Staples Inc.SPLS

Morningstar Rating

Stock Research and Analysis

by R. J. Hottovy, CFA

With a 10% share of the $330 billion worldwide market and leading margins, Staples is the dominant supplier of office products. The firm's closest competitors--Office Depot ODP and OfficeMax OMX--have struggled to remain profitable amid intense competition Read more

Bulls Say

Staples' expansive product assortment, increasing service offerings, and cross-channel capabilities differentiate it from mass merchants and online retailers, which compete on price alone.

Management anticipates that synergies from the Corporate Express transaction will build to $300 million during a three-year integration period through procurement savings, overhead reduction, best-practices sharing, and logistic network efficiencies.

Operating margins should improve as the private-label assortment increases from 20% to 30% of total sales. Private-label products carry prices that are 10%-15% below national branded competitors'.

Staples' operating margins remain comfortably higher than those of OfficeMax and Office Depot, suggesting better capital efficiency. Read more

Bears Say

Prolonged macroeconomic weakness may curtail spending by business customers of all sizes, moderating top-line growth and leading to rent and labor expense deleverage.

Mass merchants, warehouse clubs, and online retailers are targeting office-supply customers. As lower-cost providers, these competitors may constrain Staples' profitability.

With more than collective 4,000 stores, we believe the North American office-supply retail marketplace is nearing saturation. Staples competes with Office Depot and OfficeMax in virtually every domestic market.

As it further develops its international operations, Staples faces greater exposure to cultural and foreign currency translation risks. Read more

Strategy

Staples plans to extend its leading position while driving superior financial returns. A prudent store-opening schedule and productivity gains should drive North American retail growth. Within North Read more

Management

Ronald Sargent became president and CEO in 2002 after joining Staples in 1989. He was named chairman in early 2005. Although we would prefer to see the separation of Sargent's CEO and chairman roles to ensure independent oversight, we consider Staples Read more

Profile

Staples is the world's leading office supplies retailer and distributor, with roughly $26 billion in pro forma sales in 2008. The company operates almost 1,900 North American Read more

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