Staples Gets a Paper Cut

Well, this had been working out nicely.

I had tagged office-supply maven Staples (Nasdaq: SPLS  ) as a value-type candidate back in November. Although the stock didn't exactly rocket up in reaction to my missive, it nevertheless had risen about 15% from that point. So even with Tuesday's freakout, it's up a little. Such are the perks of buying on the cheap.

Despite today's market reaction, I think it was a solid quarter. Sales were up about 9% overall, with 7% growth in the North American retail business, 17% growth in the delivery business, and 6% growth (in local currencies) in the overseas business. The big bugaboo this time around? Same-store sales were up just 1% in the retail business.

I'll grant that 1% same-store growth isn't great, but let's take a step back and look at the forest instead of one specific tree. Gross margins were up nearly a full point. Operating margins rose about 70 basis points, and operating income climbed 23%. Last but not least, earnings per share were up 25%. Honestly, if you want to worry about something, I'd rather you worry about the 7% growth in operating cash flow than the same-store-sales figure.

Simply put, I still like this business. Staples has been the biggest of the Staples/Office Depot (NYSE: ODP  ) /OfficeMax (NYSE: OMX  ) triumvirate for a while, but it has been widening the lead in recent years. What's more, despite the ongoing rollout of the cookie-cutter shopping center (one office-supply store, one PetSmart (Nasdaq: PETM  ) or Petco (Nasdaq: PETC  ) , a Michael's (NYSE: MIK  ) /AC Moore (Nasdaq: ACMR  ) craft store, one of the Tipsy McStagger restaurants, and so forth), I roughly estimate that Staples still has less than 60% market penetration.

And let's not forget the international opportunity. Oh, I know -- the best that can be said about the international ops right now is at least the company isn't bleeding money, but I still think there's some potential for Staples to reap the market opportunity in Europe and, eventually, China.

With all of that in mind, I believe there's some long-term profit potential here. Sure, there are risks relating to the economy, consumer sentiment, business confidence, and so on, but you don't find risk-free opportunity. Accordingly, I think the risk/reward ratio here is still pretty favorable.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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