What's Going Wrong With Office Supply Superstores?

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Staples Launch of 3D Printing in Los Angeles
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This would seem to be a great time to invest in office supply superstores. Corporate America has been humming along, showing improvement in recent years. The second- and third-largest chains -- Office Depot (ODP) and OfficeMax -- merged late last year, giving the industry one less cutthroat competitor to battle.

However, reality paints a bleaker portrait. Staples (SPLS) reported quarterly results on Wednesday morning, and the country's leading office supply retailer isn't doing so well.

Sales slipped nearly 2 percent to $5.2 billion. The impact of foreign exchange rates at international locations weighed on results, but Staples' top line still would have taken a step back without the currency fluctuations. Adjusted earnings plunged 27 percent to $75 million, or 12 cents a share.

Analysts were holding out for 11 cents a share in adjusted net income and a 3 percent slide in sales, so technically this would be considered a beat. Staples had missed Wall Street's profit targets in three of the past four quarters, so this is a welcome surprise. But it just doesn't seem right to applaud results when sales and profitability are going the wrong way.

Extreme Makeover: Home Office Edition

Earlier this year Staples revealed plans to close as many as 225 of its stores. It shuttered 80 during the quarter and is planning to close another 140 later this year. It's not the first time that Staples has tried to shake things up. It announced a restructuring two years ago as weakness in Europe and the need to update its online platform to compete with Amazon.com (AMZN) pressured its operations.

With half of Staples' orders being placed online these days, it can't afford to ignore Amazon's pricing advantages, even if it's the one backed by local stores and delivery trucks to fulfill orders the next morning. And this is one area that has been a welcome success story.

The retailer announced on Wednesday that sales growth at Staples.com clocked in at 8 percent. The addition of in-store Staples.com kiosks is seeing growth through that channel grow even faster. Interestingly, customers are starting to buy more stuff online beyond office supplies. If a Staples truck is going to be pulling up to a customer's home or office the next day why not load up on items from its widening online catalog?

None of this should find Amazon breaking a sweat. Amazon's sales soared 23 percent in its latest quarter, and business overall continues to decline at Staples.

Taking Care of Business

The success that Staples is having in cyberspace is taking a toll on what's happening at the physical store level. The 8 percent uptick in online sales was more than offset by store closures and a 5 percent dive in comparable store sales.

Slipping sales at the store level isn't unique to Staples. Office Depot reported earlier this month a 3 percent decline in comparable store sales. It's processing fewer transactions, and overall sales also declined when we combine results of Office Depot and the acquired OfficeMax.

The decline in comps for the chains is made even more problematic because Office Depot and OfficeMax have been closing underperforming stores. This should increase visits to the remaining stores as customers at the closed locations drive over to them -- but they must be heading somewhere else.

The merger between Office Depot and OfficeMax should have helped the industry. It should have given remaining operators more pricing power. It hasn't played out that way. Sales fell at Staples and Office Depot last year, and revenue continues to head lower this year.

With the economy improving, are entrepreneurs and small business operators just not spending as much on office supplies as they used to? Have cloud computing, digital delivery and the growing popularity of telecommuting eaten into demand? Something is clearly keeping shoppers away from the office supply superstores, and the fact that Staples is trying to find growth away from office essentials but is still failing to grow its overall sales and profitability doesn't make this a very encouraging niche for investors.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Staples. Try any of our newsletter services free for 30 days.

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What's Going Wrong With Office Supply Superstores?
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