10-Minute Investment Autopsy No. 7: Staples
A cheap stock. A dominant market position. Is that enough?
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here. You will get the most out of each case if you:
Pause after the “Original Thesis” section and think about what you would have done
Engage with the discussion questions and other members in the weekly thread designed to help you further improve your investing process
The Original Thesis
Who: Adrian Mak
When: June 2012
What: Staples (ticker: SPLS)
The Thesis:
Adrian’s thesis was:
Large, $309B market
Staples is the largest supplies retailer in North America with $25B in revenue, larger than #2 (ODP) and #3 (OMX) players combined, leading to scale efficiencies in purchasing
Consistently outperformed competitors on sales growth, margins and ROIC
Superior locations to ODP and OMX
Second-largest online retailer with $10B in online sales
80% business customers, 60% delivery
Experienced management team with long tenure
Staples Retail: Stable margins, ~ 1% sales growth in the last 3 years
Staples Delivery: Large customers, recurring revenue, gaining market share, expanding margins and low single-digit sales growth in the last 3 years
Returning capital via dividends and share buybacks
CY2012E after-tax FCF of $1B (vs. $1.2B in CY2011) vs. market cap of $9B
Shares at $14 vs. CY2012E/FY2013E EPS of ~$1.45/sh
Risks:
Destructive pricing from ODP/OMX
Shift to other channels (WMT, COST)
Amazon, however Staples has scale in office supply purchasing and good distribution assets for local delivery
Secular decline of office supplies
These are the highlights of Staples then-recent financials up to the point when Adrian was presenting his thesis:
This is the stock chart up until the time that Adrian presented his thesis:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
Staples’s financials following Adrian’s presentation were as follows:
Over the 5 years between FY2012 and FY2017, sales declined at a 6% CAGR and EBIT declined at a 10% CAGR and EPS declined at an 8% CAGR.
Staples was acquired in 2017 by private equity firm Sycamore Partners for $10.25 per share, resulting in a total return of -2% compared to over 100% for the S&P 500 over that time frame
Staples underperformed Amazon, which was listed as one of the risks, by an even larger margin
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread