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Market Update

Staples Shares Remain Significantly Undervalued

Staples' second-quarter results affirmed our thesis that the firm will continue to take share from competitors and deliver solid results.

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 Staples' (SPLS) second-quarter results affirmed our thesis that the firm will continue to take share from competitors and deliver solid results. North American delivery sales were healthy (up 3%) thanks to strong customer acquisition, and North American retail sales received a slight boost from new stores, primarily in Canada as Staples takes advantage of  Office Depot's (ODP) recent exit from the market. Management continues to expect total sales growth in the low single digits, but raised its earnings per share outlook to $1.42-$1.48 from $1.35-$1.45. It had reduced this range in the first quarter from the prior outlook of $1.50-$1.60. While we are maintaining our fair value estimate of $25 per share, we note that our revenue growth forecast for the year is in line at 2.5%, but we're on the low end of EPS guidance at $1.42. Despite our relative near-term conservatism, we assert that the shares are undervalued, trading at 10 times our forward fiscal price/earnings and at 5.1 times enterprise value/EBITDA.

While its competitors continue to see flat to negative revenue trends, Staples' total sales were up 5.2% to $5.8 billion. Margins, however, contracted 40 basis points to 4.8% as the firm invested in growth initiatives, such as labor and marketing. Despite the softer margins, Staples continues to outperform its barely profitable peers on this front as well.

Joscelyn MacKay does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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