Office supply delivery and retail firm Staples (Nasdaq:SPLS) reported modest sales growth during 2011, but was able to boost its earnings in the double digits. The coming year will see more trends that are stagnant and calls into question the purchase of an archrival in Europe back during the credit crisis.
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Full-Year Recap
Total sales increased a modest 2% to reach $25 billion. The North American (U.S. and Canada) retail business is best recognized by consumers, and competes with Office Depot (NYSE:ODP), OfficeMax (NYSE:OMX), and even Wal-Mart (NYSE:WMT) in the space. It posted rather anemic trends, with total sales growth of 1% to $9.7 billion on flat comparable store sales and the opening of 17 net new stores. Staples also delivers office supplies in North America, and reported 2% sales growth to $10.1 billion. Primary rivals in this space include online retail giant Amazon (Nasdaq:AMZN), as well as online arms of the retail rivals above. International sales reported 3% sales growth to $5.3 billion, but actually fell 4% when removing the effects of currency fluctuations. A large proportion of overseas sales stem from Europe, many parts of which have been seeing weak economic growth trends.


Both North American units grew profits around 4%, but international reported a dramatic 41% drop in profitability. A lack of restructuring costs in the current year offset the overseas profit plummet and total company operating income grew 3.4% to $1.6 billion. Net income grew 11.6% on a big drop in interest expense. Share buybacks allowed earnings per diluted share to advance 15.7% to $1.40. Free cash flow was approximately $1.69 per diluted share.

Outlook
For the coming year, Staples expects again to grow sales in the low single-digits. It projects high single-digit earnings growth to $1.37 per diluted share and again expects to generate more than $1 billion in free cash flow.


The Bottom Line
With the benefit of perfect hindsight, Staples purchase of Dutch office supply deliverer Corporate Express in 2008 was an ill-advised transaction. The company is quickly paying down debt used to fund the purchase, but the dramatic drop in international profitability is a direct result of the acquisition. Its retail segment continues to be the best run in the industry, but the stock will likely remain dead money until international starts to expand.

Until that happens, investors will be stuck in a value trap, though a current dividend yield of 2.5% does offer some consolation for waiting around for a turnaround. It could also look to consolidate the retail space further, or even acquire smaller rival Acco Brands (NYSE:ABD), but its best course of action is probably to focus on internal operational improvements.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.



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

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