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Will Office Depot's Initiatives Suffice to Revive the Stock?

Zacks Equity Research

The office products sector has been grappling with multiple headwinds, and Office Depot, Inc. ODP is not fully immune to these. Analysts pointed out that demand for office products (paper-based) has been decreasing due to technological advancements. Smartphones, tablets and laptops are fast emerging as viable substitutes for paper-based office supplies. Stiff competition from online retailers such as Amazon AMZN has also been playing spoilsport. Moreover, analysts believe that with Costco COST and Walmart WMT gradually entering in the office supplies market, competition is likely to intensify further.

Consequently, shares of Office Depot have underperformed the industry in a year. In the said period, the stock has plunged 23.6% wider than the industry’s decline of 9.7%. Nevertheless, management is not sitting idle and is trying all means to uplift the company’s performance.

Let’s do a deep introspection of the stock.

What’s Giving Office Depot a Tough Time?

Dismal Top-Line Performance

For quite some time now, Office Depot has been grappling with dwindling top-line performance. We noted total sales had declined 7%, 9% and 8% in the first, second and third quarters of 2017. Management expects total sales to be lower in 2017 in comparison with 2016, due to the store closures, tough market conditions, hurricane impacts and losses of contract customers in the previous year.

However, management anticipates the rate of decline to decelerate in the final quarter after taking into consideration higher customer retention and strategic endeavors, along with the implementation of new customer wins. Further, after assessing the impact of recent hurricanes, sluggish sales and soft traffic during the back to school period, temporary rise in the supply chain costs and investments to catapult into a services-driven company, Office Depot now envisions adjusted operating income in the range of $400-$425 million, down from $500 million projected previously.

Declining Comps

Persistent weakness in the office products sector, stiff competition, loss of customers in Business Solutions Division and lower traffic count in retail stores are making things tough for Office Depot. We note that the company has been witnessing dismal comparable-store sales run for quite some time now. A look at the company’s performance in fiscal 2016 unveils that comps have declined 1%, 1%, 2% and 4% in the first, second, third and fourth quarters, respectively. In the first, second and third quarters of fiscal 2017, the same has tumbled 5%, 6% and 5%, respectively.

Management Looking Every Nook and Corner

Office Depot has undertaken a strategic review of business operating model, growth prospects and cost structure to bring itself back on growth trajectory. The company now intends to focus on core North American market. The company is also closing underperforming stores, reducing exposure to higher dollar-value inventory items, shuttering non-critical distribution facilities, concentrating on e-commerce platforms as well as focusing on providing innovative products and services. The company by increasing penetration into adjacent categories and enhancing share of wallet with existing customers intends to boost sales in the contract channel.

With respect to the cost containment effort, Office Depot is employing a more efficient customer coverage model, focusing on lowering indirect procurement costs as well as general and administrative expenditures, and also gaining from its U.S. retail store optimization plan. Management expects these endeavors to result in annual benefits of over $250 million by the end of 2018.

To widen its domain of offerings, Office Depot acquired CompuCom Systems that will help it acclimatize to the fast changing retail landscape along with providing enterprise-level tech services and products to customers. The acquisition is likely to add approximately $1.1 billion in revenues and help realize cost savings of more than $40 million within a period of two years. The company also launched a new subscription-based business services platform, BizBox, to assist start-ups and small businesses on host of things such as website designing, financing and accounting service, HR/payroll support and others.

Bottom Line

Certainly, the company is leaving no stone unturned to bring itself back on the growth trajectory, and we only hope that these endeavors may help revive this Zacks Rank #3 (Hold) stock in 2018. We noted that in a month shares of Office Depot have increased 8.3% outperforming the industry’s growth of 6.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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