Are Shorts Right About Staples?

With shares of Staples (NASDAQ:SPLS) trading at around $15.50, is SPLS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Staples has performed well this year, but is this trend sustainable? Longs will say yes, and they will most likely point to the merger between Office Depot (NYSE:ODP) and OfficeMax (NYSE:OMX). This merger will lead to many store closings for both Office Depot and OfficeMax, which will in turn lead to increased market share for Staples. As mentioned in the previous Staples article written for this column, Staples is well-positioned for the short term (for a trade), but the long-term prospects aren’t good.

To put it simply, Staples will be competing against the largest brick and mortar retailer in the world in Wal-Mart (NYSE:WMT) and the largest online retailer in the world in Amazon (NASDAQ:AMZN). What makes this situation even worse is that Staples is selling its products for much higher prices. For instance, the average price of a product that is sold by both Staples and Amazon is 19 percent higher at Staples. In an economy where the consumer is displaying strength, this could be looked at a positive for investors. However, that doesn’t describe the current situation. Consumers are currently looking for value over quality.

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Staples is cutting costs and more focused on its online operation. The cost-cutting could lead to earnings improvements in the near future, but investors want long-term returns. As far as Staples.com is concerned, traffic has been impressive over the past three months. According to Alexa.com, pageviews-per-user has increased 4.4 percent to 4.79, time-on-site has increased 1 percent to 4:41, and the bounce rate (only one pageview per visit) has declined 5 percent to 31.5 percent. These are all good numbers. Last quarter, online sales increased 3 percent on a year-over-year basis. Staples is doing something right in this area. However, it might just be that consumers are becoming aware of the site, which has led to increased visitation. It will be interesting to see if the positive traffic numbers above are sustainable.

Staples is also cutting costs by reducing square footage in its retail stores. At the same time, it’s selling interesting products such as popular mobile devices and 3D printers in order to attract consumers to its stores. This tactic might have short-term effects, but once again, is it sustainable?

Staples is currently trading at 11 times forward earnings. This might look appealing considering Office Depot is trading at 52.5 times forward earnings, and OfficeMax is trading at 15 times forward earnings. However, Staples has had some margin problems. For example, profit margin is currently -0.94 percent, which puts Staples at the 55th percentile in the industry. Profit margin has ranged from -9.39 percent to 5.04 percent since 2011. This isn’t a range that will lead to increased investor confidence. On the other hand, operational cash flow is solid at $1.42 billion. Another positive is the 3.10 percent yield. If Staples can effectively cut costs and increase profits over the next few quarters, then there will be potential for more capital to be returned to shareholders.

In regards to company culture and leadership, employees rate the company culture as subpar and leadership as slightly above average. According to Glassdoor.com, employees have rated their employer a 3.0 of 5, and 46 percent of employees would recommend the company to a friend. For leadership, 60 percent of employees approve of CEO Ron Sargent. The leadership number is impressive considering recent industry challenges.

Let’s take a look at some more important numbers prior to forming an opinion on this stock.