) remains well positioned compared to its peers, given its margin
expansion, effective merchandising, and growth prospects across its
retail, delivery and international divisions. However, the sluggish
state of the economic recovery remains a concern.
Strengths & Opportunities
Staples is making prudent investments in the highly fragmented
North American retail market to improve its business technology,
and copy and print services that generate higher profit margins.
The company entered into partnership with
Martha Stewart Living Omnimedia Inc.
Avery Dennison Corporation's
) office and consumer products group for retailing a new line of
Going forward, Staples intends to focus on improving store
productivity by generating incremental sales per store,
accelerating growth in adjacent categories, increasing market share
in core office supplies, streamlining its cost structure and
improving profitability in the International division.
During the first quarter of 2012, the company posted earnings of
30 cents per share, representing an increase of 7.1% from 28 cents
in the comparable prior-year period. Moreover, management stood by
its earlier forecast and expects sales to increase in the low
single-digit range in fiscal 2012, while the bottom line is
expected to increase in the high single-digit range. The company
expects to generate more than $1 billion of free cash flow in
Staples' decision to slow down the pace of store openings makes
sense given the sluggish spending environment. The company opened
just 37 new stores in 2011 compared with 53 in 2010, 56 in 2009 and
121 in 2008.
Weaknesses & Threats
The International segment continues to struggle with sales
contracting 8% during the first quarter of 2012, following a
decline of 4.6% in the previous quarter. The drop in revenue
reflected decline in comparable store sales in Europe coupled with
sluggish sales in Australia.
We noticed that the margins remained under pressure in the
first-quarter 2012. Gross profit for the quarter inched down 1.6%
to $1,609.7 million, while gross margin contracted 10 basis points
to 26.4%. The decline in gross margin was experienced mainly due to
a drop in International revenue driven by lower product
The decline in business and consumer spending in the wake of the
global meltdown and the deterioration of credit markets has
resulted in sluggish demand for big-ticket items such as business
machines, furniture and other durable products. Management expects
sluggish growth in the U.S. economy and hinted that demand will
remain soft in Europe.
Due to high exposure to international markets, Staples remains
prone to currency fluctuations. The weakening of foreign currencies
against the U.S. dollar may require the company to either raise
prices or see its profit margins contract in locations outside of
the U.S. An increase in price may have an adverse impact on the
demand for products.
The company is trying every means to keep itself afloat amidst
the tough economic conditions. Staples is taking up initiatives in
almost all its categories in order to drive customer traffic.
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.
), and computer and electronics superstores.
Therefore, the stock carries a Zacks #3 Rank, which means a
short-term 'Hold' rating and correlates with our long term
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