Staples Plans Bigger Push Into Tablets and Smartphones

Staples will expand its slate of tablets, smartphones and accessories as part of a multi-tiered effort to accelerate growth, reshape the company and better meet the needs of customers, CEO Ron Sargent said on the company’s Q3 earnings call Wednesday. “Customers who once only needed paper, ink and toner now need tablets, smartphones and technology accessories,” Sargent said. Customers who shop in Staples stores also want the convenience of mobile shopping and fast delivery, he said. The company plans to boost its stock of online SKUs -- 98 percent of which arrive via free shipping -- to 100,000 by year end, he said.

As part of an effort to “reinvent” the company, Staples will expand its assortment with new categories to offer customers “every product your company needs to succeed.” The move is in response to customer feedback that “they wished we offered more products,” Sargent said. Three quarters of customers said they'd order additional products if Staples had a “broader assortment,” he said. Within the pipeline of new categories, the retailer plans to go “deep into industry verticals to meet customer needs,” including tripling its assortment to reach the 100,000-item goal at Staples.com, he said. “You can have more SKUs if you don’t have to stock,” he said, referring to products secured by third-party suppliers. An example of deeper stock in a vertical market, the company might now offer a dozen first-aid kits compared with two before, he said.

Amid that expansion, the company has seen “strong early trends” in technology hardware, safety, industrial supplies and mailing and shipping, Sargent said. To support the broader assortment, Staples will expand into categories “we don’t necessarily stock,” leading to a lower margin, he said, calling it a “margin dollar play. We'll be expanding margin dollars and maybe not expanding margin rate on those things we don’t stock,” he said.

Following Q2 trends, demand for computers and software “remained weak” in Q3 ahead of the Windows 8 launch, Sargent said. The company spent “a lot of time” preparing for the launch, and since August remodeled 1,500 stores to “improve our technology presentation and assortment,” he said. Staples has more than 4,000 Microsoft-certified advisors who can provide customers “one-on-one training and equip them with the knowledge necessary” to use the new features of Windows 8, he said. Only two days of Windows 8 sales made it into Q3 receipts but early response has been “positive,” and the company looks forward to “continued momentum” throughout the holiday season, he said.

Growth in online is crucial to increasing overall revenue, which was down 2 percent to $6.4 billion for the quarter from Q3 2011, Sargent said. Staples hopes to build on its position as second largest Internet retailer with annual e-commerce revenue of $11 billion, he said. The company is starting to see results from an e-commerce innovation center it opened earlier this year in Cambridge, Mass., to develop its online and mobile commerce offerings, and grow marketing and customer acquisition efforts, he said. Staples’ online circular gets 700,000 views each week, he said, and the mobile app has more than 500,000 downloads. To help customers shop “how and when they want,” the retailer has employed in-store kiosks, the mobile website, a website customized for tablets and in-store pickup for online orders, he said.

Announcing an increased push toward business services, Staples joined OfficeMax and Office Depot, which said last week on earnings calls they were accelerating copy, shipping and other higher margin services to boost profit.

Staples remains on track for 30 store closures in North America this year and another 30 downsizings or relocations, part of an effort to improve productivity of stores by ridding the company of more than 1 million square feet of retail space for the year, Sargent said. Staples Internationals’ Q3 sales of $1.1 billion represented a decline of 8 percent in local currency and 12 percent in U.S. dollars year-over-year, said Chief Operating Officer Michael Miles. Europe same-store sales dropped 6 percent for the quarter year-over-year, customer traffic fell 4 percent and average order size shrank 3 percent for the period, Miles said.

In September, Staples said it would restructure its struggling European retail operations (CED Sept 26 p3) and Miles gave further details on Wednesday’s call. The company will close about 46 “underperforming” stores this quarter, which is 14 percent of the retailer’s European retail network. Half of the stores to be closed are in the U.K., and Staples will exit Belgium altogether by closing its six stores there.

Citi Research maintained a “sell” on Staples Wednesday citing increased potential for “margin pressure from e-commerce pricing initiatives;” the “deteriorating European macro environment;” and the absence of Apple products in the retailer’s U.S. tech mix. The company expects sales to be flat for the year, despite a 53rd sales week, it said. Staples shares closed 2.7 percent higher Wednesday at $11.55.