Retailers selling office supplies have had a strong year despite setbacks in the office supply market. For some big names, the proof is in the year-to-date performance of their shares. OfficeMax (NYSE: OMX ) leads the pack with a 14.09% gain, followed by Office Depot's (NYSE: ODP ) 9.76% climb, and Staples' (Nasdaq: SPLS ) 7.78% gain. That's a serious improvement from a year ago for all three of these players. Let's take a closer look at the challenges ahead to uncover which of these three stocks is poised to outperform the others in the quarters ahead.
A challenging environment
A tough U.S. economy and pressure in Europe have crimped profitability in the office supply sector during the past few years. At the start of 2012, Staples said it would cut hundreds of jobs in Europe and Australia on weak sales in those areas. Office Depot also struggled with softness overseas. The company reported a 44% decline in operating profit for its first quarter due to ongoing costs from store closings in Europe. But it's not all bad news.
Staples, Office Depot, and OfficeMax are successfully reducing costs, downsizing stores, and boosting online sales. The results are starting to show in their latest earnings reports. OfficeMax presented a better-than-expected first quarter, with earnings of $0.23 a share, when analysts were expecting just $0.16 per share. Office Depot, the second-largest office supplies retailer behind Staples, reported first-quarter profit that was in line with the Street's estimates.
While we have to wait until Wednesday to get Staples Q1 results, Wall Street is looking for earnings per share of $0.30 for the quarter. Staples looks like the strongest of the three retailers, with a fortress-like balance sheet and more than $1 billion in free cash flow -- an edge that's only mildly reflected in its current share price.
Staples' strong Web presence gives it an advantage over competitors. The office supplier pulled in $11 billion in e-commerce sales last year, making it the No. 2 online retailer by sales, behind Amazon.com (Nasdaq: AMZN ) . In fact, online sales now make up around 40% of Staples' revenue. For comparison, RetailSails estimates that Office Depot earned $4 billion in e-commerce sales in 2011.
Looking ahead, Amazon's recent launch of "AmazonSupply.com" could threaten Staples' lead in the online business-to-business segment. Its new website offers everything from offices supplies like paper clips to harder-to-find equipment like a centrifuge, not to mention free two-day shipping for Amazon Prime members. While this could very likely cause problems for Staples and other B2B retailers down the road, the new site won't be putting Staples out of business anytime soon.
A healthy balance sheet, plenty of free cash flow, and strict cost-cutting initiatives should boost performance for Staples going forward. Shares currently trade at a price-to-earnings ratio of 11, and offer a dividend yield that's nearing 3%. For these reasons, I think Staples is a good stock to own today. If you're not yet ready to own the stock, I encourage you to add it to My Watchlist, The Motley Fool's free tool that lets you track and monitor your favorite stocks.