Editor'snote: Theoriginal version of this article provided incorrect information for how many Staples stores are located in North America and the location of a standalone copy center. We regret the error.
Staples (Nasdaq: SPLS ) , the office-superstore giant, has had a relatively easy time of it recently. Sure, it faces competition in the form of OfficeMax (NYSE: OMX ) and Office Depot (NYSE: ODP ) , not to mention the much-feared Wal-Mart (NYSE: WMT ) and Target (NYSE: TGT ) . But even so, Staples has been executing darn near perfectly on its mission to provide shoppers with red staplers and other office needs.
Case in point: Its third-quarter results were surprisingly strong, as consumers once again shrugged off a sluggish housing market to stock up on paperclips and computer paper. Revenues increased 12% to $4.8 billion, and net income was up 29% year over year to $290 million, which included a $35 million tax benefit. Same-store sales increased 4% in North America and 5% internationally. Stronger operating margins, especially internationally, which were up 130 basis points to 1.5%. Perhaps the only nits to pick might be receivables rising faster than sales at 24%, and a decline in free cash flow to $276.6 million, versus $443.6 million last year -- a dip driven by working-capital needs.
The company certainly has ambitious plans. It's aiming for 7.5% operating margins for the international business in a few years, up substantially from 1.5% margins now.
On the domestic side, it still sees growth; the North American market, which includes Staples and its competition, can support 4,500 stores, up from 3,500 now. To get to that level, the company is experimenting with ideas such as smaller, standalone copy centers that run about 4,000 square feet in Boston. These stores are located in prime real estate locations where larger stores would not fit, and the smaller stores allow for deeper penetration into these lucrative markets.
The business results are impressive, and management is targeting 10% to 15% sales growth for the next few years. Combined with what I see as intelligent moves in terms of the urban copy centers, international expansion, and good return on equity over the past few years, a P/E of 21 seems perfectly reasonable and close to fairly valued. But I'd be looking for a larger margin of safety -- say a mid-teens P/E -- before I'd become more interested in this one.
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Fool contributor Stephen Ellis does not own shares in any companies mentioned. You canview the stocks he owns and check out his97th-percentile ranking in Motley FoolCAPS, the Fool's new stock-rating community. The Motley Fool has adisclosure policy.