Company Spotlight: Staples Inc.: (Nasdaq:SPLS) Bucking The Retail Trend
The Good: Sales are increasing while industry is struggling The Bad: Large ticket sales have slowed. The Beautiful: Exclusive partnership with Dell, climbing ROE.
January 18, 2008 - Staples Inc. (SPLS-NASDAQ) is clipping along as the #1 office supply superstore operator in the US. It sells office products, furniture, computers, and other supplies through its chain of about 1,900 Staples and Staples Express stores in the US and Canada and some 20 other countries. (About 1,620 of its superstores are located in North America.) In addition to its retail outlets, Staples sells office products through the Internet and through its catalog and direct sales operations, including subsidiary Quill Corporation. Staples also provides document management and copying services through its retail chain, as well as promotional products. The firm targets small businesses and home office professionals, as well as general consumers.
In spite of general retail weakness, Staples scored a 6% growth in earnings in the third quarter of 2007. Most of the increase came from consumables, copies, and office supplies. The larger ticket items such as furniture and computers aren't moving off the floor as in prior years. Its stand alone, store within a store of print and copy services has been a big hit and more will be opened in 2008.
The focus at Staples is private label products with their higher margins. These goods will get particular emphasis in Europe and Asia. The new line, M by Staples, is starting strong and will be expanded this spring. They're mostly high-end leather goods which don't compete with other brands in the store.
Another area for growth is the exclusive relationship with Dell as its only retail outlet in the office superstore channel. Initially hardware will drive sales. but the higher-margined business is in Dell's ink and toner supplies which until Staples got the contract were only available online through Dell. Another partnership is with Symantec. Staples offers its Security Initiative, an alliance that gives the user protection and solutions for identity and information threats, in addition to antivirus software and data storage.
Some numbers: A large cap stock with a market cap of $16.3 billion and 707.1 million shares outstanding. The company bought back 23 million shares in fiscal 2007 (year ends in January). There's $1.2 billion authorized to buy more. Net profit margin was 5.2% in 2006, should be the same in 2007 with a forecast of 5.4% in 2008. Return on Equity was 18.9% in 2006. Look for 19.5% in 2007 and 20% in 2008.
Staples is a retailer but has a special retail niche, one it's exploiting very well. The ROE tells you that. With higher-margined products and new partnerships as well as store openings, sales and profits seem to be on track for growth. And the P/E appears reasonable. Dig deeper into this one. It's worth your time.
- Company Web site: www.staples.com
- Ted Allrich
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