Office-Supply Stores Seeing Profit Margins Erased

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Office-Supply Stores Seeing Profit Margins Erased
Mary Ellen Biery Mary Ellen Biery,

Office-supply retailers are grappling with controlling costs as they battle increased competition and technological shifts that are reducing demand for traditional supplies such as pens, paper clips and paper.

Profitability among privately held office-supply, stationery and gift retailers (NAICS 4532) declined between 2012 and 2013, according to recent data from Sageworks, a financial information company. In fact, preliminary estimates from Sageworks’ financial statement analysis of 2013 data show net profit margins swung from positive to negative in 2013. Office-supply retailers are typically one of the least profitable retail industries anyway, according to Sageworks, but last year they saw overhead expenses and costs of goods sold increase relative to sales.

“There’s a big shift in the landscape within this industry, particularly because there’s less need for these office products now that everyone’s going digital,” said Sageworks analyst James Noe. “Also, because there’s a big online presence from Amazon or even Staples SPLS -1.48%.com, other, smaller retailers are scrambling for market share.”

Privately held office-supply, stationery and gift retailers operated with a net loss, on average, of 1.2% of sales in 2013, compared with a net profit margin of 3.7% in 2012, according to Sageworks’ industry data.

The margin of earnings before interest, taxes, depreciation and amortization was 0.2% of sales, on average, in 2013, compared with 5.1% in 2012. Gross profit margin, meanwhile, decreased to 41.8% from around 44% to 45% from 2009 to 2012 as costs of the goods sold increased.

Noe said some of the margin pressure might be related to the private retailers’ efforts to find a niche within the category, by offering specialized products that cost more to bring into the store’s inventory or by offering special services that add other costs.

“These smaller retailers have some pressure to provide differentiating factors,” he said. “When you go to a small stationery store, you kind of expect better customer service, more attention to your needs than you expect in other, larger chains out there. Maybe these retailers were trying to catch up with the larger guys and were trying to boost areas that differentiate them, which might have caused overhead expenses to go up.”

The biggest U.S. office-supply chains, meanwhile, are also trying to contain costs. They report customers are buying fewer binders and software as more workers distribute reports via tablet computers and the Internet rather than hard copies. And all office-supply stores are facing intense competition from a variety of retailers, including Amazon, big-box discounters and even corner drug and personal care stores.

Sales in 2013 at Office Depot ODP -1.76% fell 4%, excluding the effects of its merger with Office Max, and the company posted its second full-year net loss, according to a filing with the Securities and Exchange Commission. Sales at Staples Inc., meanwhile, have fallen for three years in a row, and the company has announced plans to close more than 225 of its more than 2,000 stores in the U.S. and abroad in an effort to cut costs and overhaul the business, according to an SEC filing.

Privately held office-supply, stationery and gift stores posted positive, single-digit percentage sales growth in 2013, keeping pace with sales growth among retailers generally, according to Sageworks’ data. But growth was slightly lower than in 2012, Noe said.

“It’s not a concerning slowdown in sales growth, but when comparing sales to expenses, it’s not  a big enough growth rate to be able to cover all of those expenses,” he said.

Average liquidity ratios for this group of retailers remain healthy, Noe said, and long-term debt relative to assets declined in 2013. Still, the lower profitability seems to have contributed to lower debt-service coverage and interest coverage, on average, he said.

“It’s something to keep an eye on,” Noe said.

Through its cooperative data model, Sageworks collects financial statements for private companies from accounting firms, banks and credit unions, and aggregates the data at an approximate rate of 1,000 statements a day. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies’ operational performance.

 

Office-Supply Stores Seeing Profit Margins Erased
Mary Ellen Biery Mary Ellen Biery,

Office-supply retailers are grappling with controlling costs as they battle increased competition and technological shifts that are reducing demand for traditional supplies such as pens, paper clips and paper.

Profitability among privately held office-supply, stationery and gift retailers (NAICS 4532) declined between 2012 and 2013, according to recent data from Sageworks, a financial information company. In fact, preliminary estimates from Sageworks’ financial statement analysis of 2013 data show net profit margins swung from positive to negative in 2013. Office-supply retailers are typically one of the least profitable retail industries anyway, according to Sageworks, but last year they saw overhead expenses and costs of goods sold increase relative to sales.

“There’s a big shift in the landscape within this industry, particularly because there’s less need for these office products now that everyone’s going digital,” said Sageworks analyst James Noe. “Also, because there’s a big online presence from Amazon or even Staples SPLS -1.48%.com, other, smaller retailers are scrambling for market share.”

Privately held office-supply, stationery and gift retailers operated with a net loss, on average, of 1.2% of sales in 2013, compared with a net profit margin of 3.7% in 2012, according to Sageworks’ industry data.

The margin of earnings before interest, taxes, depreciation and amortization was 0.2% of sales, on average, in 2013, compared with 5.1% in 2012. Gross profit margin, meanwhile, decreased to 41.8% from around 44% to 45% from 2009 to 2012 as costs of the goods sold increased.

Noe said some of the margin pressure might be related to the private retailers’ efforts to find a niche within the category, by offering specialized products that cost more to bring into the store’s inventory or by offering special services that add other costs.

“These smaller retailers have some pressure to provide differentiating factors,” he said. “When you go to a small stationery store, you kind of expect better customer service, more attention to your needs than you expect in other, larger chains out there. Maybe these retailers were trying to catch up with the larger guys and were trying to boost areas that differentiate them, which might have caused overhead expenses to go up.”

The biggest U.S. office-supply chains, meanwhile, are also trying to contain costs. They report customers are buying fewer binders and software as more workers distribute reports via tablet computers and the Internet rather than hard copies. And all office-supply stores are facing intense competition from a variety of retailers, including Amazon, big-box discounters and even corner drug and personal care stores.

Sales in 2013 at Office Depot ODP -1.76% fell 4%, excluding the effects of its merger with Office Max, and the company posted its second full-year net loss, according to a filing with the Securities and Exchange Commission. Sales at Staples Inc., meanwhile, have fallen for three years in a row, and the company has announced plans to close more than 225 of its more than 2,000 stores in the U.S. and abroad in an effort to cut costs and overhaul the business, according to an SEC filing.

Privately held office-supply, stationery and gift stores posted positive, single-digit percentage sales growth in 2013, keeping pace with sales growth among retailers generally, according to Sageworks’ data. But growth was slightly lower than in 2012, Noe said.

“It’s not a concerning slowdown in sales growth, but when comparing sales to expenses, it’s not  a big enough growth rate to be able to cover all of those expenses,” he said.

Average liquidity ratios for this group of retailers remain healthy, Noe said, and long-term debt relative to assets declined in 2013. Still, the lower profitability seems to have contributed to lower debt-service coverage and interest coverage, on average, he said.

“It’s something to keep an eye on,” Noe said.

Through its cooperative data model, Sageworks collects financial statements for private companies from accounting firms, banks and credit unions, and aggregates the data at an approximate rate of 1,000 statements a day. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies’ operational performance.

 

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April 15, 2014 at 10:44 AM