The Quarter Delivery
Total reported sales advanced 34% to $7 billion, but fell 3% when stripping out $2 billion of sales from Corporate Express, a European rival the Staples acquired in July after a lengthy bid process that became hostile shortly after the acquisition was announced in February. The only division not impacted by the purchase was North American retail, which posted a 6% decline in sales to $2.6 billion on an 8% drop in same-store sales as strong consumable goods made by firms like Acco Brands (NYSE:ABD) were offset by lower average customer purchase amounts on durable goods such as furniture and tech hardware.
The North American delivery unit experienced a 1% sales decline to $1.7 billion when removing the effects of $1.1 billion in Corporate Express sales. International sales, the third and final segment, saw its sales more than double when including the acquired sales. However, this segment also saw a 1% drop on an organic basis; this would have been flat had it not been for a stronger U.S. dollar during the quarter.
Quarterly profitability trends were also masked by the acquisition and a number of one-time items. Reported diluted earnings fell 42% to 22 cents per share but management reported that pro forma earnings were 42 cents, or flat, from the previous year. Cash flow trends were easier to discern, with Staples reporting year-to-date free cash flow of $921 million and a full-year goal of “more than $1 billion in free cash flow this year after spending between $400 and $450 million” in capital expenditure.
Prodigious Capital Generation
Management expects a similar level of free cash in 2009, which puts it in the ballpark of $1.40 per share, or under 13 times the current share price of $18. A current risk is that Staples will have to refinance $2.5 billion in loans taken out to acquire Corporate Express, although it has until mid-2009 to do so. A higher debt load is projected to lead to as much as $250 million in additional interest expense next year, but management expects the deal to be worth it over the long haul given the cost-cutting potential, increased retail and distribution scale, and added international exposure this deal is expected to create.
The Bottom Line
The market for office supplies is very competitive and highly fragmented, with formidable big-box retailers such as Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and Costco (Nasdaq:COST) as competitors. Yet it is also very large, and Staples intends to continue to expand its market share. Its growing influence will continue to make life harder for its pure-play rivals, making it the most appealing investment candidate in the office supplies industry.
Learn to analyze stocks in this sector, in our related article Analyzing Retail Stocks.