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Staples – 2011

Forest David

A. Case Abstract

Staples is a comprehensive strategic management case that includes the company’s year-end 2010 financial

statements, organizational chart, competitor information and more. The case time setting is the year 2011.

Sufficient internal and external data are provided to enable students to evaluate current strategies and

recommend a three-year strategic plan for the company. Headquartered in Framingham, Massachusetts,

Staples’s common stock is publicly traded under the ticker symbol SPLS.

Staples is the #1 office supply superstore operator in the US. selling office products, furniture, computers,

and other supplies through its chain of some 2,280 Staples and Staples Express stores in the Americas,

Europe, Asia, and Australia. Most (about 1,900) of its superstores are located in North America. In addition

to retail outlets, Staples sells office products via the Internet, its catalog, and its direct sales operations,

including subsidiary Quill Corporation. Staples also provides document management and copying services

through its retail chain, as well as promotional products. Staples also targets customers worldwide

through its Corporate Express business (acquired in 2008). Staples pioneered the office superstore concept

in 1986 and now has annual sales of $25 billion, ranking second in the world in eCommerce sales. With

90,000 associates worldwide, Staples operates in 26 countries.

B. Vision Statement (proposed)

To become the world’s largest office retail store.

C. Mission Statement (actual)

"Staples Soul reflects our commitment to corporate responsibility (8). It's a holistic approach to business

that recognizes the close connection between our financial success (5) and our desire to make a positive

impact on our associates (9), communities, and the planet (3) by joining together the following areas:

diversity, the environment, our community, and ethics (6). It's how we do business—that's Staples Soul.

(proposed)

At Staples our mission is to be the total office products and solutions provider (2) for small business, home

offices and consumers (1) by providing a broad mix of merchandise and services (4) at everyday low prices

in an atmosphere of enthusiastic and knowledgeable sales force (5,7) worldwide (3). By joining together

the following areas: sound business, diversity, the environment, our community, and ethics (6,9) we strive

to be a good corporate citizen (8) while maximizing shareholder value.

1. Customers

2. Products or services

3. Markets

4. Technology

5. Concern for survival, growth, and profitability

6. Philosophy

7. Self-concept

8. Concern for public image

9. Concern for employee

D. External Audit

Opportunities

1. Office supply sales to increase 5% as the economy improves.

2. Office products industry sales expected to increase 13%.

3. Many smaller competitors are in weak financial positions.

4. Low borrowing rates and negotiable payback terms.

5. Gift card popularity increase of 7.3% in specialty retail during 2009.

6. Online sales increasing faster than traditional retail sales.

7. World economy is slowly on a rebound.

8. "Emerging economies" have accounted for nearly 70% of world growth in the last five years.

9. Value of the USD decreasing by .07 in long-term over the last five years against the EUR.

10. OfficeMax reported negative net income in 2008 and 2009 with marginally positive net income in

2010.

Threats

1. Consumers preference for environmental friendly products and paperless society.

2. Technological problems impacting foreign operations causing production to decrease by 6%.

3. Increase in U.S minimum wage (75% of Staples profit comes from the U.S.).

4. Hesitance of banks to lend affects Staples’ expansion plans.

5. Political and economic turmoil in Europe.

6. 86% of companies plan to spend more on social media in 2011 for marketing and customer service.

