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Office Depot (ODP) Plunges 40% in 3 Months: Factors to Blame

Zacks Equity Research

Shares of Office Depot, Inc. ODP have slumped 46.7% in the past three months against the industry’s growth of 5.1%. This Zacks Rank #3 (Hold) stock’s bearish run on the bourses can be attributable to lower-than-expected operating performance at the CompuCom division that took a toll on sales and operating income during the first quarter of 2019.


 

The company’s CompuCom division reported operating loss of about $15 million during the first quarter of 2019. Weaker-than-anticipated revenues from existing customer projects and less-than-proportionate fall in related expenses acted as deterrents. Consequently, total sales of $2,769 million declined 2% year over year, while adjusted operating income came in at $67 million, down 28% year over year.

Additionally, the company’s retail division has been witnessing dismal comparable-store sales for a while. Comps in this division declined 4%, 2%, 5% and again 5% in the first, second, third and fourth quarters of 2018, respectively. Moreover, Retail division’s sales decreased 8%, 5% 6% and again 6% in the first, second, third and fourth quarters of 2018, respectively. Meanwhile, in the first quarter of 2019, the Retail division’s sales fell 6%, while comparable-store sales dropped 4%.

Nevertheless, management is looking into every nook and cranny for growth prospects. The company has been focusing on business operating model, viable projects and cost structure. Further, it has been closing underperforming stores, reducing exposure to higher dollar-value inventory items, shuttering non-critical distribution facilities, concentrating on e-commerce platforms and focusing on providing innovative products and services.

Office Depot’s initiative of buy online and pick up in-store is also gaining traction. The company is also making incremental investments to transform into a product and services-driven enterprise.

Office Depot initiated Business Acceleration Program that involves reducing costs, improving operational efficiencies, enhancing service delivery, effectively using technology and automation, and identifying investment opportunities. Moreover, in order to control discretionary spending, the company adopted zero-based budgeting approach.

As a result, management anticipates cost savings of at least $40 million in the second half of 2019. The company hopes that endeavors such as streamlining operational structure and exploring options to speed-up cross-selling opportunities would help bring the CompuCom segment back on track.

All said, we hope these aforementioned efforts to help the company achieve the much-required turnaround in an environment where demand for office products are diminishing.

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