to $198.2 millim while revenues dropped 3.8 percent to $6.17 billion. Staples has over $4 billion in goodwill a its balance sheet which is not good. In addition to its retail outlets, Staples sells office producs via the Internet and through its catalog and direct sales operations, including subsidiary Quill Corporation. Staples also provides document management and copying services as well a promotional products. It targets customers worldwide through its Corporate Express business-
Office supplies represent almost 50 percent of Staples' revenue, while business machinq account for another 30 percent. The remaining revenue comes from computers and office furniture- Staples pays a quarterly stock dividend, but at a relatively low payout ratio ofjust 29 percent. Sorc analysts contend that Staples stores have a "museum" feel as the company has not adapted well to the global shift to a paperless, ie digital, society.
The company faces intense competition from OfficeMax, Office Depot, Wal-Mart, KMart' Target, Walgreens, and many other office supply retailers.
History Founded in 1985 by Thomas G. Stemberg and Leo Kahn, Staples opened its first store in 1986 in Brighton, Massachusetts. In 1987, Staples constructed a 136,000-square-foot distribution and processing center in Putnam, Connecticut. This facility was intended to permit Staples stores to carry less on-site inventory even as the company as a whole offered a more comprehensive selection. Goods could then be shipped to individual stores rapidly as demand necessitated Staples grew from its initial three stores to 16 by the middle of 1988, atd to 23 by the beginning of 1989. The company then raised an additional $32 million in capital for additional expan- sion. The company soon introduced a new store format called Staples Express, which featured a smaller physical footprint and roughly half the typical inventory of its regular stores. The new
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EXHIBIT 1 continued
Cou ntry/State/Provi nce/Reg i onfferritory
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
WestVirginia
Wisconsin
Wyoming
Total United States
Canada
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland
Nova Scotia
Northwest Territories
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon
Total Canada
Austria
Belgium
Denmark
Finland
Germany
Ireland
Italy The Netherlands
Norway
Portugal
Spain
Sweden
United Kingdom
China
Argentina
Australia
Total Other
Number of Stores/Centers
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lnternal lssues Business Segments
Staples is organized around three business segments: 1) North American Retail, 2) Nortt American Delivery, and 3) International Operations. An overview of each segment's activities and subunits is provided in Exhibit 3. Financial information by segment is presented in Exhibit 4. Note that North American Delivery is the company's most consistent segmetrt over the past two years, overtaking North American Retail in 2009 as the largest of tlrc three. Staples' International Operations segment delivered rapid sales growth in 2009, but contracted in 2010. Note that unit's profits as a percentage of sales increased, largely due to improved cost efficiencies in its supply chain.
Signihcant country-based units within the International Operations segment include Stapler China, a joint venture in India, and Corporate Express. Staples China began as a joint venturt and now operates on a multichannel platform in Beijing, Shanghai, and Shenzhen/Guangzhou- The unit operates 27 stores, two Staples UPS Express stores, and two furniture stores, as well ru
a dedicated website. A contract business unit, similar in nature to the company's Staples Contract operation, serves larger businesses as well as various governmental agencies. The company also is rapidly expanding its presence in India, a $10 billion market, through its partnership witfo Pantaloon Retail Ltd., the largest retailer in India.
The Corporate Express unit, operating in the Netherlands, New Zealand, and Australia" is one of the more promising individual business units operated by Staples. As the company describes it, Corporate Express works with customers "on the 'little things' that matter to them, allowing them to get on with running their business." The unit has secured valuable contracts in janitorial services recently, among other similar basic office operations, and provides a range of services including technology solutions, printing functions, promotional marketing, furnifurq facility and kitchen supplies, and even catering.
The role of Corporate Express also happens to fit nicely with both the Staples Contract and
Quill units, housed within the North American Delivery segment. Within the Delivery segment, Staples Contract, the company's business-to-business products and services operation, is the fastest-growing component. This unit provides an ilrray of customized services to medium-sized
and large companies, including interiors, technology, facility solutions, print solutions, and pro motional products. Quill (and its Quill.com website) serves small to medium-sized businesses as a direct-order and delivery business, and the unit enjoys a significant presence serving the legal, educational, and medical professions. Together, these service-oriented units offer Staples the
EXHIBIT 3 Staples'Three Business Segments 1. North American Retail
. Retail store operations throughout the United States and Canada
. Average store: 20,000 sq. f1.,7000-8000 products
. In-store kiosks offer access to Staples.com and full selection of more than 30,000 products ' Copy & Print Centers . UPS Ship Centers . Staples EasyTech computer services
2. North American Delivery . Staples Contract
. Staples Business Advantage: serves small- and medium-sized businesses
. Staples National Advantage: serves large companies . Staples Business Delivery: catalogs and Staples.com . Quill: Direct marketing (catalogs and Quill.com) to small- and medium-sized businesses
3. Intemational . Asia/Pacific: China, Taiwan, India, Australia, New Zealand . European Catalog . European Contract . European Retail . South America
Source.' Staples.com.
