Staples tries get itself back on track

Lynne Sladky /Associated Press/File 2011

Ron Sargent got on the line early in the morning, braced to deliver bad news.

Staples Inc. had already reported disappointing quarterly earnings before the sun rose on Aug. 21. Sargent, the chief executive, was about to warn stock analysts and investors on a conference call that Staples had also decided to scale back expectations for the rest of the year.

Each division of the office supply retailer was performing worse than it did the previous year, and the pace of decline appeared to be accelerating. The early stages of a critical business turnaround plan at Staples weren’t producing results fast enough.

“Clearly, we’re not happy to be taking down [business forecasts] this morning,” Sargent told the analysts. “We’re making good progress on our strategic reinvention, but it hasn’t been enough to offset tough trends in our core” businesses.

Sargent’s immediate vow: Staples would cut costs even more aggressively than planned to get back on track.

Within weeks, the company began to let go a number of senior executives. Staples conceded layoffs of “leadership” executives were underway at the company’s Framingham headquarters. But it has declined to identify any of the executives involved or comment on the scope of job cuts underway.

“There’s a need to cut costs because their revenues have been shrinking,” said Michael Baker, an analyst with Deutsche Bank Securities Inc. “They have underperformed their own expectations and that leads to changes.”

Staples, once a darling of the retail world, needs to get back on track soon. Though the company still sells more than $20 billion of office supplies each year and remains comfortably profitable, it faces unprecedented challenges from competitors and changing technology.

Intensifying online competition is putting pressure on sales and profit margins. Meanwhile, demand for many key products like paper, ink, and toner is waning, further squeezing profits at the company that invented the office supply superstore. Even Staples.com, the second largest e-commerce site in the world, is feeling the heat.

Staples first rolled out a plan to respond one year ago. The company developed a “multichannel” shopping strategy, encouraging customers to visit stores and browse online at the same time. It expanded the number of products available for sale online and aimed to reduce its store space across North America by 15 percent within the next three years. Analysts say recent disappointing business results would have been even worse without the company’s ongoing adjustments.

Still, Staples’ income had slumped by more than 15 percent over the first six months of its fiscal year. Profit dropped nearly 20 percent in the most recent fiscal quarter, and each of the company’s three main business categories reported troubling declines.

Operating income from US stores and Staples.com — which accounts for about half of all Staples business — plunged by 24 percent in the second quarter. International operations continued to lose money. The company’s contract supply business was off by about 10 percent.

Analysts say Staples isn’t closing stores fast enough to offset the decline in demand for many of its basic office supplies. The company has said it will examine leases as they come up for renewal to determine if a store should be closed, cut in half, or moved. It’s on track to close about 40 stores this year.

Oliver Wintermantel, a Staples stock analyst with ISI Group, said the company should be more aggressive and consider closing every store possible. It should also focus more on its contract business, he said.

“It’s a painful process, but probably what they have to do to survive,” Wintermantel said.

Staples plans to double the number of products on Staples.com to 300,000 by the end of the year. The retailer has added new categories both online and in its stores.

Many of the new products represent a necessary shift from traditional office supplies to digital products. But that still hurts the retailer’s bottom line. Profit margins are much higher on core office supplies than on tablets and smartphones.

“We’re going to see continued disappointment on the numbers,” said Wintermantel, who has had a sell rating on Staples stock since May 2012. “If you look back 10 years ago, Staples was the poster child of retail. But unfortunately the world moved on and they still have a lot of stores.”

The price of Staples shares, which closed Wednesday at $14.76, has bounced up and down. The stock is down 12 percent since the disappointing quarterly report last month, but still up nearly 30 percent since the start of the year. Staples shares have fallen sharply since trading above $25 per share early in 2010.

Meanwhile, Staples recently announced the development of a second e-commerce and engineering research facility in Seattle. The company said the center, scheduled to open in the coming months, will focus on the next generation of digital platforms, personalization, and big-data. Wintermantel said the decision to locate the facility in the backyard of Staples largest e-commerce rival, Amazon.com Inc., suggests Staples’ digital competition is stronger than ever. “For an office product retailer to open an e-commerce center in Seattle is very telling,” Wintermantel said. “They recognize where the future of retail is.”