Staples NAD SPLS
February 22, 2024 - 1:43am EST by
2024 2025
Price: 78.00 EPS 0 0
Shares Out. (in M): 950 P/E 0 0
Market Cap (in $M): 3,444 P/FCF 0 0
Net Debt (in $M): 5,331 EBIT 730 745
TEV (in $M): 8,775 TEV/EBIT 11.9 11.8

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  • Buy SPLS 10.75% Senior Unsecured Notes due Apr-27 (ZS0031519) in 78c area
  • B2B distributor of Office Supplies (46% of revenue) and Pro Categories (54%), mostly in the US  >>>  SPLS has NO RETAIL STORES
  • After a steady multi-year rebound from Covid-lows, fundamentals are poised to reach “refinanceable” levels in the next twelve months
  • SPLS’ PE backer (Sycamore) is strongly incentivised to support their investment if needed, and has been buying these bonds on the open market
  • 45% total return (35% YTC) if refinanced at par one year prior to SSN due Apr-26 (ZS0031501)
    • 13.8% current yield while waiting
  • Attaching at 4.5x (FY24E), detaching at 5.5x  >>>  expect this to be down to 4.3-5.3x in the next twelve months
  • The 7.5% SSNs due Apr-26 also look like attractive risk/reward from here
    • 7.9% current yield and 12.7% YTC if refinanced at par one year prior to maturity
    • Attaching at 0.0x, detaching at 4.5x (FY24E)





  • Earnings are growing
    • Business hit hard by Covid (supply chain issues, operational disruptions, demand decline)
    • Having fallen from a pre-Covid high of $1.006bn in FY19, Adj. EBITDA bottomed in FY20 at $573m and has since steadily rebounded
      • Adj. EBITDA +20% / +20% / +9% YoY in FY21A / FY22A / FY23E
    • GM only reached “normalized” levels in 3Q23
    • At 3Q23, management guided $70m of cost actions executed and another $30m of additional opportunities (i.e. $100m of EBITDA upside in NTM from cost saves, o/w 70% already executed)
    • 3Q23 LTM Adj. EBITDA was $875-880m
    • Annualization of cost initiatives and GM normalisation should underpin earnings momentum over the next twelve months
    • We have NTM EBITDA at $970m
    • Management have communicated that they see a path back to $1bn+ Adj. EBITDA


  • FCF outlook is healthy
    • Expected EBITDA growth combined with stable capex, interest, tax and other should drive $150m+ of FCF generation in FY24
    • We expect SPLS to remain FCF generating beyond FY24


  • Leverage is coming down
    • Secured-Unsecured leverage peaked at 7.5-9.3x in FY20
    • Since then, it has steadily declined to 6.2-7.7x / 5.3-6.4x / 4.8-5.9x in FY21A / FY22A / FY23E
    • Combination of FY24 EBITDA growth and FCF generation should take Secured-Unsecured leverage to 4.3-5.3x in FY24E


  • Positive outlook is underpinned by substantial element of recurring revenue
    • SPLS often sells to customers through multi-year contracts
    • 70% of revenue has a recurring element
    • Within this recurring revenue, SPLS has 95% annual revenue retention
    • Another 15% of revenue comes from certain services (e.g. managed printing) where SPLS has also historically achieved 95% retention rates


  • SPLS should reach “refinanceable” levels in the next twelve months
    • 4.3-5.3x Secured-Unsecured leverage
    • >2x interest coverage
    • >3% FCF : Net Debt yield
    • Line of sight to another 0.25-0.5x deleveraging in subsequent twelve months (FY25)
    • By end FY24 we think the following credit metrics are achievable:
    • Based on our experience in credit markets, we believe that these metrics (combined with business momentum) should unlock the HY / Leverage Loan markets for a regular-way refi in H2’24 / early 2025
    • At 3Q23, management communicated H2’24 as their target refi window and have guided ~5.5x as target total leverage for a refi


