Staples in Neutral Lane – Analyst Blog

We are maintaining a Neutral rating on Staples Inc. (SPLS), the world’s leading retailer of office products and services, with a target price of $24.00.

 

Staples, which anticipates a moderate recovery in the economy in fiscal 2010, is making prudent investments in the highly fragmented North American retail market. The company intends to expand its business technology (EasyTech) and copy-and-print services that generate higher profit margins, while enhancing its core supply categories such as ink and toner.

 

Moreover, the acquisition of Corporate Express has not only enhanced Staples’ global reach but also added large contract businesses to its portfolio, helping achieve significant purchasing synergies and reducing overhead expenses considerably.

 

Staples has been actively managing its cash flows. During fiscal 2009, the company generated a free cash flow of $1.8 billion, which was used to reduce debt and pay cash dividends to shareholders. Management expects to generate more than $1 billion of free cash flow in fiscal 2010. We expect that the company may also consider resuming share repurchases, suspended in first-quarter 2008.

 

However, stiff competition from office supply retailers such as OfficeMax Inc. (OMX) and Office Depot Inc. (ODP) and warehouse clubs such as Costco Wholesale Corporation (COST), discount stores and mass merchandisers such as Wal-Mart Stores Inc. (WMT) may weigh upon the company’s results.

 

Moreover, the decline in business and consumer spending due to the recent global meltdown and the deterioration of credit markets have resulted in a sluggish demand for big-ticket items such as business machines, furniture and other durable products.

 

Given the pros and cons, we prefer to be Neutral on Staples at this juncture.