The minute the head honcho says that it's time to buckle down, management scrambles to find the quickest and easiest ways to cut back spending. One simple, short-term fix is reducing office supplies. I've seen it countless times. It looks like the supply cabinet is stocked with plenty of pens and notepads, and management thinks, "We can make it through the next few months without ordering more ... can't we?"
Staples (Nasdaq: SPLS) has started to feel this pinch as North American retail same-store sales dropped 6%. But solid international results, and some belt-tightening of its own, allowed the company to deliver the goods right on analyst expectations of $0.47 in earnings per share.
Gross margins of 29.1% were down a minimal 10 basis points, but the company managed to pare expense growth to 5.4%, a slower rate than the total sales growth of 8.3%. Net income climbed 10.6%, with a 3% lower share base providing the extra fillip to drive EPS up 15%. Keep in mind, all these fourth-quarter numbers are adjusted for an extra week that boosted last year's fourth quarter.
Citing the weak economic climate, management tempered its guidance for 2008, lowering earnings growth expectations from the low teens last quarter to high single digits this time around. Staples is joining good company -- like Target (NYSE: TGT) and Wal-Mart (NYSE: WMT) -- in taking a very cautious view of next year's prospects.
In the fragmented office supply market, competitors will occasionally look to gain share by slashing prices, but the cream will rise to the top. Office Depot (NYSE: ODP) couldn't take care of business in the fourth quarter, reporting a meager 1% increase in sales. And while OfficeMax (NYSE: OMX) gave investors some long-awaited good news by sharpening its pencil on expenses, total sales slid 2.6%.
Comparing the three office supply retailers, it seems apparent to me that Staples is gaining market share in its top-line results. I do suspect the company may lose some of its steam in the short term due to uncontrollable macro issues. And the lower 2008 guidance, along with questions about whether Staples will make it down the aisle in its bid to acquire European rival Corporate Express will probably mean negative overhang, as the market doesn't favor uncertainty these days. But I think investors could use this as an opportunity to stock up on this market leader.
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