That Was Easy: Why Staples’s Stock Now Yields Over Four Percent

Source: Getty Images

Source: Getty Images

Staples, Inc. (NYSE:SPLS) has long been my choice for office supply needs. It is a household name thanks in part to its “that was easy” slogan campaign. The company offers a range of office supplies, business technology products and services, facility and breakroom supplies, computers and mobility products, and office furniture under the Staples, Quill, and other proprietary brands. It also provides copy and print services to retail and delivery customers, as well as technology services through its EasyTech business. The company sells and delivers office products and services directly to businesses and consumers through its Staples.com and Quill.com websites, as well as through retail stores, contract sales force, and direct mail catalog business. What many may not know is that this stock is been relatively quiet for years after taking some punishment from competitors like Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN). Still, it boasts a nearly 4 percent dividend yield and brings in hundreds of millions of dollars in revenue.

Staples operates office products superstores in three segments: North American Stores & Online, North American Commercial, and International Operations. During the first-quarter, it operated approximately 2,200 stores worldwide. The company also operated 116 distribution and fulfillment centers in 30 states in the United States; 7 provinces in Canada; and in Austria, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, the United Kingdom, China, Argentina, Brazil, and Australia. It is a major business but the stock receives very little coverage. It has caught my eye today as the stock is down over 12 percent as I write after reporting mediocre earnings for the first-quarter. The purpose of this article is to discuss the earnings and outlook for Staples and whether the stock is a buy at current levels.

Overall, I was disappointed with the quarter. A few of the major points suggest that the company is struggling but taking the proper steps to grow brand recognition. First total sales for the first-quarter were $5.7 billion. However, this was a decrease of three percent compared to the first quarter of 2013.

Some of this decline in total company sales growth was due to changes in foreign exchange rates and store closures in North America during the 12 months preceding the first-quarter of 2014. While total sales were down, sales in North America One of the positives was that the company increased marketing investment in the “Make More Happen” brand campaign drove customer awareness that Staples offers products beyond office supplies (which is something I did not know.)

The company also achieved Staples.com sales growth of six percent driven by increased conversion on the company’s desktop and mobile websites, as well as its expanded assortment beyond office supplies. It also grew its business assistance services, most notably by growing copy and print same-store sales in the high single digits in North America, and grew copy and print online sales in the double digits.

To save money, the company secured approximately $100 million of annualized cost savings as part of a two-year plan to eliminate approximately $500 million of annualized costs. The company also closed 16 failing stores in North America during the first-quarter and finalized plans to close approximately 80 more stores in North America during the second-quarter.

Taken as a whole, these measures, on a GAAP basis, led to the operating income rate to decrease 209 basis points to 2.81 percent compared to operating income rate of 4.90 percent achieved during the first-quarter of 2013. Excluding the impact of the restructuring and other related charges, total company non-GAAP operating income rate declined 167 basis points to 3.23 percent during the first-quarter of 2014.

On a GAAP basis, the company reported a dismal first-quarter 2014 net income of $96 million, or $0.15 per diluted share, compared to $170 million, or $0.26 per diluted share achieved in the first-quarter of 2013. Some of this was a result of the company incurring a $46 million of pre-tax restructuring charge primarily associated with the closure of 16 stores in the first-quarter, as well as the company’s plan to close approximately 80 stores in North America during the second-quarter of 2014. The company also incurred an $11 million tax charge related to the repatriation of foreign earnings, as well as a net gain of $22 million primarily related to the sale of the company’s Smilemakers business. Excluding these items, the company reported non-GAAP net income of $115 million, or $0.18 per diluted share.

On the positive side, the company generated operating cash-flow of $360 million and invested $48 million in capital expenditures, resulting in free cash-flow of $312 million. The company repurchased 5.7 million shares of its common stock for $70 million, and ended the quarter with $1.8 billion in liquidity, including $793 million in cash and cash equivalents. Ron Sargent, Staples chair and chief executive officer, had this to say:

We’re making progress meeting the changing needs of our customers as we reinvent Staples, said Ron Sargent, Staples chairman and chief executive officer. Despite a slow start to the first quarter, our results were in line with our expectations and we expect to build momentum throughout 2014.

Looking ahead, for the second-quarter of 2014, the company expects sales to decrease once again versus the second-quarter of 2013. The company expects to achieve fully diluted non-GAAP earnings per share in the range of $0.09 to $0.14 for the second-quarter of 2014. This guidance excludes any potential impact on earnings per share related to 2014 global restructuring and other related activities. The company expects to record pre-tax charges in the range of $105 million to $155 million associated with restructuring and other related activities during the second-quarter of 2014.

For the full year, the company expects total pre-tax global restructuring and other related charges in the range of $240 million to $360 million. For the full year, the company also expects to generate more than $600 million of free cash flow. The company’s free cash flow guidance reflects an expected use of cash in the range of $60 million to $100 million associated with its 2014 global restructuring and other related activities.

In conclusion, Staples is a company in transition. It is closing failing stores and restructuring its operations. It is expanding into online commerce and successfully expanding its reach to businesses, as evidenced by increased orders for copies and orders for businesses. I believe that this recent weakness is an opportunity.

I think the stock is a solid buy if it can be purchased between $11-$12, considering the buybacks in place and the dividends being paid. Thus, at $11.71, I think starting a position in this name for the long-term can be done now. The stock has downside protection given its dividend; the lower the stock goes the higher the yield. At its current price, the stock yields 4.1 percent.

Disclosure: Christopher F. Davis holds no position in any stocks mentioned, but may initiate a position in Staples in the next 72 hours.

More From Wall St. Cheat Sheet: