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Staples sees slow sales in economic recovery

The Staples rule has accurately anticipated big swings in the economy and the stock market for longer than I can recall. So why isn’t it working now?

The rule: Simply watch small-business customers who buy supplies at Staples Inc. of Framingham, the office superstore giant. They get cold feet as soon as the economy begins to go soft and start buying again ahead of clear evidence of a recovery. They offer a ground-level view of the economy and where it is headed.

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But that part of Staples’ business has not bounced back as the economy regains steam ever so slowly. Staples’ sales improvement is so modest it almost looks like a flat line on a chart. Sales trends are even worse at the other two big office superstore companies - where 2011 sales are down so far.

There is more than one possible explanation for this turn of events. The real-life economy may be worse than government statistics suggest, or perhaps other competitors are nibbling at business. Common sources of credit for small business owners - from commercial loans to home equity lines - are harder to tap in this recovery. In the case of Staples, diversification into Europe has led the company to countries with even bigger problems than our own.

One more theory: Companies are finding new ways to trim their office supply expenses, in large part by embracing technology and cutting back on paper. Once businesses find savings like that, they don’t go back to their old ways.

That idea is advanced most assertively by Goldman Sachs, the investment bank that helped take Staples public 22 years ago. Analyst Matthew Fassler wrote extensively about it a week ago, when he cut Goldman’s recommendation on Staples stock to a “sell.’’

“The office supplies sector continues to face a secular decline in paper consumption resulting from changing office technology, environmental concerns, and companies’ ongoing quest for efficiency,’’ he wrote.

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Fassler first spotted businesses holding the line on office expenses a year ago, based on a compilation of research that included Goldman’s own survey of companies that buy supplies from retailers such as Staples.

The business results of the past year seemed to support his argument. Follow-up research, including a new Goldman survey, suggests attitudes for the year ahead haven’t changed, according to Fassler.

Goldman Sachs compares sales of office product to all sorts of economic measures - from industrial production to payrolls - and concludes they haven’t kept pace. Those sales started to recover with the economy in 2009 but could not maintain a comparable growth trajectory.

Technology and the long-term decline of paper used in the office are a big part of that story. Fassler points to the growing use of popular electronics - particularly smartphones and tablets - as well as more prosaic technology advances, such as photocopiers that print on both sides of a sheet of paper.

Staples executives have described a “pretty tough environment’’ for business this year in conference calls with stock analysts. But they declined to talk to me yesterday, citing the company’s upcoming quarterly report at the end of the month. Those executives, speaking in November, forecast “flat to low single-digit’’ sales growth for the final quarter of their fiscal year.

Staples shares have slumped 32 percent in the past year.

In its most recent quarter, the company reported earnings up 15 percent, despite revenues that were nearly unchanged. One source of growth was so-called cleaning and break-room products, which now account for $800 million in annual sales.

Stock analysts are split over Staples: Ten recommend the shares, nine rate them a “hold,’’ and two say sell.

Perhaps Staples will report better sales of traditional products when it posts its quarterly results in a few weeks. The economy seemed to be accelerating through those months - November through January.

Staples remains the gold standard in office superstores. I would count on the company finding ways to grow and prosper. But the Staples rule may not tell us as much about the economy’s future as it once did.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.

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