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Staples: When Size Matters

Posted: Dec 03, 2009 15:13 PM by Sham Gad

Tickers in this Article: ODP, OMX, SPLS, WMT

Staples (Nasdaq: SPLS), the nation's largest office products company, is a great illustration as to why size matters when investing to preserve capital. On the heels of a recent earnings release, Staples CEO Ron Sargent took quarterly announcement figures to predict optimism about Staples' future.

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Staples Vs. The Industry
Staples may very well be in a class by itself. It's a theme that may continue to prove fruitful going forward - the quality names will shine at the expense of the rest of the industry. Staples' two primary competitors are OfficeMax (NYSE: OMX) and Office Depot (NYSE: ODP), which are not much competition at all. Staples has a market cap of $17.5 billion compared with $1.7 billion for Office Depot and $830 million for OfficeMax. Combined, these two companies don't even dent Staples' reach. It may very well be that Wal-Mart (NYSE: WMT) is more of a competitor to Staples than the other pure-play office product stores.

Size Matters
Many investors think big companies are slower, more boring enterprises that offer less promise on the upside. This view only looks believable during strong bull markets. However, as reality sets in, the quality that size and strength brings to the table becomes very evident. Staples produces gross margins near 30% versus 27.5% and 24% for Office Depot and OfficeMax, respectively. Operating margins are 6% for Staples, versus a loss for Office Depot and 1% for OfficeMax. Translated: Staples is making money; the others are not.

Without exception, this year's rally has favored the lesser-quality names. Office Depot shares are up over 100% year to date, OfficeMax is up nearly 50%, while boring old Staples is up 30% or so. As long as this rally continues, these numbers may likely hold. But as a value investor, downside protection should come before capital gain. Indeed, 2008 is proof positive: while Depot and Max were down about 80% and 60%, respectively, Staples was down 20 percent. (For related reading, see The Bottom Line On Margins.)

Bottom Line
In light of a very solid quarter, Staples is clearly in a class by itself among office product retailers.

For more, see Value By The Book.

By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

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