7. Unemployment rate continues to be just below 10%.

8. Consumer spending has been flat over the last 2 years.

9. National customer satisfaction has been flat over last 2 years.

10. Office Depot and Office Max are large global competitors.

Competitive Profile Matrix

EFE Matrix

Weight Rating Score Rating Score Rating Score

0.18 3 0.54 1 0.18 2 0.36

0.12 3 0.36 1 0.12 2 0.24

0.08 3 0.24 1 0.08 2 0.16

0.09 3 0.27 1 0.09 2 0.18

0.16 4 0.64 2 0.32 3 0.48

0.09 4 0.36 2 0.18 3 0.27

0.07 3 0.21 1 0.07 2 0.14

0.06 4 0.24 1 0.06 2 0.12

0.05 4 0.20 2 0.10 3 0.15

0.10 3 0.30 1 0.10 2 0.20

1.00 3.36 1.30 2.30

Price Competitiveness

Financial Stability

E-Commerce

Customer Service

Product Quality

Advertising

Totals

Global Expansion

Sales Distribution

Organizational Structure

Critical Success Factors

Staples Office Max Office Depot

Market share

Opportunities Weight Rating Weighted Score

1. Office supply sales to increase 5% as the economy improves. 0.05 3 0.15

2. Office products industry sales expected to increase 13%. 0.05 3 0.15

3. Many smaller competitors are in weak financial positions. 0.06 2 0.12

4. Low borrowing rates and negotiable payback terms. 0.05 2 0.10

5. Gift card popularity increase of 7.3% in specialty retail during

2009.

0.03 3 0.09

6. Online sales increasing faster than traditional retail sales. 0.07 2 0.14

7. World economy is slowly on a rebound. 0.07 3 0.21

8. "Emerging economies" have accounted for nearly 70% of world

growth in the last five years.

0.08 3 0.24

9. Value of the USD decreasing by .07 in long-term over the last

five years against the EUR.

0.04 3 0.12

10. OfficeMax reported negative net income in 2008 and 2009 with

marginally positive net income in 2010.

0.06 2 0.12

E. Internal Audit

Strengths

1. Staples has an excellent pricing system.

2. Efficient e-commerce system.

3. Integrated supply chain.

4. Uniform adoption of new financial performance indicators which helps identify trends on a more

reliable basis and does not give false impressions.

5. Staples brands account for 22% of sales with 10-15% saving to customers.

6. Overall sales growth of 5.2%.

7. Currently operates in 24 different countries.

Weaknesses 1. Have many stores close together possibly cannibalizing profits.

2. Over reliance of North American retail market.

3. Low sales per employee ratio compared to the industry average.

4. Non-participation of employees in the decision making process.(top-down management)

5. Own-branded goods will eventually cause problems between Staples and third-party suppliers.

6. Inability to repay long-term debt.

7. High rates of employee turnover in international stores.

8. Debt of $2.54 billion is excessive.

9. North American Delivery’s business unit income rate decreased to 8.2% from 9.0%.

Financial Ratio Analysis

Growth Rate Percent Staples Industry S&P 500 Sales (Qtr vs year ago qtr) 5.20 7.80 14.50

