Office Depot (ODP) Implosion Won't Sink Staples (SPLS)

Despite the stock’s recent collapse and a Q2 miss by its closest comp Office Depot (ODP), Citi continues to believe Staples (SPLS) is fine:

SPLS traded down today after a negative EPS pre-announcement from ODP. ODP attributed its weaker-than-expected comps and margins as a result of the “additional pressure from weakening pressures”.

While we think there were several company-specific issues at hand for ODP, the economy could continue to weigh on comp store sales results and margins for the office retailers for the rest of 08. However, SPLS recently reiterated its high single digit EPS growth for 08 in mid-June. We believe that SPLS continues to be the market leader in the office products space and continues to gain share in both a weak and strong business environment.

Translation: In the short term, Staples is screwed, too. But, hey, in the long-term, we like it because of its:

  • scale
  • potential for growth in retail, delivery and intl.
  • potential for further margin improvement through new services
  • exclusive product
  • a strong balance sheet
  • upside to valuation

Citi reiterates BUY on Staples (SPLS), target price $28.

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