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Optimism in Good Supply at Staples

By Rich Duprey - Updated Apr 5, 2017 at 7:06PM

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Office supplies retailer finds reason to hope for future growth.

Black Friday came and went, but it had little bearing on how Staples (NASDAQ:SPLS) sees the holiday shopping season shaping up. Seeing the same soft trends that have been plaguing the industry for the past year, the office supply retailer remains conservative on its outlook for the rest of the year.

Sales in the important North American Retail segment continued falling, and comps dropped 8%, driven by steep drops in average order size, itself a function of lower sales of higher-priced office furniture and tech hardware.

While overall sales ticked upward 34%, it was due to the Corporate Express purchase, excluding the acquisition effect would have left the company posting a top line that fell 3%. However, there were enough positive notes that investors drove the stock higher yesterday. The Motley Fool Sock Advisor recommendation still managed to beat analyst profit predictions of $0.41. Excluding costs tied to the Corporate Express acquisition, Staples earned $0.42 per share. Most importantly, with OfficeMax (NYSE:OMX) and Office Depot (NYSE:ODP) mired in an even worse slump, it should be able to continue to take market share.

Yet, the looming threat here is not its two main rivals but rather the nemesis of Wal-Mart (NYSE:WMT). It's Sam's Club big box chain has been opening a number of small business centers within its stores, providing not only office products but also services like print and copy.

Management maintains it is well aware of Wal-Mart's moves and of similar initiatives begun by Costco (NASDAQ:COST). Right now, it's not perceived as a threat that will undermine its business, but they are taking note. As is the case with everything Wal-Mart does, it remains the 800-pound gorilla in the room that no one really wants to discuss -- until it's too late.

But Staples remains aggressive in opening new stores -- it's on target for over 100 this year and plans on opening 75 more next year. Included in those numbers are new stand-alone print/copy centers. Office Depot has had to scale back more ambitious plans, cutting its planned store openings because of flagging sales.

Perhaps most encouraging is the integration of the Corporate Express delivery service. While charges from the merger took a swipe at earnings this quarter (and will do so again for the next few quarters), cost savings could total as much as $300 million, and bringing the two companies together is said to be on track. It's expected that Corporate Express will be making meaningful contributions to Staples' profit picture.

It's not the first economic downturn the office supply retailer has had to weather, and I find little reason to doubt that Staples will not be able to deliver on its growth projections.

Related Foolishness:

Wal-Mart Stores is a Motley Fool Inside Value selection. Staples and Costco Wholesale are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey owns shares of Wal-Mart but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Staples, Inc. Stock Quote
Staples, Inc.
SPLS
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$129.82 (0.96%) $1.24
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$532.20 (-1.41%) $-7.62
The ODP Corporation Stock Quote
The ODP Corporation
ODP
$37.48 (1.30%) $0.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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