Ticker symbol: SPLS (NASDAQ) S&P rating: BBB Value Line financial strength rating: A+ Current yield: 1.6%
Company Profile
Staples, Inc., launched the office supplies superstore industry with the opening of its first store in Brighton (near Boston), Ma.s.sachusetts, in May 1986. Its goal was to provide small business owners the same prices on office supplies previously available only to large corporations. Staples is now a $24 billion retailer of office supplies, business services, furniture, and technology to consumers and businesses in twenty-seven countries throughout North and South America, Europe, Asia, and Australia. Staples is the largest operator of office products superstores in the world, with 2,243 stores of all types.
The company operates three business segments: North American Retail, North American Delivery, and International Operations. The company"s North American Retail segment consists of the company"s U.S. and Canadian business units that sell office products, supplies, and services.
The North American Delivery segment consists of the company"s U.S. and Canadian contract, catalog, and Internet business units that sell and deliver office products, supplies, and services directly to customers. Included in this segment is Corporate Express, the large, delivery-oriented office products distributor acquired in 2008.
International Operations has more than 300 retail stores in seven countries, but reaches further with catalog and delivery options into seventeen countries, some through joint ventures. The company has a foothold in China, Brazil, Argentina, and Taiwan among others. Finally, the company has been developing its own brand and set of branded products for years, and is gaining traction on that brand, selling through Safeway stores and other chains.
Financial Highlights, Fiscal Year 2010
Cost-cutting measures on the part of Staples" customers, large and small, took its toll in FY2009, especially on the newly acquired Corporate Express business. Although FY2010 brought lingering cost-cutting effects on the business, for the most part the year was a different story. The Delivery division, which includes Corporate Express, picked up and was delivering low single-digit gains by the end of the year. Although the timing of the Corporate Express acquisition, which added about $5 billion annually to the top line, could have been better, the integration went well and was considered to be less expensive than originally projected.
The company reported $24.5 billion in sales for FY2010 with earnings of $1.21 per share, both modest gains from the FY2009 pullback. The company is guiding for $25.5 billion in FY2011, delivering earnings in the $1.50$1.60 range, a healthy gain based on improved economic conditions, success with Staples-branded products, rollout of Tech Services at some stores, lower interest costs and tax rates, and a modest improvement in gross margins.
Reasons to Buy
In our view, Staples is still the best brand in this business, and the company has been doing a lot of the right things to leverage that brand, including the clever "That Was Easy" advertising campaign. The Corporate Express acquisition, while untimely, gives the company broader access to key markets and key countries, leverages supply chain and purchasing power advantages, and at least at present, offers broader service than its compet.i.tors. The company also has stronger financials than its compet.i.tion. Finally, we like the international expansion opportunities; the company has capitalized well so far but has a long and likely successful road in front of it.
Reasons for Caution
Consumer (and corporate) spending will likely remain soft for some time. Saturation in North America is also a risk, as many existing cities and suburbs have all the office supply superstore coverage they need. This is especially true in a soft market with compet.i.tion from the likes of Wal-Mart and warehouse club stores. Finally, we"ve seen active pursuit of acquisitions in the past, and are wary of overdependence on acquisitions going forward.
AGGRESSIVE GROWTH.
Starbucks Corporation
Ticker symbol: SBUX (NASDAQ) S&P rating: BBB+ Value Line financial strength rating: A Current yield: 1.6%
Company Profile
Starbucks Corporation, formed in 1985, is the leading retailer, roaster, and brand of specialty coffee in the world. The company sells whole bean coffees through its retailers, its specialty sales group, and supermarkets. The company has 6,706 company-owned stores in the United States and 2,184 in international markets, in addition to 88,139 licensed stores worldwide. Retail sales const.i.tute the bulk of its revenue. Note that the company-owned store count is actually down, as the company went through a modest downsizing to close 600 low-performing stores, a gutsy move in the retail sector. Note also that the company does not franchise its storesall are either company owned or operated by licensees in special venues like airports, college campuses, and other places where access is restricted.
Starbucks also has joint ventures with Pepsi-Cola and Dreyer"s to develop bottled coffee drinks and coffee-flavored ice creams. All channels outside the company-operated retail stores are collectively known as specialty operations.
The company"s retail goal is to become the leading retailer and brand of coffee in each of its target markets through product quality and by providing a unique Starbucks experience, which the company defines as a third place beyond home and work. The "experience" is built upon superior customer service and a clean, well-maintained retail store that reflects the personality of the community in which it operates, thereby building a high degree of customer loyalty.
The company"s specialty operations strive to develop the Starbucks brand outside the company-operated retail store environment through a number of channels, with a strategy to reach customers where they work, travel, shop, and dine. The strategy employs various models, including licensing arrangements, foodservice accounts, and other initiatives related to the company"s core businesses.
In its licensed retail store operations, the company leverages the expertise of its local partners, and shares Starbucks operating and store development experience. As part of these arrangements, Starbucks receives license fees and royalties and sells coffee, tea, and related products for resale in licensed locations.
The company just ended a long-term arrangement with Kraft Foods for distribution of its products into grocery chains and similar. Most likely the company plans to approach the grocery retail market more aggressively and with more products inside and outside the coffee s.p.a.ce, including single-serving products and other coffee and non-coffee based beverages.
