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Our more detailed report analysis is available, but the Staples thesis summary is as follows:

Thesis Overview:

Staples' (SPLS) stock price has declined over 30% since its peak in the beginning of 2012, mainly driven by a flat domestic business and a steep demand drop out of Europe. The office supply sector in general is nothing to write home about, but Staples has been aggressive in expanding margins, focusing on its online offerings, and stealing market share from its other two main (and much smaller) competitors. At below $12/share, Staples is trading at about half its long-term average EBITDA multiple, and is paying out a ~4% dividend yield. The noise out of Europe has certainly been the main factor in driving the stock lower, however our view is that at these trading levels, the market is assigning a zero value for the company's International business, and is expecting worst-case scenario with respect to all aspects of the business. We see limited downside to these shares with ~20% potential upside in a conservative base case scenario as detailed in the full IB report.

Company Overview

Staples is the largest office products company in the world. The company serves businesses of all sizes (~80% of sales) and consumers (~20% of sales) in North America, Europe, Australia, South America and Asia. The company's goal is to provide customers a broad (and low cost) selection of office products, a range of technology and copy / print services, convenient store locations, easy-to-use websites, fast order delivery, and great customer service. Staples operates via three segments: North American Delivery, North American Retail, and International Operations.

Staples has been experiencing flat topline growth over the past couple years as A) "core" office supplies (e.g., paper, printers) are in secular decline, and B) European economic weakness continues. The company has attempted to offset this tepid revenue growth by investing in its Delivery business, and by focusing on controlling costs and expanding margins from trough 2009 levels.

Market Environment:

Within the office supply sector, there are three main pure-play competitors: Staples, Office Depot (NYSE:ODP), and OfficeMax (NYSE:OMX). Staples calls out a few other companies with whom it competes (e.g., Wal-Mart, Target, Tesco, Costco, Best Buy, Apple, FedEx Office), however these firms do not offer office supplies as their "core" product, and they do not break out contribution, growth metrics, etc. for these segments. Focusing on the "main three," we see that the industry as a whole is not growing. Staples, however, is offsetting a decline in topline by stealing market share from OfficeMax and Office Depot, and growing its Delivery (or "online") business.

Valuation

EBITDA Multiple: Over the past five years, Staples has averaged LTM EBITDA multiple of between 7-8x, compared with its current 4.0x. This multiple compression has been fueled primarily by a severely depressed demand out of Europe. The stock has fallen from its highs of close to $17/share, to now below $12/share as a result of declining earnings (driven by Europe) and associated multiple compression. This has left Staples paying out a dividend with a yield of ~4%, and a free cash flow yield of ~15% (post dividend).

DCF: The way we are looking at the intrinsic value of Staples is separating the company into its three segments and analyzing a couple different cases for the International segment. More detailed analysis is available in our full report, but the resulting stock prices average to ~$14/share when taking these assumptions into account. We feel as though at $12/share, you are picking up a business with limited downside (from a stock price perspective) that is best suited to weather a challenging industry, and that knows how to focus on online, steal market share, and give capital back to shareholders.

Risks:

Risk #1: No European recovery.

Risk #2: Management pares back on dividends and/or buybacks.

Risk #3: Competition from Amazon and other online guys.

Source: Staples: The Winner In Office Products