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Staples Still a Buy After Weak Earnings

Staples (SPLS) isn’t exactly a sexy stock. Many investors view the office retailer as dead money, killed thanks to the e-commerce might of (AMZN) and the general decline in demand for PCs, copier paper and other quaint relics of an “old-fashioned” 1993 office.

Recent fiscal first-quarter results seem to validate that perception, as Staples earnings dropped 9.2% on weak sales in North America and Europe. Last year, SPLS vowed to reduce its physical presence in the U.S. by 15% to save $250 million annually, but clearly the focus on efficiency hasn’t paid off yet. Margins actually fell a bit, from 26.6% to 26%.

But don’t count Staples stock out. Yes, the office retail industry is painfully boring. And yes, a proposed merger between Office Depot (ODP) and OfficeMax (OMX) might close the gap between Staples and the competition should the deal go through as planned.

But Staples has a wider moat than you might think thanks to a massive online retail presence. According to Internet Retailer, Staples is the No. 2 Internet retailer worldwide ranked by sales — and actually saw online sales jump 5% in 2012 to $10.6 billion even as brick-and-mortar sales declined.

For some perspective, OfficeMax does less than $7 billion in total revenue, including both in-store and online transitions.

Staples certainly has risk. The stock moved sharply lower in early March thanks to weaker guidance, and SPLS just reinforced this lower target in its Q1 numbers. But its price-to-earnings multiple still is fairly attractive at less than 12 based on fiscal 2014 forecasts, and that’s a nice valuation for the retail sector.

Oh yeah, there’s also the 3.3% yield to sweeten the pot.

There’s not much of a chance that Staples will burn down the house with 30% returns again in the second half of the year, but chances are it will pace the market and deliver a nice yield to investors.

Plus, having some retail plays in your portfolio — even unsexy brick-and-mortar plays — seems very wise given the momentum we are seeing in the market and the chance of a broader recovery in 2014.

You could do much worse than Staples right now. So don’t sweat the earnings.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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