Posted By: Eugene Taylor

By Stephen EllisWed Nov 15, 11:45 AM ET

Staples (Nasdaq: SPLS - News), the office-superstore giant, has had a relatively easy time of it recently. Sure, it faces competition in the form of OfficeMax (NYSE: OMX - News) and Office Depot (NYSE: ODP - News), not to mention the much-feared Wal-Mart (NYSE: WMT - News) and Target (NYSE: TGT - News). But even so, Staples has been executing darn near perfectly on its mission to provide shoppers with red staplers and other office needs. ADVERTISEMENT
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Case in point: Its third-quarter results were surprisingly strong, as consumers once again shrugged off a sluggish housing market to stock up on paperclips and computer paper. Revenues increased 12% to $4.8 billion, and net income was up 29% year over year to $290 million, which included a $35 million tax benefit. Same-store sales increased 4% in North America and 5% internationally. Stronger operating margins, especially internationally, which were up 130 basis points to 1.5%. Perhaps the only nits to pick might be receivables rising faster than sales at 24%, and a decline in free cash flow to $276.6 million, versus $443.6 million last year -- a dip driven by working-capital needs.

The company certainly has ambitious plans. It's aiming for 7.5% operating margins for the international business in a few years, up substantially from 1.5% margins now.

On the domestic side, it envisions eventually having 4,500 stores in the U.S., up from about 1,800 now, even with the fierce competition from other office superstores. To get to that level, the company is experimenting with ideas such as smaller, standalone copy centers that run about 4,000 square feet in south Florida. These stores are located in prime real estate locations where larger stores would not fit, and the smaller stores allow for deeper penetration into these lucrative markets.

The business results are impressive, and management is targeting 10% to 15% sales growth for the next few years. Combined with what I see as intelligent moves in terms of the urban copy centers, international expansion, and good return on equity over the past few years, a P/E of 21 seems perfectly reasonable and close to fairly valued. But I'd be looking for a larger margin of safety -- say a mid-teens P/E -- before I'd become more interested in this one.

Wal-Mart is a Motley Fool Inside Value pick.

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