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Staples, Inc. (SPLS) is the leading office retailer in the world. Long-term investors are advised to purchase the stock due to its good business model, excellent management, and a good balance sheet. Staples' stock is selling at a very low price relative to the company's competitive position in the industry. This is a good opportunity for investors to go long this stock.

Some factors that make Staples attractive

Business Model

Staples' competitive advantage largely originates from its superior customer service. The company recently revised its corporate values that direct all its employees. The new values require the store associates to "own it; say it like it is; be caring; keep it simple; and work together." Staples has instituted a wholesome program of corporate citizenship, also known as Staples Soul. The company explains its motivations here, "Staples Soul is a holistic approach to business that recognizes the close connection between our financial success and our desire to make a positive impact on our associates, communities and the planet." The key components of Staples Soul are Ethics, Environment, Diversity and Community.

Staples' success is not different from Starbucks' (SBUX) or Whole Foods' (WFM). The company believes in great customer service and treats its employees well. Even though its products are no different from other office retailers', the difference in customer service does the trick. Salesmanship is what matters; the company could sell any products it wanted to. It could sell groceries, cars, anything. Once a customer service business masters customer service, it can sell anything it wants.

The company recognizes the increasing importance of the online business. "Staples is already one of the world's largest Internet retailers with over $10 billion of annual online sales." In 2012, the company launched an eCommerce innovation center that focuses on developing and enhancing its eCommerce and mobile commerce capabilities. Recently, Staples' website was a finalist for the "2012 Best Retail Shopping Website" award.

The company's management is one of its biggest strengths. Ronald Sargent, the company's Chairman and CEO has been responsible for the turnaround in the company's fortunes. When Sargent became the CEO of the company, the company's profits and stock prices were stagnant, and analysts were predicting a bleak future. Ronald Sargent instituted several programs to help the company gain steam again. He began the mystery shopper program. Under this program, a mystery shopper would visit each store every month and provide feedback on customer service and other factors. The stores with the best feedback were awarded bonuses. The customer service improved significantly because of the program. Also, in an interview, Ronald Sargent provided the following insight into his business plan, "If you treat your associates well, they're going to treat the customers well, and that's going to treat the stockholders well. It's a virtuous circle."

Staples has put the money where its mouth is. It has invested in its employees and grown its online business well. The company also has one of the best CEOs in the world and these factors should allow the company to stay in business for a long time.

Cash Reserves

In February 2013, the company's current assets were $6.2 billion, while the current liabilities were $4.4 billion. This gives the company a current ratio of 1.4. Even though the current ratio is not high enough to create comfort, it is also not low enough to raise alarm. The company's good business model and good management do compensate for the less than ideal cash reserves at the company.

The company's long-term debt-to-equity ratio was .16. The long-term debt was $1 billion, while the equity was $6.13 billion. The company has a very low debt-to-equity ratio and signifies the good job done by the company in keeping leverage and risk low.

Risk Factors:

The biggest risk Staples faces is the loss of differentiation in its online segment. The online business is responsible for a great portion of revenues each year and growth in that sector is pivotal to the business.

Another huge risk is the loss of good management. Ronald Sargent has done a good job of channelizing the resources of the company and motivating its associates. Ronald Sargent has been recognized as a great leader. A new CEO with a less fruitful vision would the harm the company's position.

The company must maintain a good balance sheet and keep leverage low. This would allow it to make key acquisitions when it needs to.

Stock Price:

The company suffered a loss in 2012 due to the impairment of goodwill related to its European units. As a result, the company does not have a trailing PE ratio. However, using the 2011 EPS of $1.42, we get a PE ratio of 9.52. This is a remarkably low PE ratio and makes the stock one of the most attractive in the world. The company is in a unique position of having a great business model and a very cheap stock, making it a good buy.

Conclusion

Staples is a "BUY" for long-term investors (those who buy stocks for their long-term earning power and safety). Staples benefits from its carefully thought-out business model, very low leverage, and world class management. This stock should not change unless an adverse change occurs in its management, business model or the balance sheet.

Source: Staples, Inc: Great Management And Business Model