Will Staples Survive?

With shares of Staples (NASDAQ:SPLS) trading at around $13.42, is SPLS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Staples is in trouble. It might not look that way now, but Staples is trapped in a fading industry, and outside entities are encroaching on its territory. For example, Wal-Mart Stores Inc. (NYSE:WMT) offers office supplies, and it will eventually grow in this area. This is bad news for Staples considering Wal-Mart has a larger customer base and more affordable products. The quality might not be as good, but today’s shoppers are looking for bargains more than anything else.

Wal-Mart’s ultimate goal is to conquer every industry possible. It will continue to grow and steal market share from others. It has an extraordinary list of victims already. Even if Staples were to find a way to compete with Wal-Mart, and Target Corp. (NYSE:TGT), how would it compete with online retailers such as Amazon.com Inc. (NASDAQ:AMZN)? Staples has gone to the extent of installing lockers for Amazon in its stores. Staples feels that this will lead to more exposure to Amazon customers. However, this is more likely to backfire as it also exposes Staples customers to Amazon.

If the Office Depot (NYSE:ODP) and OfficeMax Incorporated (NYSE:OMX) merger is completed, then it’s likely to help Staples in the short to medium term. Over the long haul, Staples will still find itself in a dying industry.

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The chart below compares fundamentals for Staples, Office Depot, and OfficeMax. Staples has a market cap of $8.90 billion, Office Depot has a market cap of $1.11 billion, and OfficeMax has a market cap of $1.00 billion.

SPLS

ODP

OMX

Trailing   P/E

N/A

N/A

2.43

Forward   P/E

9.44

29.92

12.81

Profit   Margin

-0.86%

-0.72%

6.02%

ROE

-2.44%

-7.17%

50.10%

Operating   Cash Flow

$1.22 Billion

$179.33 Million

$185.20 Million

Dividend   Yield

3.60%

N/A

0.70%

Short   Position

11.20%

18.50%

N/A

 

The fundamentals for Staples have weakened. Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal   

The debt-to-equity ratio for Staples is close to the industry average of 0.30. Staples has quality debt management.

Debt-To-Equity

Cash

Long-Term Debt

SPLS

0.32

$1.33 Billion

$1.99 Billion

ODP

0.63

$670.81 Million

$659.48 Million

OMX

0.90

$495.06 Million

$971.19 Million

 

T = Technicals Are Strong

Staples has been performing well year-to-date, but the past three years have been poor. The news of a potential merger between Office Depot and OfficeMax has led to increased confidence in Staples.

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1 Month

Year-To-Date

1 Year

3 Year

SPLS

2.97%

18.95%

-15.69%

-38.66%

ODP

-2.48%

19.82%

8.86%

-52.13%

OMX

-3.09%

19.07%

96.23%

-30.38%

 

At $13.42, Staples is trading above all its averages.

50-Day   SMA

13.22

100-Day   SMA

12.43

200-Day   SMA

12.25

 

E = Earnings Have Been Shaky          

Revenue has been stagnant over the past several years. Earnings had been improving on an annual basis until a recent steep setback.

2009

2010

2011

2012

2013

Revenue   ($)in   billions

23.08

24.28

24.14

24.66

24.38

Diluted   EPS ($)

1.13

1.02

1.21

1.40

-0.31

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and a decline in earnings.

1/2012

4/2012

7/2012

10/2012

1/2013

Revenue   ($)in   billions

6.19

6.11

5.50

6.35

6.42

Diluted   EPS ($)

0.40

0.27

0.18

-0.89

0.13

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

Office supply stores are suffering from shrinking margins. Competition is fierce, and it’s only going to get worse. There’s the shaky economy to worry about as well.

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Conclusion

If the Office Depot and OfficeMax merger is completed, then Staples might benefit considerably. This might lead to improved stock performance for a considerable amount of time. However, it won’t change the fact that the industry is on its last legs. Instead of facing competition from Office Depot and OfficeMax, Staples would be facing increased competition from Wal-Mart, Target, Amazon, and possibly others. For those looking for a trade, Staples might be a good option. For those looking for a long-term investment, which is the focus here, Staples is now a STAY AWAY.

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