Staples Solidifies Position

The office supplier's shares hit an all-time high after the company posts strong quarterly results.
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Updated from 10:51 a.m. EST

Shares of

Staples

(SPLS)

hit an all-time high closing price Tuesday after the office supplier reported a 15% jump in fourth-quarter earnings that beat expectations, bolstering the company as one of retail's most reliable performers.

The Framingham, Mass.-based office-supply retailer also boosted its dividend and offered an outlook in line with Wall Street's projection. Its shares closed up $1.47, or 6.4%, to $24.54.

Staples' fourth-quarter net income rose to $290 million, or 39 cents a share, from $251.3 million, or 33 cents a share, a year earlier. Analysts, on average, were expecting earnings of 38 cents a share, according to Thomson First Call.

The performance, boosted by strong growth from its delivery business, helps Staples stand out as a best-in-breed retailer in a space where there is still opportunity for growth.

"It's a large market out there," said Joseph Doody, head of Staples' delivery business, on a conference call with analysts. "We're all taking some share from all the small, independent contract stationers out there."

Other public companies making inroads in this market include

Office Depot

(ODP) - Get Report

and

OfficeMax

(OMX)

, but neither competitor has been able to keep pace with Staples.

"

Staples trounces primary competitors Office Depot and OfficeMax in almost every imaginable operating performance metric, including historical sales growth, profitability and returns," said Morningstar analyst Anthony Chukumba in a recent research note. "Staples has increased its lead over its rivals in the past few years, and we expect more of the same in the near future, as both Office Depot and OfficeMax recently hired new CEOs who will take some time to get up to speed on their respective businesses."

Office Depot hired Steve Odland, who famously led a turnaround at

AutoZone

(AZO) - Get Report

, last March. He has embarked on a consolidation campaign to boost the retailer's profit margins, including the closure of a slew of stores in the U.S. and abroad. Preliminary results of these measures showed up in Office Depot's recent fourth-quarter report.

On Feb. 15, Office Depot said its fourth-quarter profit doubled on lower costs, while revenue grew 7%, to $3.72 billion. The results beat Wall Street's expectations and led to a run-up in its stock. Still, Office Depot's operating margins remained less than half of what Staples reported in its quarter.

Meanwhile, OfficeMax reported a wider loss for its fourth quarter, weighed down by charges for discontinued operations and other items. The company has been a revolving door for top executives recently amid scrutiny of its accounting practices. Excluding one-time losses, OfficeMax's quarterly results pleased Wall Street, but the company is still dogged by a swarm of activist hedge funds, led by K Capital Partners, which has criticized its performance and proposed putting the company up for sale.

Staples, meanwhile, posted its first-ever double-digit operating margin in the fourth quarter. The margin figure rose 50 basis points over last year to 10.2%. Staples' revenue rose 9% to $4.46 billion, while same-store sales rose 3%. Growth was driven mainly by the company's delivery business, which grew 18% in the fourth quarter, while retail sales in North America were up just 8%.

"Though this rate of improvement will not likely continue, operating margins should continue to expand as the company takes share, expands categories and drives efficiencies," says Credit Suisse First Boston analyst Gary Balter (his firm has an investment banking relationship with Staples).

Overall, the retailer posted an operating margin of 8.2% for the year, marking an improvement of over 300 basis points since it laid out a plan to boost the metric in 2002.

"We believe we could expand our operating margin by another couple hundred basis points in the next couple years, bringing us to our new long-term operating margin goal of above 10%," said Staples Chief Financial Officer John Mahoney on the conference call.

Staples also showed significant headway in its international business in the fourth quarter. Sales abroad grew by 9%, but overseas sales were flat when accounting for the weakening of the U.S. dollar. More significantly, same-store sales for the international business rose 3% in Europe, marking the first positive comps from that region for Staples in eight straight quarters.

"Most of the sizzle in Staples shares today comes from the progress in its European business," says Fran Radano, a research analyst with Gartmore Global Investments. "That was a real question mark for those guys, so it's very heartening to see them turning it around."

Slow economic growth in Europe has long been a drag on office-supply retailers in that region. On its fourth-quarter earnings call, Office Depot's CEO, Odland, expressed frustration with the company's falling sales in Europe.

"It may take us some time to stabilize this situation," Odland said. "We need to reignite profitable growth in Europe and over time increase our geographical reach."

Looking ahead, Staples said it expects first-quarter earnings per share to rise by 15% to 20% from 21 cents a share a year ago. The projection is in line with analysts' estimates calling for earnings of 24 cents a share. For the full year, the company sees sales growth in the low double-digit range, with earnings up 15% to 20% from the $1.12 it posted for the recently ended year. Analysts target earnings of $1.24 a share for the year ending next January.

The retailer said it will raise its next dividend payment by 32% to 22 cents a share.

"Staples continues to be a safe, solid, cash-rich alternative in retailing today," Credit Suisse's Balter says.