2 for Tuesday: Step Up to Staples

The office-supply giant has revamped its stores and has a thriving e-commerce business.
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With the equity markets in such a state of flux, finding a solid investment idea these days has become downright difficult. Still, there are bargains to be had. And believe it or not, I think

Staples

(SPLS)

is one of them.

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Despite the lingering economic uncertainty, the well-known office-supply store offers investors some pretty decent upside -- particularly when compared with its smaller competitors,

OfficeMax

(OMX)

and

Office Depot

(ODP) - Get Report

, both of which have been minimizing expectations. Hold the email folks. Let me explain.

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Yes, Staples is going through some tough times -- earnings growth hasn't been as robust as investors might have liked. But the company is not in dire straits. To the contrary, it has the necessary capital to weather this storm. In fact, management's recent efforts to trim costs suggest that Staples will remain the industry's 800-pound gorilla -- both in terms of market cap and number of locations -- for some time to come.

Over the past several months, Staples has spent a great deal of time and effort revamping its supply chain process and managing its inventory turns. In addition, management has been experimenting with a new store layout designed to increase foot traffic and enhance the customer's shopping experience.

OK, so will all this really make a difference in this environment?

Yes.

As part of this effort, management has improved signage at its new retail locations and shifted merchandise within the stores in order to improve visibility. Plus, it reduced the number of those annoying showcases that always seem to be locked (you know, the ones where the salesperson can never seem to find the key?). Although they aren't disclosing specifics, management says this new format will have a positive impact on both total sales and sales per square foot going forward. In fact, the initial response from consumers has been so positive that Staples is said to be considering remodeling many more or even all of its 1,300 stores.

But that's not all.

Another positive is that its e-commerce business, more specifically its Staples.com site, is profitable as of the second quarter. Despite the drop-off in consumer confidence and spending in recent months, the company seems comfortable with estimates that call for its online business to generate roughly $1 billion in sales in 2001 -- about double what it did last year. The online division is pulling in about 10% of the company's overall sales.

Management's ability to contain costs and generate a profit, even in these tough times, is a terrific sign that once the economy does rebound, this high-margin business likely will be a major contributor to the bottom line.

Management has said it is comfortable with estimates calling for Staples to earn between 65 and 70 cents per share in 2001. And assuming that both its bricks and mortar and online businesses are able to show even modest growth in the coming year, the company should earn at least 75 cents per share in 2002.

As a result of both these near-term expectations and its longer-term growth potential, I think the stock is a bargain. And under $15, I'd be a buyer.

In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Curtis welcomes your feedback and invites you to send it to

Glenn Curtis