Why Best Buy Killed Staples and Office Depot

Retail

Published: January 16, 2014 3:04 pm

Last Updated: June 27, 2014 2:17 pm

Best Buy Co., Inc. (NYSE: BBY) wasn’t the only stock hit by its admission that deep discounting failed to boost holiday sales. Investors dumped Best Buy shares heavily in response, and they drove down shares of Staples, Inc. (NASDAQ: SPLS) and Office Depot, Inc. (NYSE: ODP) as well. Neither has shown anything along the lines of Best Buy’s holiday disappointment, but investors are shooting them as well.

The heavy promotion and discounts that Best Buy employed to combat intense competition from other retailers of electronics, especially Amazon.com Inc. (NASDAQ: AMZN), probably forced Staples and Office Depot to knock prices lower on their own products.

Best Buy, Staples and Office Depot offer an assortment of electronics and electronics-related products, from computers, tablets and printers to things like bags for computers, USB hubs and other peripheral products. Sale signs were all over the three stores during the holiday season.

Best Buy and Staples also have been able to make heavy investments in their online businesses. But boosting online sales doesn’t necessarily boost margins.

In Best Buy’s case, online sales in November and December were 11.5 percent of the company’s November and December sales, up from 9 percent a year earlier. Office Depot is still consolidating its operations after merging with Office Max in 2013.

Amazon.com also competes with the same products and offered low prices and free delivery on higher-ticket items. Moreover, the online retail giant has been adding warehouses and fulfillment centers ever closer to its customers so it can make deliveries in 24 hours or so.

A number of investors appear to sense how the holiday season was going to shape up for Staples and Office Depot. Staples shares have fallen about 15 percent since Nov. 1. Office Depot shares are down nearly 17 percent.

Staples shares were down 74 cents, or nearly 5 percent, to $13.74 Thursday afternoon. Office Depot shares were off 9 cents, or 2.7 percent, to $4.75. Best Buy shares were down $10.79, or nearly 29 percent, to $28.72. Best Buy is down more than 37 percent in the same period. Amazon.com is up more than 10 percent. The Standard & Poor’s 500 Index is up 5 percent.

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