Is Staples a Buy Before the Holidays?

With shares of Staples, Inc. (NASDAQ:SPLS) trading around $11.73, is SPLS a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The company’s stock price fell off a cliff on August 14 when it lowered its fiscal 2012 earnings expectations, dropping over 14 percent in a day, and 20 percent by August 28. Since then, the price has recovered about 10 percent.

Third-quarter results showed revenue fell 2 percent year over year to $6.35 billion, while earnings tanked from $0.18 per diluted share in second quarter to -$0.89 in the third quarter, compared to $0.47 per share a year ago.

E = Equity to Debt Ratio is Close to Zero

Staples has a debt-to-equity ratio of 0.30, which looks very attractive when compared to its major competitors. With Office Depot, Inc. (NYSE:ODP) sitting at a debt-to-equity ratio of 0.63, and OfficeMax Inc. (NYSE:OMX) at a debt-to-equity ratio of 0.93, Staples carries a relatively low amount of debt compared to its industry.

It’s also important to look at total cash and total debt. This comparison slightly changes the perception of Staples’ debt situation. The company current claims total cash of $1.02 billion and total debt of $1.66 billion. OfficeMax claims less total debt at $971.39 million, but also much less total cash at $506.02 million. Office Depot claims $619.53 million in total cash for the most recent quarter, and $671.11 million in debt.

T = Technicals on the Stock Chart are Weak

As of November 18, the stock price is 2.40 percent above its 20-day simple moving average, or SMA; 1.66 percent above its 50-day SMA; and 11.22 percent below its 200-day SMA.

Since the beginning of 2012, the stock has been in a fairly dramatic downward trend, losing 17.51 percent of its value this year to date, and 16.81 percent year over year.

For comparison, shares of OfficeMax are up 88.55 percent this year to date, and shares of Office Depot are up 26.24 percent this year to date.

Staples is trading in a 52-week range between $10.57 per share at $16.93 per share with a beta of 1.3.

E = Excellent Performance Relative to Peers

Many investors favor return on equity as a key metric to diagnose how well a company is performing. While Staples boasts strong operational performance, it can only claim to be the second-best in its industry under this metric. With an ROE of 13.20 percent, Staples is beat by OfficeMax, with an ROE of 54.91 percent. Office Depot clocks in at an unattractive -11.28 percent.

Operating margins are also critical for stock evaluation, particularly in the retail sector. However, with an operating margin of 6.25 percent Staples once again loses out to OfficeMax, which boasts a margin of 10.74 percent. Office Depot is once again the loser with a margin of -0.33 percent.

T = Trends Support the Industry in which the Company Operates

Like many brick-and-mortar retailers, Staples has had to cope with mounting competition from online marketplaces like Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY). Not only does Staples have to fight hard to compete on prices, but with the breadth of its inventories. According to the company, nearly 75 percent of customers would consider buying additional products from Staples if it offered them. With limited floor space and overhead for storage, growing inventory diversity can quickly become a nightmare.

The company’s initiative to increase its online presence feels almost like a defeatist motion given its timing. Staples will have to single-handedly outgun Amazon and its growing network of businesses and suppliers in order to convince shoppers to visit its website over a marketplace portal. That being said, if any of the office retailers has a fighting chance it’s Staples.

Adding to its troubles, demand for paper products, printer toner, and a slew of other traditional supplies is dwindling, which is no doubt cutting into revenue. There is some strength in the company’s high-margin printing service, and Staples has identified this component as a key factor in its plan to turn re-position itself. This type of service-oriented business may quickly become the principle revenue source for a brick-and-mortar location.

Conclusion

The company’s massive scale is definitely a plus in an industry where size matters, but its position, particularly in the short term, looks vulnerable. Its volatile, declining share price and only long-term prospects for substantial growth make it an unattractive pick.

Staples is a Stay Away based on the metrics above.

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