Wednesday, 20 August 2014

Staples - some bad, some hope and a couple of levels

Regarding Staples I almost feel as if I should just replicate large elements of my prior note.  The good news is that the company retained (earlier in the year downward revised) guidance.  The less good news is that the Staples share price continues to look...volatile (or is that support at the c. US$11 level I can spot?)


So we all still know what the problem is: sales down, margins down...and by the time you get to the year-on-year EPS line a substantial decline - still.  Pretty ugly.


No prizes for guessing the main culprit...the physical stores number remained poor and despite continued growth of Staples.com it is not offsetting despite various branding, 'specialist' initiatives and efforts.  80 stores were closed during Q2, 140 planned for the full year.


The commercial business was better in the sense that sales went up but margins did compress mildly but operating income did at least rise with growth in facilities and breakroom supplies, print, and furniture, partially offset by a decline in ink and toner.

Meanwhile the international operations remained loss-making - just why these are not sold escapes me especially as European online (online!) was blamed for the continued poor trading.

And the US$600m guided full year free cash flow is equivalent to a c. 8% free cash flow yield - more than enough to cover the 4%+ dividend yield.

Sum-of-the-parts thoughts? Core North American stores FY US$300m of ebit at a depressed x6 multiple gives US$1.8bn.  The better Commercial operations of FY c. US$550m of ebit at a x10 multiple makes US$5.5bn.  Meanwhile the International operations I value at just x0.1 of sales i.e. c. US$400m.

Add all that together and that gives US$7.7bn.  The EV is about this today but with free cash flow of US$600m (around half available ex the dividend) this gap can extend further.  Additionally I note the comment on the conference call that:

'We’re on track to eliminate at least $250 million of annualized cost in 2014 and we’re pursuing additional expense reductions beyond our previous target of $500 million by the end of 2015' 

The real hidden value of Staples though lays in simplification (getting rid of international?) and domestic store closure which places greater emphasis on the dot com operation where there is real potential.

You have to wait for a discount on that conservative sum-of-the-parts to buy more Staples shares (US$10?) but if you own some I don't think it makes much sense to kick them out now.  In the US$13s maybe start losing a few. 
As I noted the last time I wrote about the company:
'Staples is wounded but not broken...even though investors should expect the company to continue shutting shops over time.  Inherently they are well-advanced in their own online activities, have seen their number 2 and 3 competitors merge (good for margins) and retain strong brand recognition...The company retains optionality...but has to prove that it has stabilised, especially on the store front, in North America whilst the International assets have to move into profit...or be exited/sold.   Given the cashflows, I would not be surprised if private equity will circle too'. 

It is going to be a big 'back to school' trading period for Staples whichever way you look at it.  Sub US$11 I think you buy more, US$13s lose some.  Pick up the dividend in the interim and keep your fingers crossed.  

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