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with major brands across a wide variety of different product categories. The retail industry il large has seen this trend emerge over the course of several years, and its main attraction for thc retailer typically is the higher margins resulting from more favorable purchase contracts thatr those obtainable from major brand manufacturers, as well as a greater degree of control over supply, design, and manufacturing. Staples has a number of contra6tual agreements with various manufacturers who supply the company with its store-branded product line.
A key ingredient in Staples' management of its product lines, distribution, and inventory system is the company's website, Staples.com. While the company is attempting to minimize physical inventory accumulation at its stores, more than 30,000 products are available via Staples.com. Product orders are processed and products are typically shipped to a local store fu customer pickup, free of charge. In the alternative, customers caa choose to have their purchase delivered directly to their place of business or home, and Staples provides free delivery on purchases exceeding $50.
The newest development in Staples' delivery system is its purchase of a small fleet of electric trucks in the fourth quarter of 2010. The trucks, manufactured by Smith Electric Vehicles, offer a 16,000-pound capacity and a lithium-ion battery that can travel up to 100 miles between charges. The manufacturer estimates that the trucks will achieve a 75 percent reduction in fuel costs compared to diesel vehicles, but the electric trucks are more expensive. Investment payback times thus are fairly lengthy. Staples plans to deploy 30 trucks in southern Califomia, and an additional 11 in Ohio and Missouri.
The unifying theme of all of these aspects of the company's operations is, of course, efficiency and cost minimization. This has been Staples' primary focus throughout its history and it enables the company to offer lower prices to customers. But in a set of incidents eerily reminiscent of alleged problems at similar cost-based organizations, such as Wal-Mart, Staples has been sued for misclassifying employees as exempt under the Fair Labor Standards Act, thus permitting the company to avoid paying overtime. The initial claim in 2009 (more are in process) awarded close to $2.5 million in damages. In a separate incident, another employee was convicted of embezzlement in a scheme in which fictitious vendor accounts were established and paid, ultimately, to the account of the employee. While the amounts in question are, for the moment, fairly small for a company the size of Staples, the bigger question posed is whether adequate incentives and procedural safeguardq including direct oversight, are in place and effective to facilitate intemal control.
Marketing Marketing has long been a part of Staples' success. The company has successfully created and embedded in popular culture various catch phrases such as "Yeah, we've got that," and more famously and recently, "That was easy." The latter phrase was accompanied by development of the ubiquitous "Easy Button," a hockey puck-sized device that, when pushed, verbalizes the catch phrase. Brand visibility also is enhanced via mechanisms such as product placement in popular shows, such as The Office, and various publicity vehicles, such as the company's sponsorship of the Staples Center in Los Angeles.
Beyond this kind of broad and thematic brand-building, the company also seeks to tailor its message to individual companies and customers. Its database enables targeted ads and coupon or discount offers. Store openings also are used as a vehicle to capture attention, in conjunction with which, Staples typically identifies businesses within a given radius of the new store and sends them advertisements and offers. The company also utilizes a rewards program to build loyalty and encourage volume purchases.
In early 2011, Staples revamped its international marketing team to ensure brand consis- tency across all of its channels and across all international boundaries. Recognizing the problem is an important step in its solution, but its existence also suggests that the company is struggling to integrate its now far-flung operations, many of which were acquired rather than developed organically, and to deliver a consistent theme and message through its marketing efforts.
Finance
Staples' financial statements are provided in Exhibits 5 and 6. Note that the company's debt has remained relatively high, but long-term debt decreased from 2010 to 2011, when 20 percent of the amount owed by the company was shifted into current maturities. Still, the amount coming due is less than annual net income. The company's cash flows reveal two significant trends for the year ended January 29,2011: a marked decrease in cash from operations and a substantial
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EXHIBIT 6 continued Long-Term Debt
Other Liabilities
Deferred Long-Term Liability Charges
Minority Interest Negative Goodwill
Total Liabilities
Stockholders' Equity Misc. Stocks Options Warrants
Redeemable Preferred Stock
Preferred Stock
Common Stock
Retained Earnings
Treasury Stock
Capital Surplus
Other Stockholders' Equity
Total Stockholders' Equity Total Liabilities and SE
2,014,407
652,486
7,471
6,967,957
2,500,329
579,746
83,054
6,945,449
t,968,928
636,142
58,224
7,508,8,18
545
6,492,340
(3,786,97',l)
4,334,735
(96,933)
6,943,710
$13,911.667
538
5,869,138
(3,388,39s)
4,379,942
(89,337)
6,771,996
13,717,334
529
5,367,341
(3,357;734)
4,048,398
(494,327)
5,564,207
13,073,055
So u rc e : Company documents.
increase in funds used for stock repurchases. Significantly, during 2010 the company's stock dramatically undelperformed the NASDAQ Composite Index.