Net Income (YTD vs YTD) NA NA NA

Threats Weight Rating Weighted Score

1. Consumers preference for environmental friendly products and

paperless society. 0.02 3 0.06

2. Technological problems impacting foreign operations causing

production to decrease by 6%. 0.03 3 0.09

3. Increase in U.S minimum wage (75% of Staples profit comes from

the U.S.). 0.03 3 0.09

4. Hesitance of banks to lend affects Staples’ expansion plans. 0.04 3 0.12

5. Political and economic turmoil in Europe. 0.05 2 0.10

6. 86% of companies plan to spend more on social media in 2011 for

marketing and customer service. 0.04 3 0.12

7. Unemployment rate continues to be just below 10%. 0.04 2 0.08

8. Consumer spending has been flat over the last 2 years. 0.04 2 0.08

9. National customer satisfaction has been flat over last 2 years. 0.03 2 0.06

10. Office Depot and Office Max are large global competitors. 0.12 3 0.36

TOTALS 1.00 2.60

Net Income (Qtr vs year ago qtr) 36.00 26.50 48.60

Sales (5-Year Annual Avg.) 8.83 8.45 8.30

Net Income (5-Year Annual Avg.) 2.38 6.86 8.72

Dividends (5-Year Annual Avg.) 16.19 8.80 5.61

Profit Margin Percent

Gross Margin 26.9 42.9 39.5

Pre-Tax Margin 5.5 8.9 18.2

Net Profit Margin 3.8 5.9 13.2

5Yr Gross Margin (5-Year Avg.) 27.5 41.6 39.7

Liquidity Ratios

Debt/Equity Ratio 0.32 0.49 0.98

Current Ratio 1.6 1.7 1.3

Quick Ratio 0.9 0.9 0.9

Profitability Ratios

Return On Equity 13.8 14.4 26.0

Return On Assets 7.0 7.7 8.8

Return On Capital 10.0 10.6 11.8

Return On Equity (5-Year Avg.) 15.3 12.4 23.8

Return On Assets (5-Year Avg.) 8.0 6.4 8.0

Return On Capital (5-Year Avg.) 11.8 8.9 10.8

Efficiency Ratios

Income/Employee 17,714 25,229 126,792

Revenue/Employee 471,393 433,187 1 Mil

Receivable Turnover 13.3 30.3 15.2

Inventory Turnover 7.0 6.1 12.4

Net Worth Analysis (in millions)

IFE Matrix

Stockholders' Equity $6,944

Net Income x 5 $4,410

(Share Price/EPS) x Net Income $9,877

Number of Shares Outstanding x Share Price $10,401

Method Average $7,908

Strengths Weight Rating Weighted Score

1. Staples has an excellent pricing system. 0.08 4 0.32

2. Efficient e-commerce system. 0.07 4 0.28

3. Integrated supply chain. 0.07 4 0.28

4. Uniform adoption of new financial performance indicators which

helps identify trends on a more reliable basis and does not give

false impressions.

0.04 4 0.16

5. Staples brands account for 22% of sales with 10-15% saving to

customers. 0.04 4 0.16

6. Overall sales growth of 5.2%. 0.06 4 0.24

7. Currently operates in 24 different countries. 0.06 4 0.24

F. SWOT

SO Strategies

1. Adopt a new supply chain model abroad (S3, S7, O8).

2. Increase R&D on supply of office services & IT technologies by 10% (S2, O6).

WO Strategies

1. Secure external funding with favorable credit rating and excellent payback terms (W6, W8, O4).

2. Add 200 new stores in China and Brazil (W2, O1, O8, O9).

ST Strategies

1. Develop strategic alliances with suppliers (S4, S8, S3, T10).

WT Strategies

1. Focus on own-brand value pricing strategy (W2, W3, T1).

Weaknesses Weight Rating Weighted Score

1. Have many stores close together possibly cannibalizing profits. 0.07 2 0.14

2. Over reliance of North American retail market. 0.10 2 0.20

3. Low sales per employee ratio compared to the industry average. 0.04 1 0.04

4. Non-participation of employees in the decision making

process.(top-down management) 0.04 1 0.04

5. Own-branded goods will eventually cause problems between

Staples and third-party suppliers. 0.04 2 0.08

6. Inability to repay long-term debt. 0.06 1 0.06

7. High rates of employee turnover in international stores. 0.07 1 0.07

8. Debt of $2.54 billion is excessive. 0.10 1 0.10

9. North American Delivery’s business unit income rate decreased

to 8.2% from 9.0%. 0.06 2 0.12

TOTALS 1.00 2.53

G. SPACE Matrix

-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7

-1

-2

-3

-4

-5

-6

-7

IPCP

Defensive

AggressiveConservative FP

Competitive SP

Internal Analysis: External Analysis:

Financial Position (FP) Stability Position (SP)

4 -2

6 -2

3 -5

5 -3

Financial Position (FP) Average 4.4 Stability Position (SP) Average -2.8

Rate of Inflation

Technological Changes

Price Elasticity of Demand

Competitive Pressure

Barriers to Entry into Market

Return on Equity (ROE)

Current Ratio

Debt/Equity Ratio

Gross Margin

Inventory Turnover

Internal Analysis: External Analysis:

Competitive Position (CP) Industry Position (IP)

