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Staples, Inc. (SPLS): A Look at Office Supply Retailers

Staples (SPLS)I first blogged about the office supply retail store operators in December of last year (see my December blog.) Since then, the largest component of that industry, Staples, Inc. (NASDAQ:SPLS), has seen a substantial boost to its share price.

May-quarter earnings appear to have incited investors to further bid up the shares, as profitability is improving and full-year revenues are on track to climb. In all, management seems to be taking the initiatives required to support a turnaround of the company’s bottom line.

E-commerce sales expansion

The primary measure Staples, Inc. (NASDAQ:SPLS) has undertaken is a heightened investment in the product assortment that the company offers through its online channel and external websites. It also is generating increased customer interest and enrollments through a new Rewards program.

Product-wise, Staples, Inc. (NASDAQ:SPLS) is experiencing rising demand for facilities and breakroom merchandise, as well as for tablets and mobile technology. In-store services are bringing in additional traffic, too, and the North American Commercial segment is already garnering sales growth.

Staples, Inc. (NASDAQ:SPLS) remains focused on improving its online marketplace which includes sites in the U.S. and Canada. The offering of several delivery preferences, namely ship-to-store and reserve for pickup, have been rolled out. As website visitors continue to grow in number, we look for retail customer sales to advance.

Margins apt to gain ground

Efforts to reduce the company’s expense base, partly through the rationalizing of its nearly 1,900 stores as a means to drive sales growth, are likely to have a positive impact. Comparable-store sales could well show positive effects as a result of the activity, along with potentially better returns on invested capital.

The ultimate effect of management’s strategy should be a boost to the company’s operating margin. Another action that might allow for an increase in profitability is the aforementioned shift of its merchandise mix to feature an increased number technology items such as tablets which lift the average receipt total.

All in all, Staples, Inc. (NASDAQ:SPLS) is in line for improved results. Share earnings are targeted to come in between $1.30 and $1.35 for this fiscal year, which ends next February. It is worth considering in light of the positive earnings trends that may result, or as a candidate for long-term portfolio holding.

OfficeMax and Office Depot

Staples’ major competitors in the office supply market are OfficeMax Inc (NYSE:OMX) and Office Depot Inc (NYSE:ODP). The two currently have an agreement to merge, with the former’s shareholders set to receive 2.69 of the latter’s shares for each share held.

OfficeMax Inc (NYSE:OMX) touts itself as a supplier of products to businesses and retail consumers. In addition to office supplies, it differentiates itself through the offering of office furniture to a wide range of office-based customers.

Office Depot Inc (NYSE:ODP) operates across three segments: North American Retail, a business-focused division, and International. In fact, it operates a larger international operation than Staples, Inc. (NASDAQ:SPLS), with stores in 57 countries as opposed to Staples’ 25, totaling 546 stores at the end of the last quarter.

The “merger of equals” should be accretive to combined earnings in the first year after the transaction closes. Between $400 million and $600 million in annual cost synergies should be realized by the end of the third year, partly stemming from reduced costs as well as increased scale and competitiveness. Although specifics concerning the store base were not announced at the deal’s signing, the companies have been discussing a new, smaller store format. Overall, I look for the combination, when consummated, to positively impact industry financial metrics.

Summing it up

Staples, Inc. (NASDAQ:SPLS) remains the leader amongst the office supply retailers. Its shares, up sharply since the beginning of this year, may still be a good selection for momentum or long-term investors. OfficeMax Inc (NYSE:OMX) and Office Depot Inc (NYSE:ODP) both serve certain product markets to a greater degree than Staples. The shares of both are trading on a merger deal that has been set for completion by the year’s end.

The article A Look at Office Supply Retailers originally appeared on and is written by Damon Churchwell.

Damon Churchwell has no position in any stocks mentioned. The Motley Fool owns shares of Staples. Damon is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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