Staples (NASDAQ:SPLS) became the third member of the publicly held office-supply retailer contingent to weigh in with generally solid results on Thursday. Alas, when you deliver even pretty good results in a skittish market -- particularly when those results involve just 1% growth in North American same-store sales -- the market may not treat you with kid gloves.
Things could have been worse for Staples. Shortly after the release of its quarterly results, its shares dropped nearly 5% to $24.74. But as the day progressed, they recovered somewhat, finishing down $0.67, or 2.6%, at $25.35.
Unfortunately, the sluggish 1% North American same-store sales growth in the quarter followed increases of 4% in the prior two periods. It appears that the fourth-quarter figure was exacerbated by weaker-than-expected sales of office furniture and computers during the holiday season.
But that malady also plagued Staples' smaller rivals, Office Depot (NYSE:ODP) and OfficeMax (NYSE:OMX), both of which reported their quarterly results last month. In a market that's taking no prisoners, Office Depot's improved results nevertheless fell short of expectations, earning the company a slap on the wrist. Meanwhile, OfficeMax was able to benefit from a comparison to a weak year-ago quarter.
For Staples, net income grew 22% to $336 million, and total company sales increased 18% in the quarter. If you factor out the extra week, sales were up 10% in the quarter. In the context of a company with $18.2 billion in annual revenues -- up 11% from 2005, excluding the extra week -- those comparisons aren't too shabby.
Staples is clearly trying to grow its international business, where operating margin expanded by nearly 150 basis points to 2.1% for the year. Included on the international docket for this year is a joint venture in India with Pantaloon Retail Limited, along with an acquisition of Pei Pei, a chain of office products retail stores in Jiangsu province, near Shanghai, China.
In announcing his company's results, Staples Chairman and CEO Ron Sargent said, "Our 74,000 associates delivered another terrific year in 2006. We drove strong top- and bottom-line growth, while investing in new ideas and making steady progress on the key initiatives that will continue to drive our business."
Just as an exercise, let's compare Staples with OfficeMax. The two companies are miles apart in enterprise value (the equity and debt that have funded the business) divided by EBITDA (earnings before interest, taxes, depreciation and amortization). For Staples, that calculation yields a figure of about 9.6, while at OfficeMax, it comes to a more expensive 18.6. At the same time, bearing in mind that OfficeMax is a turnaround situation, that company's return on equity over the past 12 months has been about 5.3%, versus nearly 22% at Staples. Finally, Staples has the far stronger balance sheet of the two companies.
My advice to Fools, then, is to keep a close eye on Staples. If its North American same-store sales improve this quarter, the company could deserve your love.
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Fool contributor David Lee Smith does not own shares in any of the companies mentioned. He welcomes your comments or questions.
