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Assignment 33
(a) Staple case (12 PDF files = 12 page long case). If you see certain file upside down, please click “View”, then, “Rotate view” to fix it.
(b) Ratio Analysis Worksheet (1 Word document file). Please use this document and submit as an attachment.
Now, please work on the following tasks.
(1) Go over Staple case. Especially, financial part of the case! Find both Income Statement and Balance Sheet of Staples.
(2) Calculate various financial ratios on the worksheet. You can find formulas in your textbook! Do not worry too much for miscalculation, OK? Challenging is important!
(3) Check/analyze the rations to make your comments on liquidity, leverage, activity, and profitability of Staples. If you found some issues, please make suggestions to improve or maintain liquidity, leverage, activity, and profitability of Staples.
Financial Ratio Analysis Worksheet
Your Full Name:
2011 |
2010 |
2009 |
Basic Rules |
Liquidity |
|||
Current Ratio |
Should be >1.00 |
||
Quick Ratio |
Good to see close to 1 |
||
Leverage |
|||
Debt to total asset ratio |
Good to see less than 1 |
||
Debt to Equity ratio |
Smaller is better |
||
Activity |
|||
Inventory turnover |
Higher turnover will be better — Smaller inventory level will increase the turnover! |
||
Fixed asset turnover |
Higher turnover will be better — Smaller fixed assets level will increase the turnover (Productivity of the fixed assets)! |
||
Profitability |
|||
Gross profit margin |
Higher is better (Lower cost of goods sold or Higher sales will increase the margin) — Strategic directions (Ex. Focusing on sales quantity or Lean operations) |
||
Operating profit margin |
Higher is better – Operational efficiency will be indicated. Better cost structure might increase this margin. |
||
Net profit margin |
Higher is better. Total profitability (Corporate profitability). Check the interest expense and Discontinued operations. |
||
Return on total Assets (ROA) |
Higher is better. Consider EBIT and portion of total assets. The total sales for each $1 of total assets. |
||
Your own financial assessment / Analyses / Suggestions:
Liquidity of Staples:
Leverage of Staples:
Activity of Staples:
Profitability of Staples:
William J. Donoher
Missouri State University
SPLS
http J/www.staples.com
Headquartered just outside Boston, Massachusetts, in the town of Farmington, Staples, Inc. is
largest office supply retailer in the United States. The company’s 2010 financials revealed d
pointing results with only a 1.1 percent increase in sales to $24.55 billion. Staples’ stock pri
fell 7 percent during 2010, when most stocks were rising much higher. Despite dismal
Staples’ CEO’s pay package for 2010 increased 41 percent to $15.1 million. CEO Ron
received a base salary of $1.1 million plus a performance-based bonus of $2.4 million that was
percent more than the $1.3 million performance bonus he received the prior year. He also recei
in 2010 stock and option awards that totaled $11.1 million, up from $7.9 million the prior ye-.
Staples, Inc. perhaps needs a new executive compensation plan and a new strategic plan.
Staples’ International segment operates in 24 countries, including Australia, China, Uniea
Kingdom, and Germany, although about 1,900 of Staples’ 2,200 stores are located in Nufi
America. In recent quarters, Staples’ North American stores have had better margins than tlrefo
International operations, but International stores have posted stronger revenue growth. Th
future for Staples may well be outside the United States since price competition within ftfo
United States is very intense, and many countries of the world have a much higher expectel
growth in GDP than the USA. Staples perhaps needs to assess where in the world are their com-
petitors not located, and take the high ground in those countries.
Like many retailers, Staples’ fiscal year ends the end of January. Staples’ quarterly net
income reportedApril 30,2011 dropped 28 percent from the prior quarter to $198.2 millim
while revenues dropped 3.8 percent to $6.17 billion. Staples has over $4 billion in goodwill a
its balance sheet which is not good. In addition to its retail outlets, Staples sells office producs
via the Internet and through its catalog and direct sales operations, including subsidiary Quill
Corporation. Staples also provides document management and copying services as well a
promotional products. It targets customers worldwide through its Corporate Express business-
Office supplies represent almost 50 percent of Staples’ revenue, while business machinq
account for another 30 percent. The remaining revenue comes from computers and office furniture-
Staples pays a quarterly stock dividend, but at a relatively low payout ratio ofjust 29 percent. Sorc
analysts contend that Staples stores have a “museum” feel as the company has not adapted well to
the global shift to a paperless, ie digital, society.
The company faces intense competition from OfficeMax, Office Depot, Wal-Mart, KMart’
Target, Walgreens, and many other office supply retailers.
