Written by Aura Gilham, GEI Associate
On July 15, Staples (NASDAQ:SPLS) officially launched the back-to-school season. In the fall of 2013, 50.1 million students attended either public elementary or secondary schools in America alone. A slightly larger number is expected to attend this fall; the demand for educational materials should be skyrocketing again during the last few weeks before schools actually open.
Though this may seem a trivial matter to those removed from back-to-school shopping and an annoyance better left to the recesses of the minds of parents engaged in the activity, Staples' low prices for school supplies, "Less List" and 110% money back guarantee attract a lot of business during this season. This means investors should keep an eye on the price of Staples stock.
SPLS reached two-year high of $17.30 in August during last year's back-to-school season, up from from $13.08 in May. This year the stock has not made a seasonal move yet, "snoozing" around $11. SPLS closed at $10.99 Friday (25 July), very near a ten-year low. Since the next earnings date remains relatively distant, (20 August), the short term effects of increased advertising exposure and sales brought on by the back-to-school season may spur the value of the stock over the next few weeks.
As far as long term investment in Staples goes, shares are currently near decade lows. This plunge results from a combination of online competition, changes in consumer preferences and union boycotts. The stock has not been helped by revenues that have flat lined for the past three years and declining net income (2012 recorded at net income loss). The business has been suffering because of poor performance in the traditional retail arena. But online sales have been growing rapidly and the company has been able to maintain healthy free cash flow levels. All this means that, rather than indicating the company's failure, the decline in stock price may be an opportunity for investors to profit while the company restructures.
The online competition faced by Staples diverts many potential investors because the popularity and reach of e-commerce intimidates some potential customers. However, Staples follows only Apple and Amazon.com in e-commerce, making it the third largest online retailer. Additionally, Staples recently acquired PNI, a Canadian electronics company, which will improve the online experience for Staples customers as it will allow Staples to customize technological options.
As far as consumer preferences go, Staples and Staples investors can focus on other subjects, as over 80% of Staples revenue comes directly from commercial purchases. As businesses are unlikely to change suppliers or spending, Staples possesses a solid sales base. Although the boycott initiated by the American Postal Workers Union negatively impacted Staples' financials in the last quarter, Staples decided to take steps to satisfy the union and the boycott ended last week. After close consideration of facts, the consequential decline in SPLS prices of 35% year to date seems much too steep.
Stock prices dropped when Staples announced the impending closure of 225 stores across America over the next two years, but these closures may in fact facilitate a growth in overall revenue. The online market continues to grow and Staples' acknowledgment and acceptance of this trend allows them to recognize the need to close physical stores and direct more investment towards developing online presence. Although Staples already leads the industry in online presence, with convenient options such as online ordering with in store pickup and inventory checks, a great strength remains the network Staples developed that allows for next day delivery to approximately 95% of Americans. In this digital age, Staples' decision to close storefronts seems a strategic move to maintain sales and decrease costs.
Much more uplifting than the reported 2.8% decline in revenue last quarter, Staples maintains profitability, unlike other competitors such as Office Depot. Thus, despite poor outlook for growth of the office supply niche, SPLS should still be a profitable investment with a strong dividend yield of 4.3%, a low current price and below market PE of 13. Essentially, regardless of whether or not school is on your agenda, back-to-school shopping at Staples sounds attractive; and the low prices extend to stock. Readers, let us profit from education.
- Back to school statistics (National Center for Educational Statistics)
- Staples Is Trying to Become Amazon for Businesses, And It Just Might Work (Timothy Green, The Motley Fool, 27 March 2014)
- Staples Dividend Yield (YCharts, 25 July 2014)
- Staples, USPS end program to set up mini-post offices in stores (Devika Krishna Kumar, Reuters, 15 July 2014)
- Staples closing 225 stores, strengthens online focus (Paul Davidson, USA Today, 07 March 2014)