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The Science of Hitting
The Science of Hitting
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Staples: Q2 2011

August 17, 2011 | About:

Staples (NASDAQ:SPLS), an office products company, reported second-quarter earnings and held a conference call with investors on Wednesday morning. The company and its two main competitors, Office Depot (NASDAQ:ODP) and Office Max (OMX), have seen their stocks get hit pretty hard in the past year, with SPLS, ODP, and OMX dropping 27%, 39%, and 57%, respectively, compared to a nearly 10% gain for the DJIA. The companies are facing troubles from both sides of the table, with big box retailers like Walmart (WMT) and Target (NYSE:TGT) competing through one medium, and Amazon (AMZ) from the other (in management’s words on the call, “the industry remains as competitive as always”). Here are some of the highlights from the second quarter and the call:

Total company sales for the second quarter of 2011 increased 5.2% to $5.8 billion compared to the second quarter of 2010, with 400 basis points of that growth coming from a positive foreign exchange impact. North American Delivery grew the top line 3.1% to $2.4 billion, driven by strong double digit sales growth in facilities and break room supplies.

North American Retail grew the top line 1.7% to just over $2 billion, with flat comparable store sales from a mix of lower traffic but higher order size. The company opened two (net) stores in the U.S. and four in Canada, ending the second quarter of 2011 with 1,907 stores in North America (1,576 in the U.S., 331 in Canada).

In International, the top line was up 15.2% to $1.34 in U.S. dollars, but down slightly (0.1%) in local currencies ($178 million positive impact of foreign exchange rates). Europe continues to be difficult, with Retail comps down 5%, partially offset by top line growth in China, India and South America. The company opened one store in Germany and closed one store in China, ending the quarter with 378 international stores.

Net income for the second quarter of 2011 increased 36% year over year to $176 million, while diluted EPS increased 39% to $0.25 from $0.18 in the second quarter of 2010; excluding onetime expenses (tax benefit in 2011, restructuring expense in 2010), diluted EPS increased 10% from $0.20 to $0.22 per share.

EPS increased at a faster rate than net income due to the company’s buyback program: 12 million shares of stock were repurchased in Q2 for $199 million or a cost of roughly $16.58/share; year to date, the company has repurchased 19 million shares at a cost of $346 million, for an average purchase price of $18.21/share. At the end of the second quarter, the company had 711 million shares outstanding.

For the full year 2011, the company expects sales to increase in the low single-digits compared to 2010, resulting in expected diluted EPS in the range of $1.42 to $1.48 (that includes the $0.03 in tax benefit). For the year, the company expects to spend roughly $400 million in capital expenditures, and generate more than $1 billion in free cash flow; that seems pretty impressive considering the current valuation and the fact that management doesn’t seem to be stretching themselves on their estimates - “our expectations for the full year are -- incorporate a pretty soft economy in Europe; and as John said, a relatively slow economic recovery around the world.”

One thing that I liked to hear from management on the call was similar to what we’ve been hearing from Buffett for awhile now. CEO Ronald Sargent had this to say about the economy: “Last quarter I said that the economy was stuck in neutral and nobody liked it. But I'm really not sure that anything has changed since then. I don't think things are any better. On the other hand, I don't think things are any worse… I'm not an economist at all, but from what I see, we have no chance at another recession. I think we're probably more likely to stay in economic purgatory for a while longer. But I don't have any worries about a double-dip at this point.”

The stock spiked more than 10% in premarket trading on the news; however, by the time the market closed at 4 p.m., it was up a mere 0.49%.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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