History
Founded in 1985 by Thomas G. Stemberg and Leo Kahn, Staples opened its first store in 1986
in Brighton, Massachusetts. In 1987, Staples constructed a 136,000-square-foot distribution and
processing center in Putnam, Connecticut. This facility was intended to permit Staples stores
to carry less on-site inventory even as the company as a whole offered a more comprehensive
selection. Goods could then be shipped to individual stores rapidly as demand necessitated
Staples grew from its initial three stores to 16 by the middle of 1988, atd to 23 by the beginning
of 1989. The company then raised an additional $32 million in capital for additional expan-
sion. The company soon introduced a new store format called Staples Express, which featured
a smaller physical footprint and roughly half the typical inventory of its regular stores. The new
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EXHIBIT 1 continued
Cou ntry/State/Provi nce/Reg i onfferritory
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
WestVirginia
Wisconsin
Wyoming
Total United States
Canada
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland
Nova Scotia
Northwest Territories
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon
Total Canada
Austria
Belgium
Denmark
Finland
Germany
Ireland
Italy
The Netherlands
Norway
Portugal
Spain
Sweden
United Kingdom
China
Argentina
Australia
Total Other
Number of Stores/Centers
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lnternal lssues
Business Segments
Staples is organized around three business segments: 1) North American Retail, 2) Nortt
American Delivery, and 3) International Operations. An overview of each segment’s activities
and subunits is provided in Exhibit 3. Financial information by segment is presented in
Exhibit 4. Note that North American Delivery is the company’s most consistent segmetrt
over the past two years, overtaking North American Retail in 2009 as the largest of tlrc
three. Staples’ International Operations segment delivered rapid sales growth in 2009, but
contracted in 2010. Note that unit’s profits as a percentage of sales increased, largely due to
improved cost efficiencies in its supply chain.
Signihcant country-based units within the International Operations segment include Stapler
China, a joint venture in India, and Corporate Express. Staples China began as a joint venturt
and now operates on a multichannel platform in Beijing, Shanghai, and Shenzhen/Guangzhou-
The unit operates 27 stores, two Staples UPS Express stores, and two furniture stores, as well ru
a dedicated website. A contract business unit, similar in nature to the company’s Staples Contract
operation, serves larger businesses as well as various governmental agencies. The company also
is rapidly expanding its presence in India, a $10 billion market, through its partnership witfo
Pantaloon Retail Ltd., the largest retailer in India.
The Corporate Express unit, operating in the Netherlands, New Zealand, and Australia”
is one of the more promising individual business units operated by Staples. As the company
describes it, Corporate Express works with customers “on the ‘little things’ that matter to them,
allowing them to get on with running their business.” The unit has secured valuable contracts in
janitorial services recently, among other similar basic office operations, and provides a range of
services including technology solutions, printing functions, promotional marketing, furnifurq
facility and kitchen supplies, and even catering.
The role of Corporate Express also happens to fit nicely with both the Staples Contract and
Quill units, housed within the North American Delivery segment. Within the Delivery segment,
Staples Contract, the company’s business-to-business products and services operation, is the
fastest-growing component. This unit provides an ilrray of customized services to medium-sized
and large companies, including interiors, technology, facility solutions, print solutions, and pro
motional products. Quill (and its Quill.com website) serves small to medium-sized businesses as
a direct-order and delivery business, and the unit enjoys a significant presence serving the legal,
educational, and medical professions. Together, these service-oriented units offer Staples the
EXHIBIT 3 Staples’Three Business Segments
1. North American Retail
. Retail store operations throughout the United States and Canada
. Average store: 20,000 sq. f1.,7000-8000 products
. In-store kiosks offer access to Staples.com and full selection of more than 30,000 products
‘ Copy & Print Centers
. UPS Ship Centers
. Staples EasyTech computer services
2. North American Delivery
. Staples Contract
. Staples Business Advantage: serves small- and medium-sized businesses
. Staples National Advantage: serves large companies
. Staples Business Delivery: catalogs and Staples.com
. Quill: Direct marketing (catalogs and Quill.com) to small- and medium-sized businesses
3. Intemational
. Asia/Pacific: China, Taiwan, India, Australia, New Zealand
. European Catalog
. European Contract
. European Retail
. South America
Source.’ Staples.com.
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with major brands across a wide variety of different product categories. The retail industry il
large has seen this trend emerge over the course of several years, and its main attraction for thc
retailer typically is the higher margins resulting from more favorable purchase contracts thatr
those obtainable from major brand manufacturers, as well as a greater degree of control over
supply, design, and manufacturing. Staples has a number of contra6tual agreements with various
manufacturers who supply the company with its store-branded product line.
A key ingredient in Staples’ management of its product lines, distribution, and inventory
system is the company’s website, Staples.com. While the company is attempting to minimize
physical inventory accumulation at its stores, more than 30,000 products are available via
Staples.com. Product orders are processed and products are typically shipped to a local store fu
customer pickup, free of charge. In the alternative, customers caa choose to have their purchase
delivered directly to their place of business or home, and Staples provides free delivery on
purchases exceeding $50.
