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Staples Upped to Neutral

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On Jun 19, we upgraded leading office product retailer, Staples, Inc. to Neutral based on its improved prospects. The company also currently carries a Zacks Rank #3 (Hold).

Why the Upgrade?

Being a leading retailer of office products and services, Staples remains well positioned to benefit from the sector consolidation that would help it capture incremental market share through rational pricing. The company is poised to generate growth by enhancing its online features, expanding offerings and streamlining its cost structure.

The company shifted focus on improving store productivity, accelerating growth in adjacent categories and increasing market share in core office supplies. Alongside, the company is focusing on the delivery business, which requires less capital and generates higher margins. These factors could prove to be a game changer for the company in the long run.

Staples now contemplates closing underperforming locations and downsizing stores. As part of its strategy to optimize real estate portfolio, the company intends to shrink its store square footage by about 15% in North America by the end of fiscal year 2015. Going forward, the company expects to close 40 stores, while downsizing another 45 stores during fiscal 2013. We believe that Staples’ aggressive restructuring strategies will enhance store productivity and drive profitability in the coming quarters.

However, the company continues to disappoint on the sales front as decline in business and consumer spending in the wake of the global meltdown and the deterioration of credit markets have resulted in sluggish demand for big-ticket items. During the last reported quarter, sales decreased 3% year over year to $5,814.6 million and missed the Zacks Consensus Estimate of $5,951 million. Going forward, we expect demand for office products to remain soft. Moreover, margins are likely to remain under pressure owing to the company’s price investment and macroeconomic headwinds.

Other Stocks to Consider

Until any further upgrade in Staples’ Zacks Rank, other well performing stocks in the retail, wholesale sector include Big 5 Sporting Goods Corp. (BGFV - Free Report) , which carries a Zacks Rank #1 (Strong Buy).  The Gap, Inc. (GPS - Free Report) and Cabela's Incorporated , carrying a Zacks Rank #2 (Buy) are also worth considering.

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