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Staples, Inc. Message Board

  • up_it_goes up_it_goes Aug 9, 2011 9:33 PM Flag

    S&P Ratings Mess and the Office Supply Industry

    If you thought that the U.S. downgrade to AA+ was bad- Office Depot & Office Max are rated as “junk status” by S&P

    Stock Market Insider (SMI)

    August 9th, 2011


    As the U.S. markets plunged office supply retail chains were hit especially hard. On Monday (8.8.11) Office Max (OMX) fell 21% to $5.43; Office Depot (ODP) fell 14% to $2.78 and Staples (SPLS) declined 8% to close at $13.14. As the markets reacted to the Standard and Poors (S & P) down grade of the U.S. from their previous stellar AAA rating, it brings up the interesting matter as just how does S&P rate the three major office supply retail chains?

    S&P has recently downgraded both Office Depot and Office Max to B-1 junk status ratings, while retaining Staples at BBB above junk status. The term "junk" is reserved for entities with Standard & Poor's ratings below BBB. Investments which are rated B generally lack characteristics of the desirable investment, assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.

    When one delves deeper into the credit situation of Office Depot there are signs of significantly more trouble than those facing either Office Max or Staples. In July of 2009, Office Depot frantically search for ways to raise needed capital to stave off what many considered the growing possibility of bankruptcy. Office Depot was able to raise $350 million from the private equity firm BC Partners. However, the $350 million came with a multitude of strings attached. For the $350 million BC Partners received convertible preferred stock with a minimum annual dividend of 10% or $35 million; a 20% convertible equity stake in Office Depot, and three seats on the Board of Directors. The BC Partners deal amounts to terms similar to what one would expect to receive from loan sharks. Simply put, Office Depot needed the money to survive, and it seems the best terms they could find were the outlandish terms of 10% annually (with severe penalty escalators for late payments). After receiving the infusion of cash in 2009 and pulling back from the brink of a financial abyss, Office Depot may be in an actually worse and more precarious situation now then they were then.

    Office Max seems to be equally as weak as Office Depot and is stuck with the same B-1 junk status rating. Recently, Office Max gave a very tepid outlook for the remainder of the year, and stated that their critical back-to-school season was slow and starting late. Office Max is another company that is considered prime for future bankruptcy, as the overcrowded retail office supply sector is expected to contract to just one major player.

    Staples is the only one of the three major players in the retail office supply sector with an S & P rating above junk status, and is the only one with continued year on year(s) sales revenue growth. Industry analysts are now giving more and more weight to top line growth over false earnings increases which are resultant from seemingly never ending cycles of cost cutting. The only sure bet for survival in this beleaguered industry fighting for relevance is Staples.

    Staples looms as an 800 pound gorilla over its struggling competitors as Staples has over ten times the market capitalization of either Office Depot or Office Max. In the last 5 years Office Depot has lost 92% in value and now sits with market capitalization at an anemic $908 million while Office Max’s market capitalization is an even weaker $600 million, while industry leader has over $10 billion in market capitalization.

    It seems a near certainty that the obituary of either Office Depot or Office Max or both, will be written in 2012.

    Compiled from wire services and staff reports SMI updated at 0534 EDT

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