Staples Retained at Neutral

Zacks Equity Research

We maintain our Neutral recommendation on Staples Inc (SPLS), 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 cost structure.

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 margins.

Moreover, the company is focusing on innovative products and services and has entered into a partnership with Martha Stewart Living Omnimedia Inc (MSO) and Avery Dennison Corporation’s (AVY) office and consumer products group for retailing a new line of products.

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 OfficeMax Inc. (OMX) and Office Depot Inc. (ODP), and warehouse clubs such as Costco Wholesale Corporation (COST), discount stores, mass merchandisers such as Wal-Mart Stores Inc (WMT), 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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