We maintain our Neutral recommendation on
), with a target price of $13.00, as the lingering macroeconomic
concerns and sluggish job market continues to deter the sales of
this leading retailer of office products and services.
However, it is encouraging to observe the company's focus on
augmenting store productivity to generate incremental sales per
store, accelerating growth in adjacent categories, efforts towards
enhancing market share in core office supplies and streamlining its
As the recovery in the economy remains slow, consumers and small
businesses remain frugal about big-ticket spending like business
machines and other durables. Therefore, we believe that the demand
for office products is likely to remain soft as performance of the
sector is correlated to the health of the economy.
Consequently, Staples is making investments in the highly
fragmented North American retail market to expand its business
technology, and copy and print services that generate higher profit
Moreover, the company is focusing on innovative products and
services and has entered into a partnership with
Martha Stewart Living Omnimedia Inc
Avery Dennison Corporation
) office and consumer products group for retailing a new line of
Further, Staples has been actively managing its cash flows,
returning much of its free cash to shareholders via dividend and
share repurchases. During the second quarter of 2012, Staples
repurchased 12.1 million shares for $159 million, and in the
26-week period ended July 28, 2012, distributed $148.5 million
through cash dividends. Management now expects to generate free
cash flow of over $1 billion in fiscal 2012.
However, the company faces stiff competition from office supply
retailers, such as
Office Depot Inc.
), and warehouse clubs such as
Costco Wholesale Corporation
), discount stores, mass merchandisers such as
Wal-Mart Stores Inc
), computer and electronics superstores on attributes such as store
format, pricing strategy and in-stock consistency. This may weigh
upon the company's results.
Currently, Staples holds a Zacks #4 Rank, which translates into
a short-term Sell rating as the sluggish macroeconomic environment
acts as short-term deterrent.
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