Monday, April 26, 1999

Staples, Inc.
(Nasdaq: SPLS)
Phone: 508-253-5000
Website: www.staples.com
Price (4/23/99): $32


While not exactly the explosive growth seen by many of the Internet stocks of late, investors in office supply retailer Staples have nevertheless seen their shares embark on a slow but steady ascent. Trading as low as $14 11/16 last spring, the shares have more than doubled over the past 12 months, which is no small feat for a company with $7 billion in trailing sales.

Look no further than the flawless execution of an aggressive expansion strategy for the reason that Staples shareholders have seen their patience rewarded. The company opened 174 new retail stores worldwide in 1998, and a similar pace of expansion is expected in the next few years. Throw vibrant same-store sales and expanding margins at existing locations into the mix and it is of little wonder why profits have also been on a steady course northward.

The increase in sales and profits at the company is nothing new to those who have been following Staples for some time. Staples has seen increasing sales in each and every year this decade, and the company has increased its profits for seven straight years. In the last five years the company has gone from $1.1 billion in sales and $25 million in profits to $7.1 billion in revenue and profits of $184 million, making Staples one of the fastest-growing retail chains in the nation.

Those who own shares of Staples have been rewarded quite nicely over the past year, and even better over the longer term.


Founded in 1985 and based in Massachusetts, Staples is the second-largest retailer of office supplies and related equipment in the nation. Only Office Depot (NYSE: ODP), a firm Staples tried to buy in 1996 (the sale was thwarted by Uncle Sam on antitrust grounds) sells more office supplies.

As of January 30, Staples operated 913 retail locations in the U.S., Canada, the U.K., and Germany, with 840 of those locations located domestically. Continuing its rapid expansion, approximately 150 new units are slated to open in the next year. Most of the retail locations are in the superstore format with large square footages and a high number of product offerings. The company has also been making inroads in the e-commerce and mail-order business with its recent purchase of the private Quill Corporation.

Staples is a member of the S&P 500 index.


Income Statement
12-month sales: $7,123.2 million
12-month income: $185.4 million
12-month EPS: $0.41
Profit Margin: 2.6%
Market Cap: $14,844.8 million

Balance Sheet
Cash: $358.0 million
Current Assets: $2,064.1 million
Total Assets: $3,179.3 million
Current Liabilities: $1,265.3 million
Long-term Debt: $205.0 million
Total Liabilities: $1,522.4 million

Price-to-earnings: 78
Price-to-sales: 2.1


One of the attributes that may have made Staples particularly attractive is the fact that the company has been able to expand largely through internally generated cash. Seeing that Staples was able to add nearly 200 stores last year without loading up on debt or depleting cash should have spoken volumes about the company's prospects. Top and bottom line growth is a good thing, and doing it strictly from generated funds is even better.

Staples has also shown up on several of the screens published on the Fool website. The company has been popping up on the increasing margins screen, an extremely common occurrence for companies featured in the Daily Double. Furthermore, Staples has periodically popped up in the Unemotional Growth screen, a screen that looks for companies with a "1" ranking in the Value Line Investment Survey and high EPS growth. In addition, Staples has met or beaten earnings estimates in all of its recently reported earnings reports, which is yet another characteristic that seems to be quite common among those featured in this column.


It looks to be a rather safe bet that Staples will successfully continue to roll out more and more of its superstores across the country and abroad. The current consensus profit estimate calls for the company to earn $0.69 per share in this fiscal year with $0.88 per share expected in fiscal 2001. There is little reason to doubt those figures. Plus, if the company is successful in some of its mail-order and Internet business ventures, an argument could be made that those profit estimates may be aiming a bit too low.

Nevertheless, even though the expected sales and profit growth looks to be a lay-up for the company, the valuation the stock carries is quite lofty. Even some of the other premier retailers such as Home Depot (NYSE: HD) and Wal-Mart (NYSE: WMT) do not carry P/E multiples above 70x like Staples currently does. But then again, Staples has always carried a valuation that was slightly above its peers.

The bottom line with Staples is that it is a top shelf company, but the stock is quite pricey at today's levels. Interested investors would probably do best to keep an eye on the company while waiting for the next time the market panics and puts the shares on sale before loading up.

--Paul Larson

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