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Staples a stable, but not stationary, store


Dear Mr. Berko:

Which stock would you recommend in the office products business: Office Max, Office Depot or Staples? I have a six- to eight-year horizon, and I would like to try to double my investment in that time frame.

I’ve bought drug stocks, oil and gas pipelines, bank issues and food companies you like. In the past six months, I’ve put together a fairly good portfolio from the issues you recommended in your column, which should make my retirement in a dozen years a lot more comfortable.

H.E., Erie, Pa.

Dear H.E.:

Staples Inc. (SPLS-$19.50) is the largest owner/operator of office product superstores, with 1,509 units in the United States and abroad. Last year, SPLS had gross revenues of $11.6 billion and earned a record $446 million, or 94 cents a share.

The second-largest office supply superstore chain is Office Depot Inc. (ODP-$16.24) with 1,005 units worldwide. In 2002, ODP produced $11.3 billion in revenues and earned a record $310 million, or 98 cents a share.

OfficeMax Inc. (OMX-$8.59) operates 998 superstores in the United States, Puerto Rico and the U.S. Virgin Islands, plus a new joint venture in Mexico. OMX, the midget in this superstore business, posted $4.7 billion in revenues last year that produced an unimpressive net income of $10 million, or 8 cents a share.

Forget OfficeMax. On July 14, Boise Cascade Corp. announced it had agreed to but the company for about $9 a share, which leaves little room for appreciation in this stock.

On June 2, Office Depot purchased Guilbert, a French firm specializing in contract stationery that caters to large businesses and is also a leading provider of office supplies to companies in Britain and France. This $1.4 billion revenue company is expected to add about a nickel a share to ODP’s net income in 2004.

A friend of mine who works in Paris tells me that ODP may have bought a pig in a poke when it purchased Guilbert from France’s Pinault-Printempts Redoute. Guilbert’s best asset was its mail-order business, which was snapped up by Staples in mid-2002.

ODP’s revenues should exceed $1.35 billion this year, and earnings are expected to come in at $338 million, or $1.07 a share. In 2004, the suits expect the company to earn about $1.18, with net profit margins at 2.8 percent and return on investment reaching 12.9 percent. Office Depot’s same-store sales are likely to be down due to sluggish traffic, weak furniture revenues and slow-moving technology products.

ODP’s balance sheet is solid, with just $400 million in debt. Standard & Poor’s, however, believes that the company should be accorded a lower valuation than Staples, commenting that its net income would fall by 10 percent if it expensed its executive stock options.

Even considering the Guilbert acquisition, S&P believes that ODP’s future growth is weak compared with Staples, and it rates the shares as a “hold.” I think S&P may be too generous.

Staples is the hands-down and hands-on favorite. Revenues for this year are expected to grow in the low double digits, aided by new stores, continued advances in Europe, a growing private-label business, improved same-store sales and increased worker productivity. The company should also benefit from newly remodeled units, better customer service, a merchandise shift to small businesses and lower merchandise costs, and an excellent management team.

As a result, profits at SPLS’s North American Retail Group, which accounts for 65 percent of revenues, should grow by 26 percent. Internet sales, which make up 15 percent of revenues, look poised for a 20 percent gain this year. Meanwhile, European mail-order revenues, which also generated 15 percent of revenues, including the purchase of Quill in 1998 and the Guilbert mail-order business in 2002, are expected to grow by 12 percent this fiscal year.

Last year, SPLS had net income of $410 million. Net income is expected to grow to $502 million in 2003, and to $588 million in 2004. The company’s net-profit margin of 3.9 percent this year is a glowing testament to superior management, and so is its 15.5 percent return on equity.

It’s no wonder that S&P ranks SPLS as a “strong buy” and that Value Line believes SPLS could appreciate at $40 a share in the coming four years.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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