Office superstore Staples (SPLS - commentary - Cramer's Take) will come out somewhat ahead of the office retail pack in its first quarter. While earnings are expected to be flat year over year, coming in at 30 cents per share, the company is nevertheless better positioned than rivals Office Depot (ODP - commentary - Cramer's Take) and OfficeMax (OMX - commentary - Cramer's Take) in the current recessionary environment for a variety of reasons:
For one thing, it is better positioned in North America -- both in retail sales, at $10 billion for Staples compared to OfficeMax's $4.3 billion last year, as well as business-to-business (B2B) sales, representing $6.2 billion of revenue for Staples vs. OfficeMax's $4.1 billion.
For another, Staples is on the threshold of possibly finalizing an acquisition of Dutch retailer Corporate Express (CXP - commentary - Cramer's Take), a $2.3 billion company and a strong niche player internationally in pure-play B2B.
It should be noted that analysts expect revenue to be flat year over year as well, at $4.82 billion. Staples stock declined last year by 7%.
Issues that should be considered in advance of the call on Tuesday include the following:
Although the bid for Corporate Express is at a stalemate, the Dutch company is willing to further reconsider, which at $2.3 billion, or 8 euros per share, is considered seriously undervalued by Corporate Express. Staples has already gathered $3 billion in financing for this acquisition and seems determined to close the deal. The upgraded international presence with the merger should help Staples shore up its position against giants like Wal-Mart (WMT - commentary - Cramer's Take) and Target (TGT - commentary - Cramer's Take).
Income in the company's international operations increased by 94% last year (14% of revenue), which primarily drove the 4.5% year-over-year earnings increase for 2007, while remaining flat for North American retail (50% of sales). Furthermore, the only area where the company increased its capital expenditures was in its international operations, where capex increased by 39%.
The company made an agreement with Dell (DELL - commentary - Cramer's Take)to become its exclusive office supplier.
Last year, 159 stores were opened worldwide, however, the rate of expansion is expected to slow, with 75 stores expected to open over 2008 compared to the 150 previously anticipated. The company now operates 268 stores in Europe, which should continue last year's trend whereby currency effects represented 7% of the total 16% growth in international sales.
Expenses increased by 7%, less than the revenue increase, which stabilized the company's operating margins at 8% under adverse conditions. The company is expected to continue to pay close attention to costs into 2008.
The low debt-to-capitalization ratio, at 6%, bodes well for the bottom line in 2008. Interest expense actually declined year over year in 2007 by 20%.
The company boasts a relatively strong level of free cash flow at $890 million.
The outlook for 2008 has the company predicting revenue growth in the mid-digit range. Staples will probably come out ahead of the pack but is still looking at relatively flat earnings over 2008.
P.S. Will you be there when Cramer makes his next move?
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Retail KSS Holds Steady 5/16/2008 9:51 AM EDT The company reported EPS of 49 cents on $3.6 billion in sales.
Retail JWN Puts Earnings on Discount 5/16/2008 8:05 AM EDT The company posted EPS of 54 cents on $1.88 billion in revenue.
At the time of publication, Vijayraghavan had no positions in the stocks mentioned.
Vasu Vijayraghavan was an academic finance professor at the University of Paris who has now turned to a new career as a financial consultant. As an academic, she wrote on corporate governance issues, especially in the European context, and she believes in a long-run and balance sheet approach to stock picking.
Currently, Vasu is working as a consultant for lawyers, doing business valuation. She is a Level II CFA candidate and enjoys writing long/short and earnings calls pieces for TheStreet.Com.
Vasu holds a Ph.D. from the University of Michigan and a B.A. from Harvard University.
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