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:
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
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.
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?