Management
Staples' top executives are listed in Exhibit 7. Atorganizational chart for the company is also pro, vided. (Circles 16 and 17, on the lower right side of the chart, comprise North American Retail)
External lssues The United States stock market dropped 512 points in one day in August 2011 and S&P for the first time ever downgraded the country's credit rating from AAA to AA. Federal Reserve economists predict U.S. growth of 3.1-3.3 percent in2OlI, and some economists predict at least 3.8 percent growth in2012, but gross domestic product growth actually slowed to 1.8 percent in the first quarter of 2011. Forecasts for the unemployment rate range from 8.3 to 9.2 percent by the end of 2Ol7 and 7 .6 to 8.5 percent by the end of 2012. Consumer confidence, and therefore spending, remains speculative for the balance of 2011 and 2012 and may be adversely affected by federal and state fiscal difficulties. With federal stimulus money being depleted, states are likely to face continuing severe cuts in spending. For the time being, most states and Congress appear unlikely to implement tax increases, which would further limit disposable income. But other factors, notably rising oil and commodities prices worldwide, are expected to exert con- tinuing pressure on consumer and business budgets for the foreseeable future. Spending is likely to be restrained, and consumers and businesses are likely to remain very price sensitive.
Although the "paperless office" has yet to become the pervasive reality predicted in popular media, it is still true that more and more technological innovations have been adopted to reduce the consumption of paper and other traditional office supply products. Record-keeping, in par- ticular, is moving rapidly into the digital realm, and document delivery is as well. But recent figures suggest that traditional paper archival systems still account for 60 percent of document storage. Advances in mobile technologies, including devices such as the NOOK, Kindle, iPad, and iPhone are negatively impacting the offlce supply business.
Perhaps the most persistent trend that relates to paper usage in particular, and indeed business practice in general, is the increasing sensitivity to and interest in environmental sustainability. All of the office supply industry competitors have undertaken various "green" initiatives in recent
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EXHIBIT I Comparative Data for Office Supply lndustry Competitors Staples Office Depot OfficeMax
Revenue (billions)
Net Income (millions)
Total Assets (billions)
Total Debt (billions)
Store Count
Distribution Centers
Employees (approx., thousands)
$24.ss
881.95
13.91
6.97
2281
125
89
$11.63
-81.74
4.65
3.52
t602 39
40
$7.15
68.63
4.08
2.78
1050
44
35
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Sources: Staples, Office Depot, OfficeMax -10Ks; Staples.com; OfficeDepot.com; OfficeMax.com.
stores. Companies thus have made significant investments in warehousing and fulfillment cen- ters, permitting them to stockpile inventories in centralized locations that can service regional stores with products tailored to local demand. This trend has been accelerating in recent years as industry competitors have decreased store sizes, opting instead to achieve flexibility in their distribution systems.
Competitors Comparative financial data and key statistics for rival firms in this industry are presented in Exhibit 8. Brief discussions of the history and operations of Office Depot and OfficeMax follow. Note that Staples is larger than Office Depot and OffrceMax combined.
Office Depot The second-largest office supply company, Office Depot opened its first store in Boca Raton, Florida, in 1986. Today the company boasts annual revenues of nearly $12 billion and oper- ates over 1,100 stores in the United States and Canada, with an additional 400 stores overseas. Office Depot followed much the same pattern of rapid expansion that Staples had undertaken, and briefly overtook Staples for the lead in the industry in 1989. Both companies continued to expand, Staples more rapidly. Most of Office Depot's efforts of late have been in the interna- tional arena and the continuing development of its online presence.
Office Depot, like Staples, is organized into three divisions: 1) North American Retail, 2) North American Business Solutions, and 3) International. Its Retail division offers the standard range of products, and most stores also offer copying and printing services. The company also offers PC support and a network installation service. The Business Solutions Division focuses on providing small- and mid-sized companies with supplies, technology, services, and furniture through catalogs, the Internet, and a dedicated sales force. There is also a contract business that serves medium to large companies, offering contract pricing rather than item-by-item retail pricing. The International division operates in 55 countries in Europe, Asia, and Latin America.
Office Depot's total revenue of $2,973.0 million the first quarter of 2011 fell short of the Zacks Consensus Estimate of $2,979.0 million and dropped 3.2 percent from the prior-year quarter, registering sales declines in each business segment. Reflective of engrained problems facing the industry, Office Depot is struggling.
OfficeMax The third-largest office supply company, OfficeMax was incorporated in 1988 and enjoyed rapid success. The company has about 1,000 superstores across the United States, Puerto Rico, and Mexico. The stores offer about 11,000 name-brand and OfficeMax-branded prod- ucts, including paper, pens, forms, and organizers, as well as office furniture and a wide range of technology products. Much like Staples and Office Depot, OfficeMax also provides printing and document services through its ImPress store-within-a-store. In addition to its
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