The newest development in Staples’ delivery system is its purchase of a small fleet of
electric trucks in the fourth quarter of 2010. The trucks, manufactured by Smith Electric
Vehicles, offer a 16,000-pound capacity and a lithium-ion battery that can travel up to 100 miles
between charges. The manufacturer estimates that the trucks will achieve a 75 percent reduction
in fuel costs compared to diesel vehicles, but the electric trucks are more expensive. Investment
payback times thus are fairly lengthy. Staples plans to deploy 30 trucks in southern Califomia,
and an additional 11 in Ohio and Missouri.
The unifying theme of all of these aspects of the company’s operations is, of course, efficiency
and cost minimization. This has been Staples’ primary focus throughout its history and it enables
the company to offer lower prices to customers. But in a set of incidents eerily reminiscent of
alleged problems at similar cost-based organizations, such as Wal-Mart, Staples has been sued
for misclassifying employees as exempt under the Fair Labor Standards Act, thus permitting the
company to avoid paying overtime. The initial claim in 2009 (more are in process) awarded close to
$2.5 million in damages. In a separate incident, another employee was convicted of embezzlement
in a scheme in which fictitious vendor accounts were established and paid, ultimately, to the account
of the employee. While the amounts in question are, for the moment, fairly small for a company the
size of Staples, the bigger question posed is whether adequate incentives and procedural safeguardq
including direct oversight, are in place and effective to facilitate intemal control.
Marketing
Marketing has long been a part of Staples’ success. The company has successfully created and
embedded in popular culture various catch phrases such as “Yeah, we’ve got that,” and more
famously and recently, “That was easy.” The latter phrase was accompanied by development of
the ubiquitous “Easy Button,” a hockey puck-sized device that, when pushed, verbalizes the catch
phrase. Brand visibility also is enhanced via mechanisms such as product placement in popular
shows, such as The Office, and various publicity vehicles, such as the company’s sponsorship of
the Staples Center in Los Angeles.
Beyond this kind of broad and thematic brand-building, the company also seeks to tailor its
message to individual companies and customers. Its database enables targeted ads and coupon
or discount offers. Store openings also are used as a vehicle to capture attention, in conjunction
with which, Staples typically identifies businesses within a given radius of the new store and
sends them advertisements and offers. The company also utilizes a rewards program to build
loyalty and encourage volume purchases.
In early 2011, Staples revamped its international marketing team to ensure brand consis-
tency across all of its channels and across all international boundaries. Recognizing the problem
is an important step in its solution, but its existence also suggests that the company is struggling
to integrate its now far-flung operations, many of which were acquired rather than developed
organically, and to deliver a consistent theme and message through its marketing efforts.
Finance
Staples’ financial statements are provided in Exhibits 5 and 6. Note that the company’s debt has
remained relatively high, but long-term debt decreased from 2010 to 2011, when 20 percent of
the amount owed by the company was shifted into current maturities. Still, the amount coming
due is less than annual net income. The company’s cash flows reveal two significant trends for
the year ended January 29,2011: a marked decrease in cash from operations and a substantial
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74 WILLIAM J. DONOHER
EXHIBIT 6 continued
Long-Term Debt
Other Liabilities
Deferred Long-Term Liability
Charges
Minority Interest
Negative Goodwill
Total Liabilities
Stockholders’ Equity
Misc. Stocks Options Warrants
Redeemable
Preferred Stock
Preferred Stock
Common Stock
Retained Earnings
Treasury Stock
Capital Surplus
Other Stockholders’ Equity
Total Stockholders’ Equity
Total Liabilities and SE
2,014,407
652,486
7,471
6,967,957
2,500,329
579,746
83,054
6,945,449
t,968,928
636,142
58,224
7,508,8,18
545
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$13,911.667
538
5,869,138
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4,379,942
(89,337)
6,771,996
13,717,334
529
5,367,341
(3,357;734)
4,048,398
(494,327)
5,564,207
13,073,055
So u rc e : Company documents.
increase in funds used for stock repurchases. Significantly, during 2010 the company’s stock
dramatically undelperformed the NASDAQ Composite Index.
