Staples Inc. Value in Office Supplies?

Staples Inc.Last Wednesday, Staples Inc. (SPLS-Q) reported lower-than-expected quarterly results on higher costs and weak demand for office supplies. Shares plummeted from the previous day close of $19.65 to $16.63, a decline of 15.4%. Since Wednesday, shares have already climbed over the $17.00 level. Staples is not an unprofitable business, far from it. According to a recent Globe and Mail article, Staples profit rose to $198.2-million, or 28 cents a share, in the first quarter. However, analysts on average were expecting 32 cents a share.

With big blue chip dividend payers and dividend aristocrats hitting their 52 week highs, there haven’t been many value plays in U.S. stocks. So when Staples missed analyst’s expectations, I figured the much beaten-up office supplies sector needed a second look. At a cursory glance, Staples fits the profile of a recent bargain from bad news, mainly in a sector that is feeling the current economic crunch from consumers.

At the end of the day, people may have a blackberry or iphone in their pocket, but they still make notes on paper and store handouts in binders. They also buy furniture for their offices. On top of that office supply stores have also moved into computer and related hardware, and at prices that are equally as competitive as Best Buy or Future Shop.  While the office sector might be feeling the pain of a tightening in consumer spending, it is far from being ploughed under – as some analysts have suggested. Staples is also the dominant player in the office supply sector.

The (Lack of) Competition

Competitors OfficeMax (OMX-N) and Office Depot (ODP-N), have also been feeling the office supply crunch. Staples does indeed have the economic moat in the office sector, with four big plusses going for it. First it’s the largest player in the office sector, with 11.9B in assets which is nearly six times the market cap of OfficeMax and Office Depot combined. Second it’s a dividend paying stock. Granted with a yield of only 2.40% but its Dividend Payout Ratio is only 31.7%, and its two main competitors don’t even pay dividends. Third, Staples has its debt under control, with a liabilities-to-equity ratio of 0.89 (less than 1.0 is a good measure). Compare that to Office Depot with a liabilities-to-equity ratio of 3.17, and OfficeMax with a staggering liabilities-to-equity ratio of 5.37. Fourth, Office Depot is closing its Canadian Stores, which is a decrease of competition for Staples. Also in part competition with Staples is Grand & Toy (which was bought out by OfficeMax in 1996).

Here is the basic financial info on the three office-supply companies:

Company Symbol Market Cap Price 52-Week Low P/E Ratio L/E Ratio Dividend
Office Depot ODP-N 1.1B 4.20 3.36 NA 3.17 NA
OfficeMax OMX-N 703M 8.40 7.90 13.14 5.37 NA
Staples Inc. SPLS-Q 11.9B 17.06 16.19 13.54 0.89 2.40%

Considering the level (or lack of) competition for Staples, it appears on the surface that the company is doing well. I recently bought my new speakerphone at their UBC (University of British Columbia) Store. The store is the main office supply store on campus, so it’s well targeted and positioned, and is always busy. The customer service at Staples is excellent, something I cannot say for my last visit to Office Depot – where I literally had to chase a sales associate to get service.

Lights Out for Office Depot

Office Depot Closing

The office-crunch has already hit Staples leading competitor Office Depot. I noticed a few weeks ago the big Office Depot store here in Vancouver, at Yukon and Broadway had mysteriously closed. A recent post by smartcanuck.ca alludes to the fact that Office Depot are closing all their Canadian retail locations by June 11th, 2011. A yahoo finance article Office Depot Exits Canada, also provides more detail. Regardless, when a big business closes its main retail locations, you know there’s trouble. That of course bodes well for Staples.  It will be interesting to see what happens with Office Depot stores in the U.S.

Conclusion

Is Staples a value-play on sale, or a value-trap? Only time will tell if the office sector will be able to weather the consumer downturn until after the summer doldrums. Personally I see an economic sector that is out of favour, but good value through Staples Inc. I may consider 100 shares of Staples (SPLS-Q) in my RRSP sooner than later. Your thoughts?

