Staples, Inc. (SPLS) is an easy company to dismiss. As of yesterday, SPLS stock was down about 20% this year, underperforming the S&P by a whopping 31 percentage points year-to-date. But SPLS is enjoying its day in the sun Wednesday — shares are up 9% by midday after topping analyst expectations on both sales and earnings.
Admittedly, Staples isn’t in an ideal industry. Brick-and-mortar retailers of all sizes shapes and colors are facing headwinds in a world where commerce dollars are increasingly migrating to the internet. OfficeMax Inc and Office Depot Inc (ODP) were practically forced to merge last year by the bleak economy of their trade.
But don’t write off SPLS just yet. Its third-quarter earnings report shows that it’s not ready to throw in the towel just yet.
SPLS Has an Ace in the Hole
The office supplies company saw revenue fall 2.5% in the quarter ended November 1. But everyone knew sales would be down, and the $5.96 billion in revenue Staples logged came in ahead of calls for $5.93 billion. But SPLS net income soared by 60%, rocketing from $135 million a year ago to $216 million.
Like other companies that aren’t growing sales, Staples is cutting costs in order to drive bottom-line growth, and has successfully reached $200 million of its two-year, $500 million annualized cost-cutting goal. It’s also free cash flow positive — way positive. SPLS has generated $700 million in free cash flow year-to-date.
Not such a shabby business after all, eh?
Staples is achieving this surprising profitability through shuttering underperforming stores and cutting the size of store prototypes from 24,000 square feet to 12,000 square feet — an initiative that cuts down on store maintenance and leasing costs while retaining more than 95% of the sales in a 24,000 square foot store. But the real kicker, and something you might not expect from SPLS, is its massive online presence.
In May, Apple Inc. (AAPL) — yes, Apple, the largest publicly traded company on the planet earth — made headlines when it overtook Staples as the number 2 online retailer behind Amazon.com (AMZN). You read that right. Amazon, Apple, and Staples: the world’s elite e-commerce retailers.
Don’t Be Too Giddy With Results
That said, let’s come back down to earth and remember the dismal state that longtime brick-and-mortar retailers find themselves stuck in. Even SPLS, which has somehow become one of the top online retailers in the world by marketing itself as a sort of Amazon for businesses — is seeing sales fall year after year.
On top of that, the company is still dealing with the effects of a massive data breach, the consequences of which are yet unknown. Staples has no idea what kind of losses it will incur as a result of the incident. That’s not the kind of uncertainty I like to see in a stock when I’m looking to invest.
So while SPLS stock isn’t exactly dead in the water, it’s not a screaming buy, either. I’m glad the company had a good quarter, but sales will have to get back on track eventually, because you can’t grow by cutting costs forever.
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As of this writing John Divine was long AAPL. You can follow him on Twitter at @divinebizkid.
