Edited by Vani Rao
Competition from online stores triggers cost-cutting to save $500 million
Staples Inc. (NASDAQ:SPLS), the largest US office-supplies chain, is on a massive cost-cutting spree after facing intense competition from online stores. As part of this strategy, the company will close about 12% of its North American stores and cut as much as $500 million in costs by 2015. Last year, Staples pull down shutters in 42 stores in North America; it now has 1,846 stores in the region. By the end of 2015, in addition to the store closings, Staples is looking to achieve savings from areas including supply chain, sales force, marketing and information-technology services, according to Bloomberg.
The retailer is facing increased competition from online rivals such as Amazon.com Inc. Others brick and mortar retail chains are also facing the heat from their online rivals, a challenge that prompted consolidation in the industry such as the Office Depot Inc. (NYSE:ODP) and OfficeMax Inc. merger last year.
Staples stated that sales in its fiscal first quarter will fall from a year earlier, the fifth straight quarterly decline if this happens; and profit will be as little as 22 cents a share, lower than analysts’ estimates of 27 cents. “With nearly half of our sales generated online today, we’re meeting the changing needs of business customers and taking aggressive action to reduce costs and improve efficiency,” Chief Executive Officer Ron Sargent said in a press release dated 7 March 2014.
During the fourth quarter, Staples said that its same-store sales fell 7%, its biggest plunge since the mid-2009, while sales from Staples.com gained 10%. Profit plunged 28% to 33 cents a share, or $212 million, from 46 cents a share, or $308 million, a year earlier.
Meanwhile, following the cost-cutting announcement, shares fell 15% to $11.35 at the close in New York on 7 March, the biggest one-day decline since May 18, 2011, as shown below. The stock has slid 29% this year, compared with a 1.6% gain for the Standard & Poor’s 500 Index.
Harsh Retail Climate Plays Spoilsport
Staples Inc. is not the only one impacted by the harsh retail environment. Many other retailers unveiled tepid February same-store sales figures that missed already modest expectations. Retail Metrics Inc., a provider of retail metrics and same store data, said that sales at reporting retailers were up 2.7% so far. Sales marginally improved 1.7% without factoring in drugstores, according to the Retail Metrics.
Another set of metrics from Thomson Reuters also found that sales rose 2.7% last month, falling short of a projected 2.8% rise. Some segments, however, showed signs of beating analyst predictions. For instance, the clothing sector sans Gap beat estimates by growing 1.3%, while teen apparel struggled, reporting a 0.1% sales dip.
Predictions for a tough January showed some unexpected results with more store visits and post-holiday clearances that helped lift sales. On the other hand, retailers bore the brunt of lower margins. Thomson Reuters said that “retailers were severely affected by bad weather” in the first two weeks of February. However, the saving grace came in the form of improving weather conditions and tax refunds as the month progressed.
According to industry experts, foot traffic into stores declined 3% last month from February 2013. The best shopping day of the month was Monday, February 24, when shoppers lingered in stores for more than 25 minutes on average. The worst day was on Wednesday, February 19, when the harsh climate forced more people to shop online for Valentine’s Day purchases, resulting in a 10% drop in in-store visits.