Summary
1.)With a very tough front half of FY 2007 behind them regarding retail store comps, the Office Supply sector players will be continually pressed to find ways to drive topline revenues the balance of this year and next as a "new" core supplies player drops over 700 new and strategically placed stores onto the retail landscape. 2.)FedEx Kinko's profitability model will succeed by adding core office supply sku's carrying gross margins ranging from 35-40% to existing print and shipping services which already carry GM as high as 70%. Coupled with lower rent costs from small stores averaging less than 2,000 sq.ft., this new format should prove to be highly competitive and profitable against the 20,000+sq.ft.megastores of ODP,SPLS and OMX. 3.)The focus customer in these FDX mini-stores is small and midsize businesses that currently accounts for over 50% of all revenue in the print division at FedEx Kinko's. The key consideration for Real Estate and site selection will be business counts.
Analysis
Although the small store(FedEx Kinko's calls it the compact car) growth strategy appears sound for a multitude of reasons including convenience of service offerings, strategic RE locations, assortment of key/core office supplies and reduced cost of overhead operation to name but a few, the financial results to the overall FedEx Kinko's Division appear negligible in this same Division which saw a 2.3% sales decline and a 21% decline in operating profit for their fiscal year ended 5/31/07. However, that is likely to change over the next several years as the network of these small stores is built out over the last 4 years of the 5 year plan to open over 2000 "compact car" stores. Once this build out is achieved, these new stores will not only press the Office Supply sector players for market share of both core supply and print-for-pay revenues, but more importantly for FedEx Kinko's, will play an increasingly vital role in the overall FDX strategy by helping to increase high margin shipping revenues. One indicator that the current 200 new concept stores might be proving this strategy can be successful is found in the Q4 and FY end Earnings announcement where revenues dropped slightly to $532 million, but operating profits grew by 28% to $23 million with a full 1% lift in operating margin due undoubtedly to highly profitable POS transactions from the addition of core supplies to the mix.
