Stock Valuation - Staples, United Stationers and Office Depo - Case Study Example

Stock Valuation INTRODUCTION This paper conveniently selected to study the Staples Inc., United Stationers, Inc., and Office Depot, Inc. the Staples Inc. is the target company while the United Stationers, Inc. and Office Depot, Inc. are the comparable firms. Staples, Inc. has a leading retail, online as well as delivery capabilities which enable its customers to shop whenever and however they want. The Office Depot, Inc. is a worldwide supplier of office services and products while the Unites Stationer, Inc. is a leader of the national wholesale distributor of workplace essentials. MACRO-ECONOMIC FACTORS Economic Factors According to the Office Depot, Inc., the majority of its customers in the International Division, the North American Business Solutions, and the North American Retail Division are predominantly small. Accordingly, these customers’ spending is affected by macroeconomic conditions, including the credit availability, and the housing market and commodity costs. The global downturn, which has been experienced over the recent periods have negatively continued to impact on these companies sales and profits. In addition, the economic situations in areas where these companies acquire their products and the shipping and dockage issues have continued to adversely affect the cost and availability of their products. Equally important factors to note, the increasing fuel prices negatively impact on the earnings of these companies (Office Depot, Inc.). Given their global delivery networks, these companies are forced to make significant purchases of the full amount to transport products to their stores and customers. Another economic factor affecting these companies is the seasonality of their market. According to the United Stationers, Inc., its customers exhibits a varying buying pattern such as the sales of traditional office equipment, which are higher during the beginning of customer’s financial periods while others are higher during summer periods. According to the Office Depot, Inc., the future US and international economic conditions, which affect the employment levels, the level of consumer debts, higher interest rates and the customers’ ability to obtain credit will continue to affect its operations. Technological Factors These companies rely heavily on the use of computer systems to process transactions, in supply chains, to manage inventory and to summarize and analyze their global business (Office Depot, Inc.). In the circumstance that these systems fail to function properly, are not timely upgraded or are damaged, substantial costs are borne in maintaining them in the functional state in order to avoid their normal business activities from being interrupted. Additionally, the security failure of these systems, which may lead to their attack results to the breach of their information technology systems, especially where the customers’ information such as the credit and debit card information is hacked. Such things will materially damage their reputation, brand, loss of customers’ loyalty as well as the associated costs. Systems enhancements and conversions are being undertaken with a view to increasing productivity and efficiency. Political Factors The Staples Inc., United Stationers, Inc., and Office Depot, Inc. are affected by political unrests in some of their operating segments. Such unrests are experienced in the Middle East and are adversely affecting the availability of products. According to the Office Depot, Inc., they source most of their products from the Asia. These products are then shipped to the USA and labor unrests and security issues. The unstable political conditions in international markets have made it difficult for these companies to benefit from any first-to-market benefits (Staples, Inc.). Legal Challenges The Staples Inc., United Stationers, Inc., and Office Depot, Inc. are faced with several legal issues during the course of their operations. These legal issues include a wide range of consumers, intellectual property, contracting, product liability, commercial, tort, employment, and other litigations. This industry is faced by litigations regarding compliance with the local, state, federal, foreign laws, national labor regulations, and industry standards. They are also affected by some claims that the technology they use and the products they sell, infringe third parties’ intellectual property (Staples, Inc.). Social Changes The products offered by the Staples Inc., United Stationers, Inc., and Office Depot, Inc., are affected by some changes in the social context. These include the change in the consumer tastes and preference for their products (United Stationers, Inc.). According to the Office Depot, Inc., the industry is making significant progress towards the identification of customer preferences and developing the necessary methods to reaching them. Environment The environment in which these companies operate impacts significantly upon their operations. For instance, the regulatory environment is experiencing an increase in legal and regulatory requirements and increased enforcements. In addition, there are multiple foreign laws and regulations that these companies are required to abide by, failure to which, may make the respective governments take the necessary enforcement actions. International developments The Staples Inc., United Stationers, Inc., and Office Depot, Inc. have internationalized their operations. They are, however, affected by the cultural differences between the local and foreign practices of conducting business. These differences lead to conflict in their business practices as well as ethical standards. The presence of these companies in the international arena exposes them to several unique risks such as the costs and difficulties of managing the foreign enterprise, currency fluctuations, limitations on investment and repatriation of funds, unstable political and economic conditions. As noted by the Office Depot, Inc., restructuring plans are underway in order to lower the operating expenses. THE PORTER’S FIVE FORCES Suppliers The Staples, Inc. has a supplier diversity program helps in promoting professional and business development among several business enterprises (Staples, Inc.). According to the Office Depot, Inc., it has entered into credit arrangements with its vendors for the supply of products for resale. The negotiation of payment terms has been made such that it is approximately equal in length to that time it takes to sell these products. In case there is a declining operating performance, vendors seek credit insurance to caution against any non-payment to them. Additionally, vendors may demand that these companies accelerate their payments for products or demand for cash on delivery. Competitors Staples, Inc. admits that it faces a lot of competition in the course of its business. The competition arises from online and traditional retailers, dealers as well as distributors. Irrespective of the presence of still competition, Staples, Inc. has been