15 Responses to “Staples Inc. Value in Office Supplies?”

  1. I had a quick look at the research from my trading platform and it’s getting some buy ratings recommendations and holds. No sell at all.

    With its current yield, I personally would look elsewhere. Not a play for me.

    School season is probably when they make their money …

    Reply to this comment
  2. The Dividend Ninja

    May 24. 2011

    Hello PIE,

    Thanx for posting. I wasn’t actually thinking of buying it for the yield, but for the potential short-term capital appreciation – as a value play. The fundamentals are very good, though sales are lower than expected in this sector. It’s trading at a 15% discount from last week 😉 The upside potential is quite attractive, but of course it could go down further as well.

    The best time to buy stocks such as these is after they have been beaten down. That after all is part of value investing. Definitely I would want to buy before the school season begins.

    Cheers!

    Reply to this comment
  3. My Own Advisor

    May 26. 2011

    Good post Ninja.

    To be honest, I wasn’t aware of the “moat” that Staples has. I simply didn’t expect it; nice to see though. Being the biggest definitely has its advantages; great market cap can certainly work in any investors’ favour. Yield is OK, but not great but sometimes you don’t just buy stocks for yield.

    There is some upside potential, and if you’re already well diversified across many other sectors, this might be a decent one to pick up for the value-play as you say and take a small flyer on.

    For me, I know I need more blue-chips or “staples” before I actually buy Staples 😉

    Reply to this comment
  4. My Own Advisor

    May 26. 2011

    Good post Ninja.

    To be honest, I wasn’t aware of the “moat” that Staples has. I simply didn’t expect it; nice to see though. Being the biggest definitely has its advantages; great market cap can certainly work in any investors’ favour. Yield is OK, but not great but sometimes you don’t just buy stocks for yield.

    There is some upside potential, and if you’re already well diversified across many other sectors, this might be a decent one to pick up for the value-play as you say and take a small flyer on.

    For me, I know I need more blue-chips or “staples” before I actually buy Staples 😉

    Reply to this comment
  5. The Dividend Ninja

    May 26. 2011

    MOA,

    Thanx for posting. I too was surprised to find out that Staples has such an “economic moat” in that sector. But once I did the research that is exactly what I found. It’s certainly doing a lot better than its competition!

    As you say, a nice play on words, buy more blue-chip “staples” before buying Staples 🙂

    Cheers

    Reply to this comment
  6. roger

    May 29. 2011

    Interesting to hear your side of the customer service story. Just the opposite where I am … I find atrocious service at the 3 staples stores around here, and Office Depot is really very good. I am avoiding all the stocks in this group, since OD/OM don’t look great, and I have a bad taste for the service at Staples.

    Reply to this comment
  7. The Dividend Ninja

    May 30. 2011

    @roger, thanx for dropping by 😉

    It’s fascinating how varied customer service really is these days. If you ask 10 people about their expereince at a store, I bet you a bag of tim-bits that 5 people will have a good experience and 5 people will be unsatisfied.

    One thing I learned is not to avoid companies I don’t like. For example Aeroplan sucks, but the stock did very well last year. Rogers Communications customer service isn’t much better either, but it was good value recently below $35 etc. So don’t give up opportunities 🙂 It’t actually a nice way to get back at these companies, because you can make money off them flipping the stock and collecting dividends from them.

    Cheers
    The Dividend Ninja

    Reply to this comment
  8. Wonder

    May 31. 2011

    Thanks for the post, I too paid very close attention to the price decrease as of late.
    I work for Staples and I am enrolled in there SPP, i was very excited to see there share price decrease, we get a 15% discount on the purchase of our share stock price for the lowest price in the 6 month period. I have no doubt that there share price will return to its most recent highs, the company is very profit oriented. Right now they are reducing hours of staff so they are saving large until traffic increase, which as stated by someone above, will be back to school/Christmas time. 🙂

    Reply to this comment
  9. The Dividend Ninja

    May 31. 2011

    @Wonder, thanx for posting. WOW what a fabulous deal a 15% discount on the lowest 6-month share price is! Fabulous opportunity 😉

    Reply to this comment

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