Staples, Inc. (SPLS) is solidifying its place as the second-largest online retailer behind Amazon (AMZN), beating expectations that the company would follow in the steps of Circuit City and Best Buy Co., Inc. (BBY), says Chris Welch, Co-Chief Investment Officer and Portfolio Manager for Diamond Hill Capital Management, Inc.
“The concern on Staples was that they were going to go the route of Circuit City and to some extent, Best Buy — Amazon was just going to continue taking more and more of their business. And, in fact, the office supply stores have been in a very challenging position for some time,” Welch said. “Our view was that Staples’ business was going to be stable rather than continually declining. That’s what we’ve seen since we bought them.”
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Staples has since reduced their store square footage, whereas competitors Office Max and Office Depot Inc (ODP) have announced a potential merger, which is actually favorable to Staples‘ store business, Welch says. In addition, Staples‘ online business is continuing to be very solid and the company is generating free cash flow, making this stock an attractive opportunity, Welch adds.
“They have a very large online business; over 40% of their business is online. In fact, they’re the second largest online retailer after Amazon. So our view is that at the valuation we can buy the company at, the kind of free cash flow they generate — that’s a very attractive opportunity, and we’ve had good results since we purchased it,” Welch said.
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