Financial Highlights, Fiscal Year 2010
Macroeconomic factors combined with a bloated costs structure to bring a pretty dreary 2009 financial and stock price performance; at one point the stock had dropped 80 percent from its highs set just three years prior. This turned out to be a cla.s.sic buying opportunity, as revenues were off only 6 percent and earnings 15 percent from previous years. Was the "trendy" Starbucks star finally fading? Was a substantial base of clients about to defect to McDonalds to sip coffee on plastic chairs with vanloads of screaming kids in the background? We never really thought so, and we were right.
We were actually surprised that the recession cut into the business as much as it did, for we"ve thought Starbucks to be one of those little luxuries people could afford no matter what. That wasn"t entirely the case, as same-store comps were dropping 5 or 6 percent during the height of the downturn. Since then, comps have come roaring back, and the company reported FY2010 revenues some $1 billion ahead of the previous year, with earnings of $1.28 well ahead of the previous year"s $0.80. Modest price hikes, strategic product and store expansion, and a return to macroeconomic tailwinds are expected to bring earnings back to $1.42$1.47 per share in the company"s view; they frequently deliver something better than that view. We also applaud the company"s decision to start paying a meaningful dividend during FY2010.
Reasons to Buy
With founder Howard Shultz back at the helm, the company seems to be hitting on all cylinders again. We never thought the downturn to be permanent; the company"s stores continue to be more than coffee shops and really that "third place" where professionals, students, moms, and other prosperous people will meet and dole out a few bucks for quality drinks. Beyond the business itself, the concept and the brand are huge a.s.sets that have kept most of the compet.i.tion to small niches and probably will continue to do so. The company has a steadily (and profitably) growing presence in Europe, j.a.pan, and China. The company plans to target the majority of its near-term growth outside the U.S. market, which may be approaching saturation. The company"s financials are solid, and it just sent a strong signal of attention to shareholder returns with the dividend and the willingness to "ungrow" for a couple of years to get its house in order.
Reasons for Caution
It"s not completely clear that consumer tastes have not been permanently affected by the recent recession. It may well be that coffee drinkers have learned to get along without the $5 latte and are now just $1.50 drippers. Spending per visit is a stat that will bear watching as the economy continues to turn aroundrevenues may have a lid on them now. There is some risk that the company won"t take root quite as well on the international front, but things seem to be going okay so far.
AGGRESSIVE GROWTH.
Stryker Corporation
Ticker symbol: SYK (NYSE) S&P rating: A+ Value Line financial strength rating: A++ Current yield: 1.2%
Company Profile
Stryker Corporation was founded in 1941 by Dr. Homer H. Stryker, a leading orthopedic surgeon and the inventor of several orthopedic products. The company now ranks as a dominant player in a $12 billion global orthopedics industry. The Orthopaedic Products segment, comprising about 61 percent of sales, has a significant market share in such "spare parts" as artificial hips, prosthetic knees, craniomaxillofacial implants, and trauma products.
The MediSurg unit, about 39 percent of sales, develops, manufactures, and markets worldwide products such as orthopedic implants, trauma systems, powered surgical instruments, endoscopic systems, and patient care and handling equipment.
Stryker"s revenue is split roughly 60/40 among implants and equipment and 64/36 domestic and international. The company has been recently active in acquisitions, and in late 2010 announced the acquisition of Boston Scientific"s Neurovascular Division for about $1.5 billion in cash. The company also announced the acquisition of the Porex Surgical business, makers of porous polyethylene products for implants.
Financial Highlights, Fiscal Year 2010
The company reported FY2010 sales of $7.32 billion, a healthy increase over FY2009"s $6.7 billion. Earnings came in at the top of previous guidance at $3.30 per share. The company also announced a 20 percent dividend increase and a $500 million share repurchase program, which would reduce share counts about 2.5 percent at current prices. For FY2011, the company sees currency-adjusted sales growth in the 1113 percent range, including the new Neurovascular business, or 57 percent without currency and the acquisitions, for a revenue base just across the $8 billion line. Earnings are projected in the $3.65$3.70 range.
Reasons to Buy
Stryker"s top-line is driven largely by elective surgeries, and 2009 turned out to be the year for delaying whatever medical procedures could be delayed. Many consumers decided to wait and see how the medical care legislation would turn out, and some were simply deciding to hold on to their cash until economic conditions improved. The good news for Stryker is twofold: Medical care reform did not significantly increase the cost to consumers of implant surgeries; and those dodgy hips aren"t getting any better and eventually will need to be replaced. In fact, joint-replacement surgeries started to rebound in late 2009 and have continued the pace in FY2010 and early FY2011.
Hospitals and other inst.i.tutions were under many of the same economic pressures as consumers and simply delayed many of the big-ticket purchases that had been planned for 2009. Stryker"s Medical/Surgical equipment sales were off 5 percent in 2009, but came back well in 2010.
Stryker is the number one player in the orthopedic niche, and we like niche dominance as a guiding principle in selecting companies. The niche is important especially in an aging demographic, and aging demographics in overseas markets should bode well for the company"s future. Financials are solid, and there were many buying opportunities along the way in 2009 and 2010, which could easily be repeated.
Reasons for Caution