-3 5

-3 4

-4 5

Competitive Position (CP) Average -3.2 Industry Position (IP) Average 4.4

Growth Potential

Financial Stability

Ease of Entry into Market

Resource Utilization

Profit Potential

Market Share

Product Quality

Customer Loyalty

Technological know-how

Control over Suppliers and Distributors

H. Grand Strategy Matrix

Staples

Strong

Competitive

Position

Slow Market Growth

Weak

Competitive

Position

Quadrant III Quadrant IV

Rapid Market Growth

Quadrant II Quadrant I

I. The Internal-External (IE) Matrix

Sales (in millions) 2010 North American Delivery $9,849

North American Retail 9,530

International Operations 5,166

Total Sales 24,545

4.0 I II III

High

3.0 IV V VI

The

EFE

Total Medium Staples

Weighted

Scores

2.0 VII VIII IX

Low

1.0

Strong Average Weak

4.0 to 3.0 2.99 to 2.0 1.99 to 1.0

The Total IFE Weighted Scores

J. QSPM

Opportunities Weight AS TAS AS TAS

1. Office supply sales to increase 5% as the economy improves. 0.05 4 0.20 2 0.10

2. Office products industry sales expected to increase 13%. 0.05 0 0.00 0 0.00

3. Many smaller competitors are in weak financial positions. 0.06 2 0.12 3 0.18

4. Low borrowing rates and negotiable payback terms. 0.05 0 0.00 0 0.00

5. Gift card popularity increase of 7.3% in specialty retail during

2009. 0.03 0 0.00 0 0.00

6. Online sales increasing faster than traditional retail sales. 0.07 2 0.14 3 0.21

7. World economy is slowly on a rebound. 0.07 4 0.28 3 0.21

8. "Emerging economies" have accounted for nearly 70% of world 0.08 4 0.32 2 0.16

9. Value of the USD decreasing by .07 in long-term over the last 0.04 1 0.04 4 0.16

10. OfficeMax reported negative net income in 2008 and 2009 with

marginally positive net income in 2010. 0.06 0 0.00 0 0.00

Increase

financial

staff by 20%

Add 200 new

stores in

China and

Brazil

Threats Weight AS TAS AS TAS

1. Consumers preference for environmental friendly products and

paperless society. 0.02 0 0.00 0 0.00

2. Technological problems impacting foreign operations causing 0.03 4 0.12 2 0.06

3. Increase in U.S minimum wage (75% of Staples profit comes from

the U.S.). 0.03 0 0.00 0 0.00

4. Hesitance of banks to lend affects Staples’ expansion plans. 0.04 2 0.08 4 0.16

5. Political and economic turmoil in Europe. 0.05 3 0.15 2 0.10

6. 86% of companies plan to spend more on social media in 2011 for

marketing and customer service. 0.04 1 0.04 3 0.12

7. Unemployment rate continues to be just below 10%. 0.04 1 0.04 3 0.12

8. Consumer spending has been flat over the last 2 years. 0.04 3 0.12 4 0.16

9. National customer satisfaction has been flat over last 2 years. 0.03 3 0.09 4 0.12

10. Office Depot and Office Max are large global competitors. 0.12 3 0.36 4 0.48

K. Recommendations

1. Add 200 new stores in China and Brazil at $2M each for 400M. 2. Increase financial staff by 20%.

L. EPS/EBIT Analysis (in millions)

Amount Needed: $400M Stock Price: $15.37 Shares Outstanding: 709

Interest Rate: 5% Tax Rate: 35%

Strengths Weight AS TAS AS TAS

1. Staples has an excellent pricing system. 0.08 1 0.08 3 0.24

2. Efficient e-commerce system. 0.07 0 0.00 0 0.00

3. Integrated supply chain. 0.07 0 0.00 0 0.00

4. Uniform adoption of new financial performance indicators which

helps identify trends on a more reliable basis and does not give

false impressions.

