Being a leading retailer of office products and services, Staples Inc. (SPLS) is better positioned than its competitors to sustain its growth momentum based on its margin expansion, effective merchandising, and growth prospects across its retail, delivery and international divisions.
Management now forecasts sales to rise in the low single digits in the first quarter and in the low to mid single digits in fiscal 2011. Staples expects first-quarter 2011 earnings in the range of 30 cents to 32 cents and fiscal year 2011 earnings between $1.50 and $1.60 per share.
Anticipating a moderate recovery in the economy, Staples is making prudent investments in the highly fragmented North American retail market to expand its business technology, and copy and print services that generate higher profit margins.
We appreciate Staples rational approach to slow the pace of store openings given the sluggish consumer environment. The company opened 53 stores in fiscal 2010 a drop from 56 in 2009, and significantly down from 121 stores opened in 2008 and 147 stores opened in 2007. For fiscal 2011, the company plans to open 50 new stores in North America, Europe and Asia.
Staples has been also actively managing its cash flows. During fiscal 2010, the company generated free cash flow of $1 billion, which was used to repurchase shares and pay cash dividends to shareholders. Management now expects to generate more than $1 billion of free cash flow in fiscal 2011.
Recently, Staples raised its quarterly dividend by 11% compared with 9% a year earlier. The company’s board approved a hike in annual dividend to 40 cents a share (or 10 cents quarterly) from 36 cents a share (or 9 cents quarterly). The increased dividend will be paid on April 14, 2011, to stockholders of record on March 25, 2011.
The dividend hike reflects the company’s sound financial position and well-defined future prospects. Signs of recovery in the economy have made share buybacks and dividend increases a common factor among companies sitting on ample cash. Apart from enhancing shareholders’ return, such a strategy lifts the market value of the stock.
However, we remain cautious about the macroeconomic environment and sluggish job market. The decline in business and consumer spending and weak credit markets have resulted in slow demand for big-ticket items such as business machines and other durable products. We observe that the demand for office products is closely tied to the health of the economy.
Given the pros and cons, we prefer to maintain a long-term “Neutral” rating on the stock. Staples, which competes with Office Depot Inc. (ODP) and OfficeMax Inc. (OMX), holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.
OFFICE DEPOT (ODP): Free Stock Analysis Report
OFFICEMAX INC (OMX): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
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