Rationality pays in retail
I’ve talked on Postcards about the greatest sins of the big retailers: believing that if you build it, they will come. That focus on growth at all costs has hurt Starbucks (SBUX) and Home Depot (HD), whose stocks have just recently risen risen off of 52-week lows. Speaking of lows, there is Lowe’s (LOW), which announced earnings Monday morning: down 8% in the second quarter. But thanks to solid expense control, profits were better than Wall Street expected. Retail investors are now bracing for Home Depot’s earnings report Tuesday morning.
Meanwhile, another well-known retailer I’ve been watching is trading near its all-time high: Staples (SPLS). CEO Ron Sargent is one of those smart operators who stays under the radar. He’s low-ego — a trait that has helped the company pursue rational growth. When Sargent holds a conference call with investors Tuesday morning to talk about cost savings from Staples’ $4.7 billion acquisition of Corporate Express, he’s expected to forecast savings in the range of $200-300 million. But that’s probably conservative, as Sargent tends to be. Gary Balter, the hardlines analyst at Credit Suisse, contends that savings could actually exceed $400 million. Balter also notes that Staples’ operating margin is 8%, twice Corporate Express’s margin. The margin of the combined businesses could well head to 10%, he says.
Money tends to be made in tough times like these, when flagging retailers go Chaper 11 (like the Mervyns department-store chain and Bennigan’s eateries lately) and others cut capital spending and consolidate. Talking about Staples’ weakened rivals, Balter notes that over a year ago Office Depot (ODP) management talked about adding 150 new stores in 2008 and 200 in 2009. Now Office Depot is aiming for eight new stores in 2008. (Eight in ‘08 may be lucky in China, but not in America!) Office Max (OMX), another competitor, is slashing its new-store openings and remodeling plans as well. Meanwhile, Staples’ expansion continues rationally as it builds out its newest market, Houston — which happens to be one of America’s prospering metro areas these days. The stock is approaching $25. Balter’s target: $29.
P.S. Do you know the fascinating origin of Corporate Express and its eccentric founder? See my recent post, The origin of Staples’ big deal.
Journalism teacher and newspaper adviser at Palo Alto High School
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