able to compete favorably because of: its focus on business customers; a wide assortment of services and products to meet every business need; the ability of its management team to respond to the dynamic market; easy to use mobile platforms and web sites; fast checkouts; reliability and speed of order shipment; hassle free returns and competitive prices; and convenient store locations. According to the Office Depot, Inc., this industry has continued to experience development and growth of competitors. Customers Staples, Inc. has got a diverse workforce and network to strengthen its relationship with its customers, and gives it the flexibility to adjust to the ever-changing global marketplace. According to the United Stationers, Inc., a diverse group of reseller customers is served by this industry and include the office product superstores, contract stationers, computer products resellers, mass merchandisers, office furniture dealers, paper and food service distributors, sanitary supply, drug and grocery store chains, e-commerce merchants, healthcare distributors as well as other independent distributors. The industry supports its customers by offering customer care capabilities aimed at providing value-added services to resellers. Substitute products There is a continuous introduction of a new assortment of products and services in this industry (Staples, Inc.; United Stationers, Inc.). According to the Office Depot, Inc., the grocery stores, drug stores, Merchandisers and warehouse clubs have increased their office merchandise assortment. Threat of new entrants There are so many new entrants that come to compete with Staples, Inc. among them include the office supply stores, discount stores, wholesale clubs, internet based companies, Merchandisers, food and drug stores, direct marketing companies and the computer and electronics superstore. INTANGIBLES The Staples, Inc. has trademarks, copyrights, patents and domain names. The company has registered numerous trademarks and service marks in connection with its business. Among its global and regional principal marks are the Staples, Make More happen, the Staples red brick logo, Staples the Office Superstore, that was easy, the Easy Button logo, Corporate Express, Quil.com among others. The company also owns and maintains several products, business processes and designs, systems among other things. Among its copyrights include training materials, packaging, computer software, in-store graphics, promotional materials, and the website contents and multimedia (Staples, Inc.). RISKS AFFECTING THE INDUSTRY Common risks Different risks The ever changing needs of customers Changes in the distribution strategies and suppliers. Uncertainties in business restructuring and transformation Customers are experiencing credit risks. Highly competitive business environment that affects their ability to continue to operate successfully Risks associated with mergers and acquisitions. Interruption and unauthorized access to the computer system may compromise its operations as well as the breach of the information laws. Disruption of normal business operations by unexpected events. There are risks posed by third parties such as vendors A significant amount of impairment charges, a condition that is expected to continue. Loss of the most significant personnel and which could adversely affect their businesses. The exposure to legal proceedings as well as other legal compliance risks The internationalization of operations has exposed these companies to the foreign currency fluctuations. There are unfavorable political and economic conditions in the international market segments. Risks posed by the unionization of the workforce Company’s failure to attract, recruits, train and retain the right quality and quantity of workforce. DIFFERENCES IN THE SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Particulars Staples, Inc. Office Depot, Inc. United Stationers, Inc. Revenue recognition The incomes realized from the sale of services and products are recognized when there is a persuasive evidence of an arrangement, the delivery has been rendered, the sales price is determinable or fixed, and the collectability is reasonably assured. For retail transactions, the revenue was recognized at the point of sale, while for contracts and internet sales, and it was recognized at the time of successful delivery. The revenue was recognized upon rendering of services or the transfer of the title to the products to the customers. The company also bills the shipping and handling costs to the customers and treats this as revenues and recognizes them upon transfer of the title to the customers. Intangible assets The goodwill and other intangible assets are significant as they are 32.36% of total assets. The goodwill is usually retested for impairment. The company assesses for possible goodwill impairment. The goodwill and intangible assets are 6.76% of total assets Goodwill and other intangible assets are assumed to have a finite life and as such they are amortized over their life. These intangible assets are 21.5% of total assets. Unfunded pension None None None Unexercised Option They become exercisable upon issuance of a written notice. Stock options are issued as awards, and their fair value is established using the Black-Scholes Model Stock options are issued as awards, and their fair value is established using the Black-Scholes Model Restatement of earnings Yes Yes Yes THE REVENUES, OPERATING INCOMES, OPERATING CASH FLOWS AND FREE CASH FLOWS Staples Office Depot United Stationers 2014 $million 2013 $million 2014 $million 2013 $million 2014 $million 2013 $million Revenue Trend 23,114 24,381 16,096 11,242 5,327 5,085 Operating profit 1,178 510 (275) (205) 210 209 Operating cash flows 1,108 1,219 156 (107) (184) (30) Free cash flows (833) 70 116 284 (2) (9) MAIN SOURCES AND USES OF FUNDS AS A PERCENTAGE OF REVENUES Staples Office Depot United Stationers 2014 $million 2013 $million 2014 $million 2013 $million 2014 $million 2013 $million Revenue Trend 23,114 24,381 16,096 11,242 5,327 5,085 Financing activities (1,442) (812) 15 (640) 106 (53) Financing as a percentage of sales 6.2% 3.3% 0.13% 12% 2% 1% Operating cash flows 1,108 1,219 156 (107) (184) (30) Operating cash flows expressed as a percentage of sales 4.8% 5% 1% 1% 3.45% 0.59% Investment activities (480) (342) (28) 1,028 (183) (30) 2.08% 1.4% 0.17% 9.14% 3.4% 0.6% MERGERS AND TARGETS The Office Depot, Inc. and the Staples Inc. entered into a definitive merger agreement on 4th February, 2015. In addition, the Office Depot, Inc. has had other mergers such as ones with OfficeMax in 2013. The Staples, Inc. in 2014, United Stationers, Inc. acquired CPO and MEDCO (United Stationers, Inc.). Works Cited Office Depot, Inc. Office Depot, Inc. 2014 Annual reports. Annual report. Boca Raton, FL.: Office Depot, Inc., 2014. Staples, Inc. Staples, Inc. annual reports. Annual Report. Framingham, MA: Staples, Inc., 2014. United Stationers, Inc. United Stationers, Inc. Annual report. Financial report. Deerfield, IL.: United Stationers, Inc., 2014. Read More