  • Value covered - we believe SPLS is worth at least 9x EV : EBITDA, and see upside to that
    • By comparison, the SUNs are attaching at 4.5x, detaching at 5.5x 
      • We expect this to be down to 4.3-5.3x in the next twelve months
    • Key Office Supplies competitor GWW trades at 16.9x EV : FY24 EBITDA
    • Many other distributor businesses (listed peers and precedent M&A) trade at >9-10x (e.g. see 3Q23 company presentation, p28)
    • ODP trades at 6.3x EV : FY24 EBITDA but we see that as a downside case / floor given their substantial retail exposure
      • ODP has 980+ retail locations
      • Meanwhile, SPLS has no retail stores


  • Sponsor likely to support a refi (although we don’t expect that this will be needed)
    • Sycamore bought SPLS in 2017, injecting $1,555m equity at the time
    • We estimate that Sycamore has since reduced its cash equity exposure to $84m
    • In doing so, they have successfully de-risked and created significant optionality for themselves
    • Sensitizing equity values at various EV multiples and EBITDA levels shows Sycamore’s significant asymmetry:



    • If our EBITDA and EV multiple assumptions are remotely right, then Sycamore appears to own a very valuable option in SPLS
    • Our base case is that SPLS will be “refinanceable” in the next twelve months, even without an equity injection from Sycamore
    • However, a 0.5-0.75x equity injection likely guarantees refi execution in 2024 / early 2025
      • This would be a reasonably immaterial amount for Sycamore relative to their potential equity upside
      • Injecting $0.5-0.7bn to protect $3b+ of potential equity value seems compelling to us
    • If getting a regular-way refi does require an equity injection, we expect that Sycamore will be willing to provide one
    • Note: in the last year or so Sycamore have been buying SUNs themselves, which they would be able to equitize to facilitate a par refinacning (similar to what the sponsors did in Brand Industrial)



  • B2B distributor of Office Supplies (46% of revenue) and Pro Categories (54%) – mostly in the US
  • Founded in 1986, bought by current owner Sycamore Partners in 2017
  • This is not a retail operation (that was carved off into a totally separate company in 2017)
    • SPLS has NO retail stores
  • Office Supplies: notebooks, pens, paper, ink & toner etc
    • Facing modest secular decline due to declining usage rates and digital shifts
  • Pro Categories: janitorial / sanitation, breakroom supplies, tech, furniture etc (GDP grower)
    • GDP grower, many categories considered non-discretionary
    • Was just 38% of sales in 2013, 47% in 2018 and now 54%
  • 70% of revenue has a recurring element, selling through multi-year contracts (achieves 95% annual revenue retention on this)
  • Pre-Covid: 22% Gross Margins, 9%+ Adj. EBITDA margins and 30%+ ROIC
  • Serves 50%+ of Fortune 100 and 200k+ mid-market businesses
    • Customer relationships often structured via multi-year contracts or annual membership programs
    • Top 10 customers historically <4% of sales
    • Top 100 customers historically <11% of sales
    • No industry exposure >15% of sales
  • Operates 35 FCs and employs 3k+ sales associates
  • Core strategy is to consolidate fragmented market and grow organically in Pro Categories
    • Office Supplies competitors: ODP, WB Mason and 1.5k+ regional re-sellers
    • Pro Categories competitors: WW Grainger, long-tail of regional re-sellers



  • US Recession
    • Customer base primarily comprises SMEs
    • An economic downturn could lead to demand decline which could negatively impact SPLS earnings
  • Capital Markets 
    • SPLS is targeting a refi in H2’24
    • The company is somewhat dependent on capital markets remaining accommodative through FY24
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


  • Regular-way refinancing in H2’24, or shortly thereafter
    • TL-1 matures Sep-24
    • Likely they will be able to organically address this
    • However, could provide an ideal opportunity for the company to execute a full refinancing
  • Continued EBITDA and FCF growth leading to deleveraging and rerating of credit risk ahead of refinancing
  • Potential additional bond buybacks and/or equity injection from Sycamore in advance of H2’24 regular-way refi process 
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