Staples (SPLS +0.00%), the once-dominant office supply store, isn't what it used to be due to weak consumer spending and competitive online threats. However, Staples is attempting to expand its online business. While Staples continues to venture into this Amazon-dominated realm, it's doing everything it can to reward its shareholders via dividends and stock buybacks. The question is whether or not Staples can buy enough time to turn its business around, or if it will slowly fade away as a result of mounting headwinds.
Recent results
In the second quarter, sales declined 2.2% to $5.31 billion year over year, mostly due to international weakness; international sales plummeted 8.3%. The austere environment in Europe has presented a significant headwind, which was evidenced by a 6% decline in comparable store sales. Staples has closed 49 stores in Europe since the year-ago quarter, which might limit top-line potential, but should aid the bottom line.
In North America, sales dropped 2.3%, with comps declining 3%. This is a clear indication that most North American consumers are hesitant to spend money unless it is necessary. Staples has seen reduced traffic, lower average order size, and has been forced to close 54 stores across North America.
On the bright side, Staples.com's sales have jumped 3.5% year over year, and commercial sales increased a moderate 1.3%. According to Alexa.com, Staples is currently ranked No. 972 globally and No. 211 in the United States. These impressive rankings should indicate Staples' online potential moving forward.
Speaking of which, Staples also plans on increasing its online presence. This will cost money, but Staples seems to have enough cash and cash flow to handle it. Currently, Staples has $1.19 billion in cash and short-term equivalents (vs. $1.97 billion in long-term debt), and it expects to generate $900 million in free cash flow for the year.
For the second quarter, diluted EPS came in at $0.16 versus $0.19 in the year-ago quarter. Staples has made several moves in order to improve the bottom line, which include reducing headcount, changing management incentive programs, limiting marketing, and buying back shares. Due to a competitive pricing environment, these moves were necessary.
Staples also must contend with the fact that lower-margin products are more in demand than high-margin products. For instance, today's consumer is more interested in mobile technological devices and print and copy services than business machines, office supplies, ink, and toner.
An often overlooked peer
Staples is often compared to Office Depot (ODP +0.00%) and Office Max (NYSE: OMX). However, United Stationers (USTR +0.00%), a pure wholesaler of business products, isn't often mentioned in the conversation. Consider some key metrics for these four stocks prior to deciding which one you think is likely to provide the best investment opportunity.
|
Metric |
Forward P/E |
Net Margin |
ROE |
Dividend Yield |
Debt-to-Equity Ratio |
Short Position |
|---|---|---|---|---|---|---|
|
Staples |
11 |
(1.02%) |
(3.18%) |
3.40% |
0.33 |
8.80% |
|
Office Depot |
63 |
(1.25%) |
(12.64%) |
None |
0.68 |
27.30% |
|
Office Max |
18 |
6.63% |
56.06% |
0.70% |
0.99 |
12.20% |
|
United Stationers |
12 |
2.34% |
16.31% |
1.40% |
0.68 |
11.60% |
(Source: Company financial statements)
As you can see, Staples and Office Depot, despite their heightened popularity compared to peers, are not impressive fundamentally. That said, Staples truly takes care of its shareholders with a 3.40% yield. And with a strong cash position and decent cash flow, the dividend appears to be safe -- at least for the moment.
You might have also noticed the elevated short positions for all of these stocks. The shorts are simply betting against a weak industry. With a hesitant consumer and Amazon stealing market share, it's a logical bet to make. It should also be noted that with the exception of United Stationers, all of these companies suffered revenue declines in their last fiscal year. This is part of the reason why United Stationers has outperformed Staples, as well as its peers, over the past several years.
The bottom line
Staples is an interesting story. Management is making the correct moves, but even if these moves pay off, they will take time. Staples is rewarding its shareholders for their patience via share buybacks and healthy dividend payments. It's likely that Staples will expand its online presence, but considering significant headwinds, such as competitive threats, a hesitant consumer, and consumer demand shifting to lower-margin products, don't be surprised if Staples' stock remains range-bound for the foreseeable future. You can definitely find stocks with more upside potential, but considering the shareholder-friendly nature of Staples, you could also do worse.
