1. STAPLES COMPANY VALUATION JACKIE PHAN LATRISHA SEARCY ANNA DAI

2. STAPLES INC.  Founded in 1985 by Tom Stemberg  First store opened in 1986 to serve the needs of small businesses and consumers  Staples operates in over 26 countries in the retail, business to business, and e- commerce areas  Sells office supplies, furniture, computers, and technology products and services

3. INDUSTRY AND COMPETITORS  Staples is the leading office supply retailer  Office Depot, Amazon.com Inc., and United Stationers Inc., who all offer similar office supplies, furniture, and equipment  OfficeMax and Office Depot were the No. 2 and No. 3 office supply retailers behind Staples Inc. until the two companies merged  Customers now look beyond office supply superstores when buying office supplies

4. SWOT ANALYSIS StrengthsWeaknesses Brand Recognition E-retail Strong Competition OpportunitiesThreats Strategic expansion Growth in office equipment High Competition

5. VALUE DRIVERS  Staples refers to their key values as Staples Soul  Staples Soul is divided into four categories  Community, Environment, Diversity, and Ethics

6. FINANCIAL ANALYSIS Company Values Industry Values 201220112010 201220112010 Liquidity Ratio Current1.41.541.51 1.51.3 Quick0.881.040.96 0.8 Asset Management Ratio Inventory Turnover10.5410.2910.4 3.723.773.6 Total Asset Turnover1.993.981.76 111 DSO27.18 days29.6729.3 110.9594.53106.57 Fixed Assets Turnover12.4212.0311.43 6.587.35.75 Profitability Ratio Net Profit Margin-1%4% 39.438.938.7 ROA-17%7%6% 3.93.52.3 ROE-3%14%13% 14.810.25.8 Debt Management Ratio Total Debt Ratio50.03%47.71%50.03% 77.6%73.5%71.9% Times Interest Earned3.149.377.32 2.82.91.9 Market Value Ratio P/E Ratio-54.8511.2517.9 Market/Book Ratio9.1710.119.71

7. LIQUIDITY  In conclusion, Staples does not have as good ability to use assets to cover the cost of liabilities as they come due.  Not as good as others in industry 201220112010 2012 Liquidity Ratio Current1.41.541.51 1.5 Quick0.881.040.96 0.8

8. ASSETS MANAGEMENT RATIO  Decrease in 2010 to 2011 shows decreases in sales of Staples products or that more of the inventory was sitting on shelves or warehouses.  The increase demonstrates the opposite of the situation in which there were higher sales of products. Asset Management Ratio Inventory Turnover10.5410.2910.4 3.72 Total Asset Turnover1.993.981.76 1 DSO27.18 days29.6729.3 110.95 Fixed Assets Turnover12.4212.0311.43 6.58

9. TOTAL ASSET TURNOVER  This 2.22 point increase measures the company’s efficiency at using their assets to generate sales or revenue.  However in 2012 the ratio shows that there was a decrease of 1.99 from 3.98. therefore reducing their revenue or sales.  Had a net loss Asset Management Ratio Inventory Turnover10.5410.2910.4 3.72 Total Asset Turnover1.993.981.76 1 DSO27.18 days29.6729.3 110.95 Fixed Assets Turnover12.4212.0311.43 6.58

10. DSO  Overall Staples is improving on their ability to collect revenue, requiring less time to wait. Asset Management Ratio Inventory Turnover10.5410.2910.4 3.72 Total Asset Turnover1.993.981.76 1 DSO27.18 days29.6729.3 110.95 Fixed Assets Turnover12.4212.0311.43 6.58

11. FIXED ASSET TURNOVER  Overall increase indicates that the company has been more effective in using their investments in fixed assets to generate revenue as time goes on. Asset Management Ratio Inventory Turnover10.5410.2910.4 3.72 Total Asset Turnover1.993.981.76 1 DSO27.18 days29.6729.3 110.95 Fixed Assets Turnover12.4212.0311.43 6.58

12. PROFITABILITY RATIO  Net Profit Margin  Loss $0.01 in 2012  ROA  2012, the company had a net loss of income  therefore a decrease in ROA to -17% and  was not being efficient in raising income from assets.  Return on Equity  Fairly efficient  Suffered huge loss Profitability Ratio Net Profit Margin-1%4% 39.4 ROA-17%7%6% 3.9 ROE-3%14%13% 14.8

13. DEBT MANAGEMENT RATIO  total debt ratio  staying constant.  debt ratio of less than 1,  More assets than debt, not much risk  Time Interest Earned ratio  High Times Interest Earned ratio  does not have much debt or is paying down too much debt with earnings that could be used for other projects.  With a significantly lower ratio, Staples may perhaps have invested their earnings in other projects or has taken on more debt. Debt Management Ratio Total Debt Ratio50.03%47.71%50.03% 77.6% Times Interest Earned3.149.377.32 2.8