Management
Staples’ top executives are listed in Exhibit 7. Atorganizational chart for the company is also pro,
vided. (Circles 16 and 17, on the lower right side of the chart, comprise North American Retail)
External lssues
The United States stock market dropped 512 points in one day in August 2011 and S&P for
the first time ever downgraded the country’s credit rating from AAA to AA. Federal Reserve
economists predict U.S. growth of 3.1-3.3 percent in2OlI, and some economists predict at least
3.8 percent growth in2012, but gross domestic product growth actually slowed to 1.8 percent in
the first quarter of 2011. Forecasts for the unemployment rate range from 8.3 to 9.2 percent by
the end of 2Ol7 and 7 .6 to 8.5 percent by the end of 2012. Consumer confidence, and therefore
spending, remains speculative for the balance of 2011 and 2012 and may be adversely affected
by federal and state fiscal difficulties. With federal stimulus money being depleted, states are
likely to face continuing severe cuts in spending. For the time being, most states and Congress
appear unlikely to implement tax increases, which would further limit disposable income. But
other factors, notably rising oil and commodities prices worldwide, are expected to exert con-
tinuing pressure on consumer and business budgets for the foreseeable future. Spending is likely
to be restrained, and consumers and businesses are likely to remain very price sensitive.
Although the “paperless office” has yet to become the pervasive reality predicted in popular
media, it is still true that more and more technological innovations have been adopted to reduce
the consumption of paper and other traditional office supply products. Record-keeping, in par-
ticular, is moving rapidly into the digital realm, and document delivery is as well. But recent
figures suggest that traditional paper archival systems still account for 60 percent of document
storage. Advances in mobile technologies, including devices such as the NOOK, Kindle, iPad,
and iPhone are negatively impacting the offlce supply business.
Perhaps the most persistent trend that relates to paper usage in particular, and indeed business
practice in general, is the increasing sensitivity to and interest in environmental sustainability. All
of the office supply industry competitors have undertaken various “green” initiatives in recent
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ueq) leuollez!ue6ro pue ureol luaura6euelN dolsaldels t uglHxl 76 WILLIAM J. DONOHER
EXHIBIT I Comparative Data for Office Supply lndustry Competitors Revenue (billions)
Net Income (millions)
Total Assets (billions)
Total Debt (billions)
Store Count
Distribution Centers
Employees (approx., thousands)
$24.ss
881.95
13.91
6.97
2281
125
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44
35 I 7 I I Sources: Staples, Office Depot, OfficeMax -10Ks; Staples.com; OfficeDepot.com; OfficeMax.com.
stores. Companies thus have made significant investments in warehousing and fulfillment cen- Competitors Office Depot Office Depot, like Staples, is organized into three divisions: 1) North American Retail, 2) Office Depot’s total revenue of $2,973.0 million the first quarter of 2011 fell short of the OfficeMax ‘p-re8e; pqt ‘3.rnqrey pue ‘ue8uuqg ‘rnquelurrll ur ^\oq-.toDl dole,tep JequnJ 1pm .(ueduroc slcnpord ecg;o lse8rel s.plro.\\ eql qll&\ ecuerlle .treu JnO ‘sell
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ters, permitting them to stockpile inventories in centralized locations that can service regional
stores with products tailored to local demand. This trend has been accelerating in recent years
as industry competitors have decreased store sizes, opting instead to achieve flexibility in their
distribution systems.
Comparative financial data and key statistics for rival firms in this industry are presented in
Exhibit 8. Brief discussions of the history and operations of Office Depot and OfficeMax follow.
Note that Staples is larger than Office Depot and OffrceMax combined.
The second-largest office supply company, Office Depot opened its first store in Boca Raton,
Florida, in 1986. Today the company boasts annual revenues of nearly $12 billion and oper-
ates over 1,100 stores in the United States and Canada, with an additional 400 stores overseas.
Office Depot followed much the same pattern of rapid expansion that Staples had undertaken,
and briefly overtook Staples for the lead in the industry in 1989. Both companies continued to
expand, Staples more rapidly. Most of Office Depot’s efforts of late have been in the interna-
tional arena and the continuing development of its online presence.
North American Business Solutions, and 3) International. Its Retail division offers the
standard range of products, and most stores also offer copying and printing services. The
company also offers PC support and a network installation service. The Business Solutions
Division focuses on providing small- and mid-sized companies with supplies, technology,
services, and furniture through catalogs, the Internet, and a dedicated sales force. There is
also a contract business that serves medium to large companies, offering contract pricing
rather than item-by-item retail pricing. The International division operates in 55 countries in
Europe, Asia, and Latin America.
Zacks Consensus Estimate of $2,979.0 million and dropped 3.2 percent from the prior-year
quarter, registering sales declines in each business segment. Reflective of engrained problems
facing the industry, Office Depot is struggling.
The third-largest office supply company, OfficeMax was incorporated in 1988 and enjoyed
rapid success. The company has about 1,000 superstores across the United States, Puerto
Rico, and Mexico. The stores offer about 11,000 name-brand and OfficeMax-branded prod-
ucts, including paper, pens, forms, and organizers, as well as office furniture and a wide
range of technology products. Much like Staples and Office Depot, OfficeMax also provides
printing and document services through its ImPress store-within-a-store. In addition to its
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