Staples: Retail Refuge?

Not all retailers are the same, and that may be a good thing for Staples (Nasdaq: SPLS  ) in the coming year or two. If America follows the pattern set down by Australia and the U.K., and a slowdown in the housing market leads to a pronounced slowdown in consumer spending, Staples may end up being a relatively safer place to hide in the retailing sector.

It's not as though this leader in office supply retailing is a purely defensive idea. Growth in this quarter looked pretty appealing to this Fool, as revenue rose about 12%, operating income rose 18%, and earnings per share rose about 22%. Comps in the retail business grew a respectable 4% (with nearly 10% overall growth), and the delivery business continues to grow nicely at a double-digit clip.

The international business is still a bit of a cipher. Revenue was up about 8% as reported and up 5% in local currencies, with a 1% increase in comps in Europe. Management referred to "steady progress" in international operations, and I suppose they're right -- the business is still losing money, and that's been steadily true for a while. Cheekiness aside, the company did lose less money in this segment, and I still believe there's long-term potential here. Just because Wal-Mart (NYSE: WMT  ) failed in Germany doesn't mean Staples can't eventually do OK.

If consumer spending develops along the lines that many people expect, Staples could end up being a relatively safer play on retail. I say "safer" because . well, let's be honest here: If the economy gets bad enough, even Staples will get hit. But if things just slow a bit, I think the company could come out looking good. It has a meaningful lead on OfficeMax (NYSE: OMX  ) and Office Depot (NYSE: ODP  ) , and I personally see more potential vulnerability in retailers like Best Buy (NYSE: BBY  ) , Zale (NYSE: ZLC  ) , or Abercrombie & Fitch (NYSE: ANF  ) than I do in Staples.

Helping matters, I see a decent spread between the company's return on capital and the cost of that capital -- something that isn't quite as common in retailing as you might think. Put that all together, and I think Staples has a better-than-average chance of holding its own over the next couple of years.

For more Foolish thoughts on retailing:

Best Buy is aMotley Fool Stock Advisorrecommendation. To see other solidretailing recommendations by the Gardner brothers, click here for a free trial.

Wal-Mart is aMotley Fool Inside Valueselection.

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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