Staples Will Outlive Its Big-Box Brethren
Staples is the de facto leader of the office supply retailing world, but that won't keep it insulated from industry disruptions. Luckily for investors, management has kept its head out of the sand and is actively pursuing other avenues of growth. As the No. 2 Internet retailer behind Amazon.com, Staples has a unique position among big-box chains. Its core office supplies business is increasingly undesirable, but it is not without options -- an element that separates it from a few peers. Is Staples an easy pick, or a "do not touch"?
Though Staples' third-quarter numbers fell short of analyst estimates, the market appeared indifferent to the results. On the top line, sales contracted by about 4%, to $6.1 billion. One percent resulted from store closures, while the continued drop in core office supplies sales was responsible for the rest.
Adjusted earnings from continuing operations dropped 9% to $0.42 per share. Same-store sales ticked down about 3% from the year-ago quarter.
Even with lackluster operating numbers, Staples was able to turn the report into a positive via encouraging figures out of Staples.com, the aforementioned second-biggest e-commerce player in the world.
The company gave the website its biggest makeover since 2005 and added 70,000 new products, while growing sales 3% in the quarter. Average order size could still use improvement, but traffic numbers and conversion rates have improved.
Looking ahead to the full year, Staples management still expects sales to drop into the low single digits, with an adjusted earnings-per-share estimate of $1.21-$1.25. Even with the hundreds of millions the company is pouring into its Web reinvention, free cash flow is estimated to come in at $900 million for the year.
Can it work?
Staples is a $10.25 billion company, according to its market cap. Sales will continue to shrink until Staples.com hits a large enough scale to drive the numbers higher. To make the process easier, the retail chain is continuing its cost-cutting efforts and closing down the least-attractive stores. In the past quarter, the company completed, ahead of schedule, a $150 million cost reduction.
By transforming into a leaner, more cash-focused business, Staples could be a survivor after the great big-box retailer paradigm shift. It's only been one year since management really put the pedal down on this new strategy, so investors have yet to see it in full force. Watch as those expenses come down and Web sales take on a more elevated position. The resulting cash flow could prove today's valuation to be a good deal for investors.
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The article Staples Will Outlive Its Big-Box Brethren originally appeared on Fool.com.Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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