Staples Sticks to Outlook

• Email
• Share
• Print

These are no doubt tough times for retailers who must overcome a plethora of challenges, including a hike in both interest rates and oil prices. So last Friday, it was nice to see an industry leader like Staples (Nasdaq: SPLS) step up and affirm its quarterly and full-year outlook. As if that weren't enough, Staples also announced a $1.5 billion stock buyback, a move that seemingly shows confidence in the future.

The company expects to earn $0.32 per diluted share in the third quarter and $1.11 for the year. These estimates are in line with analyst expectations. The company also announced its forecast for FY 2006. It expects earnings per share of $1.20 to $1.26. Although this estimate is below the $1.27 analysts had anticipated, it includes a deduction of between $0.07 and $0.08 for stock option expensing, which the company has not accounted for before FY 2006. The end result would be earnings growth of 15% to 20% (after adjusting FY 2005 earnings for options expensing) and revenue growth in the low double digits.

Now, in happier times when the economy is hitting on all cylinders, such news might cause the Street to unload Staples. After all, simply confirming estimates isn't all that impressive. However, in this environment, the Street was pleased with the confirmation, lifting the company's shares by $0.12 in Friday's trading.

Based on its outlook for the remainder of FY 2005, Staples sports a reasonable forward P/E of 20.5, which includes a $0.05 adjustment for options expensing. Its 2006 earnings range gives it a longer-term forward P/E of 17.2 to 18.1, which is slightly higher than its estimated long-term growth rate of about 16% and slightly lower than the P/E of its rival, Office Depot (NYSE: ODP).

There is no question that Staples is financially sound, as is evident from its aggressive share buyback plan and its strong management team. It maintains an impressive outlook despite a challenging environment. I expect Staples to continue as a solid performer, leading the way in the office supply market. Investors may benefit from sticking with it in their portfolio, or at least adding it to their watch list.

Fool contributor Mike Cianciolo welcomes feedback and doesn't own shares of any of the companies in this article.