0.04 0 0.00 0 0.00

5. Staples brands account for 22% of sales with 10-15% saving to

customers. 0.04 0 0.00 0 0.00

6. Overall sales growth of 5.2%. 0.06 1 0.06 3 0.18

7. Currently operates in 24 different countries. 0.06 1 0.06 3 0.18

Add 200 new

stores in

China and

Brazil

Increase

financial

staff by 20%

Weaknesses Weight AS TAS AS TAS

1. Have many stores close together possibly cannibalizing profits. 0.07 0 0.00 0 0.00

2. Over reliance of North American retail market. 0.10 4 0.40 2 0.20

3. Low sales per employee ratio compared to the industry average. 0.04 1 0.04 3 0.12

4. Non-participation of employees in the decision making

process.(top-down management) 0.04 0 0.00 0 0.00

5. Own-branded goods will eventually cause problems between

Staples and third-party suppliers. 0.04 0 0.00 0 0.00

6. Inability to repay long-term debt. 0.06 1 0.06 3 0.18

7. High rates of employee turnover in international stores. 0.07 0 0.00 0 0.00

8. Debt of $2.54 billion is excessive. 0.10 1 0.10 3 0.30

9. North American Delivery’s business unit income rate decreased

to 8.2% from 9.0%. 0.06 2 0.12 3 0.18

TOTALS 3.02 3.92

M. Epilogue

Many analysts believe Staples is gearing up for a takeover of OfficeMax and/or Office Depot. Staples is

slowly taking away market share from both rival firms, but the company would improve margins

significantly if it could reduce competition. Staples operates in 26 countries but has performed weakly

outside the USA. Staples’ China operations is likely going to lose about $20 million in 2011, while Brazil

has seen double-digit revenue growth but zero profit. Staples is scaling back on the European printing

business. A buyout of either OfficeMax or Office Depot would improve Staples’ brand, add products, and

improve the firm’s economies of scale.

Europe and Australia stand out in Staples' international operations. Contrasting with operations in other

foreign regions, all of Europe for Staples is profitable, with the strongest performance in Germany.

Australia follows with improving Staples operations. Staples has a goal to return $300 to $500 million back

to shareholders through its share purchasing program but many analysts are bullish that this figure will be

exceeded and actually total $750 million. Staples has sufficient resources to stage an exciting takeover of

OfficeMax and/or Office Depot if it chooses.

Staples actively supports Jumpstart’s Read for the Record®, a national campaign that mobilizes adults and

children to close the early education achievement gap by setting a reading world record. For the third

consecutive year, Staples in October 2011 hosted events in Framingham and Worcester, Massachusetts to

give local youth the opportunity to participate in this unique reading experience. In the last few years,

Staples has donated more than $100,000 to Jumpstart in support of Read for the Record, and has helped

raise awareness of the early education crisis affecting millions of at-risk children all over the world.

Investors and financial analysts believe that Staples’ rising sales and profit can reverse 2011’s 35 percent

decline even as demand for office supplies falls. Shares of Staples trade near a record low price-to-earnings

ratio and have lost less than rivals Office Depot and Office Max which plunged 60 percent and 71 percent

Recession Normal Boom Recession Normal Boom

EBIT $1,000 $1,500 $2,000 $1,000 $1,500 $2,000

Interest 0 0 0 20 20 20

EBT 1,000 1,500 2,000 980 1,480 1,980

Taxes 350 525 700 343 518 693

EAT 650 975 1,300 637 962 1,287

# Shares 735 735 735 709 709 709

EPS 0.88 1.33 1.77 0.90 1.36 1.82

Common Stock Financing Debt Financing

20 Percent Stock 80 Percent Stock

Recession Normal Boom Recession Normal Boom

EBIT $1,000 $1,500 $2,000 $1,000 $1,500 $2,000

Interest 16 16 16 4 4 4

EBT 984 1,484 1,984 996 1,496 1,996

Taxes 344 519 694 349 524 699

EAT 640 965 1,290 647 972 1,297

# Shares 714 714 714 730 730 730

EPS 0.90 1.35 1.81 0.89 1.33 1.78

in 2011.

“Staples’ stock is relatively cheap, and we’re also having year-on-year earnings growth,” Liam Dalton,

chief executive officer of Axiom Capital Management Inc. in New York, which oversees $1.8 billion, said

in a telephone interview. “There are other industries where earnings are much more sensitive to the

economic cycle, and this one has less sensitivity because they have a fairly predictable business model.”

Staples’s annual revenue has increased every year since at least 2001, according to data compiled by

Bloomberg. Net income rose 19 percent in fiscal 2011 and will climb 11 percent and 6 percent in the next

two years, according to analyst estimates compiled by Bloomberg.

Staples’ stock currently trades for 11.3 times reported earnings, 14 percent less than the S&P 500’s

valuation. The 22 percent discount on August 10, 2011 was the lowest since December 2000, according to

data compiled by Bloomberg.