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Staples (NASDAQ:SPLS) already holds the title of the undisputed market leader in office supply retailing due to their wide product offerings and international presence in 26 countries. The latest Q3'12 earnings and reaffirmation of its FY'12 forecast puts the company in an excellent position to continue succeeding and then dominate the industry following an eventual rebound in the macroeconomic climate.

North American retail sales were flat when compared to Q3'11 with weakness in computers, technology, accessories, and software. International sales were sluggish and were dragged down by weak results in Europe and Australia. Despite all this Staples reported Q3'12 net sales of $6.4B, operating margin (excluding one time items) decreased 30 bps yr/yr to 7.9% and diluted Earnings Per Share was $0.46 which came 1 cent ahead of consensus.

Management has recognized weak aspects of their business and unveiled plans to cut costs of $250 million annually by 2015 by closing unprofitable stores, and relocating to areas which can provide larger sales. Staples also has ambitious plans to cut down unnecessary expenses in areas like product costs, indirect procurement, store operations and supply chains.

A 4 point plan to better position themselves in the industry during their investor conference call on November 14 2012:

  • Expand in-store and online product assortments. 75% of customers have reported a desire to purchase additional products in store if Staples were to offer a broader assortment. Gone are the days when customers only require ink and paper. Management realizes that now more than ever their clients demand tablets, smartphones and technology accessories.
  • Accelerate online presence and sales growth.
    1. Staples is already the second largest Internet retailer with $11 billion of sales. Management announced that in the near future they will be offering over 100,000 items for sale on staples.com
    2. Staples boasted the fact that their online circular in the U.S receives over 700,000 views per week. Meanwhile, the mobile app has over half a million downloads to date, and management has pledged to boost up their presence through social media sites like Facebook and Twitter.
  • Create a seamless in-store and online customer shopping experience. Consumers these days demand the convenience of online shopping while not compromising the experience of shopping in brick and mortar stores. Staples plans on making the shopping experience easier by offering the ability to pick up online orders in stores giving the end user the convenience of shopping online with the added benefit of not waiting for delivery to occur. Staples also plans on expanding in-store kiosks which offers the user the ability to evaluate the product specifications in a convenient matter, read pamphlets and informational brochures and test the product first hand without the need to interact with anyone. As always sales associates are available to aid the consumer and to answer further questions.
  • Boost service relates sales. When you think of service relates sales at Staples you automatically think of the high margin printing services. Staples plans on expanding on this through further investments in training and quality, remodeling stores to give it a more upscale look and the continuation of their partnership with Vistaprint. Staples is building on this by improving cross-channel coordination and better aligning around the customer.

Looking forward I believe that Staples is well positioned to achieve large scale growth and I have a target of $15 on the stock. Among the reasons for this bold evaluation include the following:

  • Staples still remains the king of in the industry being the leader in nearly every single conceivable metric such as number of stores, profitability and financial consistency.
  • Staples is the only retailer that can boast of their ability to offer next day delivery to 98% of the North American population.
  • Competition continues to struggle specifically Office Depot (NYSE:ODP) and OfficeMax (NYSE:OMX) that failed to report an increase in same store sales.
  • Staples management has the most extensive experience in the industry with senior executive who average more than 13 years in the industry.
  • Staples generates strong free cash flow, which is routinely given to shareholders through dividends and share repurchases.
  • On the macro-economic front consumer confidence is at a 5 year high which improves the prospect of increased spending gains. This is a boost that management is hoping for.

Despite all this, many analysts have lowered their price target. The average consensus amongst analysts remains a HOLD recommendation with an average price target of $12.60. One can assume these targets are based on the view that the economy is either in worse shape than assumed or a full recovery is not as likely to occur.

Staples remains a very interesting stock to follow and based on management's ambitious plans and their already strong established presence achieving further success is realistic and can provide shareholders with a long term return.

Source: Staples Taking Action Now To Flourish When The Economy Fully Recovers