It's not often that a drop in a retailer's same-store sales is followed by a 11% jump in its stock, but that's what happened to Staples (Nasdaq: SPLS ) on Tuesday. Apparently, investors preferred to look on the bright (pro forma) side.
And ignoring the accounting sleight-of-hand for a moment, it was bright. Although comps fell 3%, sales of office supplies partially offset a decline in computers, furniture, and other office equipment, and Staples said it gained market share in all three of its business units. Improvement in the gross margin was achieved primarily through supply-chain efficiency and a sharper focus on higher-margin categories.
Growth in purchase volume per customer was modest, and management admitted that its competitors, OfficeMax (NYSE: OMX ) and Office Depot (NYSE: ODP ) , have been winning some of its accounts based on pricing. However, Staples believes its rivals' pricing strategies are unsustainable.
And now for the magic show. Leaving everything in -- that is, on an "as reported" basis -- Staples delivered $0.38 per diluted share in the latest quarter, down from $0.39 a year ago. Why? Well, last year's income got a boost from a one-time $33 million tax settlement, though this was slightly offset by the $10.8 million expense from correcting stock-option measurement dates. Additionally, the company owed $24 million to settle a California wage and hour class action lawsuit.
Leave out the "extras," and voila! -- you wind up with EPS rising from $0.36 a year ago to $0.42 in the latest quarter, beating analysts' estimates of $0.40. Not bad, huh?
To be fair, it makes sense to strip out the $33 million tax benefit and the $38 million class action, since those are one-time events. As we've noted before, companies can abuse pro forma reporting, but it doesn't seem unreasonable in this case.
Despite the big bump on Tuesday, Staples is still down substantially from a high of about $27.50 earlier in 2007. It's trading at around 16 times trailing earnings, nearly double its two rivals. However, the company has a history of successfully growing its business, and with a current PEG of just 0.93, it is looking attractively priced.