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The past three months have not been a smooth ride for Office Depot, Inc. ODP with shares nosediving nearly 38% compared with the industry’s decline of 8.3%. Clearly, stiff competition from online retailers such as Amazon AMZN and lower traffic count in retail stores have been playing spoilsport.
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. Industry experts believe that with Costco COST and Walmart WMT gradually making way in the office supplies market, competition is likely to intensify further.
For quite some time now, this Zacks Rank #4 (Sell) company has been grappling with dwindling top-line performance. We noted total sales had declined 7%, 9%, 8% and 5% in the first, second, third and fourth quarter of 2017, respectively. Following, the same chronological order comparable-store sales have tumbled 5%, 6%, 5% and 4%, respectively. Meanwhile, earnings per share have decreased 13% and 27% during the third and fourth quarter, respectively.
Office Depot now envisions sales to be $10.6 billion during 2018, down roughly 5% on a pro-forma basis due to pressure in the Retail Division and impact of prior store closures. Further, it expects earnings to come in at 30 cents a share for the full year, which is sharply down from 45 cents and 46 cents reported in 2017 and 2016, respectively.
Will the Initiatives Aid in Reviving the Stock?
Office Depot has undertaken a strategic review of business operating model, growth prospects and cost structure to bring itself back on growth trajectory. Management hinted that incremental growth investments to catapult it into a services-driven company and reduced sales volume are the primary reasons behind lower adjusted operating income.
The company now intends to focus on core North American market. It 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 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 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.
Certainly, the company is leaving no stone unturned to bring itself back on growth trajectory, and we only hope that these endeavors may help revive the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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