Why I Bought Staples Inc.

Staples Inc.Back on May 18th, 2011, Staples Inc. (SPLS-Q) plummeted 15.4% to close at $16.63, from $19.65 per share, after missing earnings expectations. It did not recover its share price, and was again walloped with the massive market sell-off that occurred in early August. It closed to a low of $12.49 per share by August 10th, 2011. But with so many other big-blue chips on sale during those few days, and limited funds to invest, Staples was certainly not at the top of my buy list. There were many more other great U.S. Stocks to choose from such as Pepsi, Procter & Gamble, Home Depot, Wal-Mart, etc. I was also waiting for an indication of a turnaround in Staples share price before purchasing.

I reviewed Staples and the undervalued office sector back on May 24th, in Staples Inc. Value in Office Supplies?  I found that Staples was the dominant player in the office sector, dwarfed its competitors, and had low debt. It appeared to be a well managed company stuck in the retail sales doldrums. In addition, its main competitor Office Depot (ODP-N) had already started closing its Canadian retail locations. In a sense, all these factors give Staples an economic moat in the office supplies sector.

Many retail stocks back in May were out of favour, due to a lack of consumer confidence and spending. So I kept Staples on my watch list, even with its low dividend yield of only 2%, with the intention to purchase before September back to schools sales. With its closing share price today of $14.29 and the current dividend yield of 2.8%, Staples was looking an attractive buy opportunity. More importantly, with some money to go shopping with in my RRSP, I purchased a position in Staples at $14.00 per share this afternoon.

Profits Back on Track

This morning a Globe and Mail article indicated that Staples had indeed regained its retail dominance in the office supply sector, and that its profits were back on track – Staples Profit Climbs on Foreign Sales.  According to the article, net income for the three months ended July 30th, rose to $176.4-million (U.S.), or 25 cents per share, from $129.8-million, or 18 cents per share last year. Revenue rose 5 percent to $5.82-billion. As I had mentioned in my previous article, Staples is not an unprofitable business. Back in May it had missed analysts’ expectations during a retail slump. With back to school sales already starting, I felt it was time to make a move on Staples now or never.

The Reasons to Buy

Buying value stocks, from a price point of view, often means buying what is unpopular or flies under the radar. The retail office sector, I believe is one of those undervalued and unnoticed areas – until recently. September is one of the most influential months for this sector, with Christmas sales following in December. From an investment point of view, buying in August for an industry that makes most of its profits from September to December just makes good sense. This should be an interesting retail play.

The reasons on my decision to buy Staples Inc. (SPLS-Q) include the following:

  • Back to school sales in September will no doubt boost profits, and Staples bottom line.
  • Christmas retail sales in December follow shortly after.
  • Staples is the dominant player in the office supplies sector, and dwarfs its competition. It has 10.2B in assets which is nearly eight times the market cap of OfficeMax (OMX-N) and Office Depot (ODP-N) combined. It was 6 times the market cap back in May.
  • Staples also has low debt, especially when compared to its competitors.
  • Office Depot has already closed its Canadian retail locations.
  • Staples is a dividend paying stock, and its competitors do not pay dividends.
  • The potential growth from a price point of view, IMO, outweighs the lower paying dividend.

Readers, what’s your take? Do you think Staples is a good value play, or a value trap?

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14 Responses to “Why I Bought Staples Inc.”

  1. MoneyCone

    Aug 18. 2011

    Hard to tell. The profit margins in this sector seems razor thin… but you are right, among its competitors, Staples seem better poised.

    Reply to this comment
  2. The Dividend Ninja

    Aug 18. 2011

    Hey MoneyCone,

    I think I will find out soon enough at the next earnings report 3 months from now (which includes back-to-school sales), and of course in the new year after the retail Christmas season. But the current market turmoil, of course, throws all that into a loop.

    If I was psychic and had of known there would be a market decline today, I would have waited 🙂

    Cheers!

    Reply to this comment
  3. Canadian Couch Potato

    Aug 18. 2011

    @Ninja: I’m going to play devil’s advocate here. Of the seven bullet points you list at the end of the post, are any of them unknown to the market as a whole? And if these facts are all public knowledge, why would they not be baked into the market price of the stock?

    Reply to this comment
  4. The Dividend Ninja

    Aug 18. 2011

    @Canadian Couch Potato

    Hey Dan, the answer to your first question is of course not. And the answer to your second question, is becuase it was caught in the sell-off with everything else in the market decline today. I also think many investors are running to the big familiar defensive stocks such as PG,KO,JNJ, etc. SPLS isn’t even on their radar.

    SPLS is a small position for me. Just in case I’m wrong, I’m holding a whack of bond ETFs/Funds, and baking a TFSA Potato on the side 😉 I also added TD International Index Fund – e series to the potato recently. But you have a point, I could have easily bought XIU shares with that position 🙂

    Cheers

    Reply to this comment
  5. My Own Advisor

    Aug 19. 2011

    Great post, and great details! Thanks for sharing your logic on this one.

    To be honest, I don’t think I would have pulled the trigger on this one. I recall back in May, I wrote on your blog that I wasn’t aware of the “moat” Staples had. Being the biggest definitely has its advantages and there is some upside potential no doubt, but I see it as a riskier play than many of the big blue-chippers you mentioned above. You know that I know…

    If you’ve got great company diversification, I don’t see this as a big risk. We both know you need to take some risks to get big rewards. This might be yours?! 🙂

    Keep us posted on what happens with Staples. I am very interested in knowing (and learning) how your reasoning will aid you on this transaction.

    Good stuff Ninja, I always enjoy these posts from you.

    Reply to this comment
  6. The Dividend Ninja

    Aug 19. 2011

    MOA, this will be a long term play for me, it’s been on my watchlist a long time now. It’s also a small position for me, but there certainly is associated risk with it. Your right, there were other fish to choose from in the pond, including topping up CLF or XBB, and other blue-chips 🙂

    Reply to this comment
  7. The Dividend Ninja

    Aug 21. 2011

    Here is something interesting. According to the Dynamic Dividend website:

    “Staples began returning cash to shareholders in 2004, and has raised its annual dividend total in six of the ensuing seven years, with 2009 (the year it transitioned from annual to quarterly payouts) being the only exception. With its 11% dividend hike earlier this year, the company has now tripled its payout during its short stint as a dividend-payer.”

    http://dynamicdividend.com/staples-spls-earnings/

    Reply to this comment

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