14. MARKET VALUE RATIO Market/Book Ratio  decreased between 2010 and 2012 from 9.71 to 9.17.  However, because the ratio is higher than 1, the stock is undervalued.  P/E Ratio  2010 Investors would be willing to spend $17.9 for every $1 earnings that Staples generate.  2011 Investors would pay $11.25 per $1 earnings.  2012 ratio of -54.85.  The stock price of Staples in 2012 was completely undervalued. Market Value Ratio P/E Ratio-54.8511.2517.9 Market/Book Ratio9.1710.119.71

15. FIRM RISKINESS  Consumer base is relatively staple  The growth rate can be limited  Vulnerabilities of the supply chain  Low level of cost efficiency and low profit margins

16. BETA ESTIMATION  Our estimation of Beta:1.2553  Yahoo! Finance :1.58  Google Finance :1.25  Reuters :1.24

17. CAPM  r i = r RF + (RP M )b i  Market Risk Premium-5.00%  Beta-1.2253  30 year yield US Treasury(Nov 3 rd,2013)-3.84%  Cost of equity-10.117%

18. DDM  Historical Perspective Year20122011201020092008 Annual Dividend 0.390.360.33 0.29 Dividend Growth Rate 8.33%9.09%3.13%0.00%13.79%

19. DDM  Analyst report dividend growth rates  Yahoo Finance 3.10%  Bloomberg 3.10%  Google Finance 3.12%  ROE*plowback  Since Staples run a loss in terms of the net income, our ROE became -0.0343, which make our dividend growth rate -8.22%.

20. DDM  Forecasted dividends Forecasted Dividends 20132014201520162017201820192020202120222023 0.4532 0.4667 96 0.4808 0.4952 24 0.51008 1 0.5253 83 0.5411 45 0.557 379 0.5741 0.591 323 0.6090 63

21. DDM Dividend Discounted Model Constant growth rate5.00% Dividend growth rate5.75% Length of growth period10 years Cost of capital10.12% Horizon Value12.8205 Price7.84

22. FREE CASH FLOW Timel ine 1234567891011 Unleve red Free Cash Flow 8499631,0701,1021,2301,3851,5601,6571,7791,9292,068 WACC=7.37% Terminal WACC=6.58% Constant growth rate after year 10: 2.00% Horizon Value:45,152.84 Firm Value:31,006.64

23. FREE CASH FLOW Firm value$31,006.64 Add Cash and marketable securities$1,334.30 Subtract long term debt$1,733.23 Equity Value $ 30,607.72 Final Stock price$46.82

24. Fiscal year201220112010200920082007 Total revenues25,002,192 24,545,1 13 24,275,4 51 23,083,7 75 19,372,6 82 18,160,7 89 Revenue growth rate ([Revenue(t)-Revenue(t- 1)]/Revenue(t-1)]1.86%1.11%5.16%19.16%6.67% 2-year average1.49% 6-year average6.79% 6-year average (2006-2001 excluding 2004)6.79% Conclusion Because negative growth in revenue in 2004 was caused by discountinued operations, one can exclude from calculations as being non-representative Conservative estimate6.79% Aggressive estimate (assuming recent growth will persist)1.49% Yahoo analyst forecast for 2015 -0.70% See Yahoo Data

25. WACC calculation Cost of equity10.117% = Rrf +(Market risk premium)*beta=3.84%+5.00%*1.2553 Beta1.2553Source: Yahoo Market risk premium5.00%Our assumption 10-year yield on a US Treasury3.84%21-Nov-13 Cost of debt4.64% =3.84%+0.80% 10-year yield on a US Treasury3.84% Credit ratingBBB spread0.80% Debt to Value37.92% Equity to Value62.08% Market value of equity 10,070in million Number of shares outstanding653.68Need to use diluted shares Market price per share15.36Source: Yahoo Market value of debt6,151 Assume that it equals book value of debt Value 16,221 a WACC7.37% = rE*(E/V)+rD*(1- t)*(D/V) It is reasonable to assume that when Target enters a constant growth phaze, its beta will approach 1 Terminal WACC7.25% Terminal cost of equity8.8400% Terminal growth rate2.00%

26. MULTIPLE VALUATION  Multiply Staples’ most recent earnings per share (EPS) of 0.74 as of December 2, 2013 by the industry’s P/E ratio of 49.20 to get an answer of $36.41.  weighted average of the stock price ($7.84 +$46.82+ $36.41) 3 $30.35

27. RECOMMENDATION  Worth to invest  Compare with the current stock price of $15.7 from yahoo finance  The Staples stock price is undervalued