Staples Remains Neutral - Analyst Blog

Leading retailer of office products and services Staples, Inc. (SPLS) is better positioned than its competitors to benefit from the economic recovery, and is poised to sustain growth based on its margin expansion, effective merchandising, and growth prospects across its retail, delivery and international divisions.

Staples, which anticipates a modest recovery in the economy in the remainder of fiscal 2010, is making prudent investments in the highly fragmented North American retail market to expand its business technology, and copy and print services that generate higher profit margins.

Staples has been also actively managing its cash flows. Management expects to generate more than $1 billion of free cash flows in fiscal 2010 and 2011. The company also resumed its share repurchase activity, which was suspended in first-quarter 2008.

The company recently posted third-quarter 2010 earnings. The quarterly earnings of 41 cents a share came a penny ahead of the Zacks Consensus Estimate and rose 5.1% from 39 cents earned in the prior-year quarter. Despite a marginal increase in the top-line, Staples was able to deliver a mid single-digit growth in its bottom-line on the back of effective cost management.

Staples reported total sales of $6,537.7 million that rose marginally by 0.3% from the prior-year quarter, and came ahead of the Zacks Consensus Revenue Estimate of $6,536 million.

Management now expects fourth-quarter earnings in the range of 39 cents to 41 cents and fiscal year 2010 earnings between $1.27 and $1.29 per share. For fiscal 2011, Staples forecasts earnings in the range of $1.50 to $1.60. The office products retailer forecasts sales to rise in the low single-digits in the fourth quarter and fiscal year 2010, and to increase in the low to mid single-digits in fiscal 2011.

However, we remain cautious about the macro-economic environment and sluggish job market. The recovery in the economy still lacks luster. As a result, consumers and small businesses still remain watchful about their spending on big-ticket items such as business machines and other durable products. We observe that the demand for office products is closely tied to the health of the economy.

Staples, which competes with Office Depot Inc. (ODP) and OfficeMax Inc. (OMX), holds a Zacks #3 Rank, which translates into a short-term ‘Hold' recommendation and correlates with our Neutral rating on the stock.

 
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