Office Depot Walks the Tight Rope - Analyst Blog
March 21 2012 - 10:21AM
Zacks
The change in the demand for office supplies products and
services remains one of the indicators that describe the health of
the economy. The economy has not completely awaken from the state
of hibernation, and amidst such a scenario Office Depot
Inc. (ODP) has to walk the tight rope to juggle with
unprecedented situation that may hurt its growth prospects.
How the Company Balances
Office Depot is repositioning itself to keep afloat in a
difficult consumer environment. The company is containing costs,
closing underperforming stores, reducing exposure to higher
dollar-value inventory items, shuttering non-critical distribution
facilities, and focusing on providing innovative products and
services, which should all contribute to margin improvements.
The company in order to drive sales has undertaken initiatives,
which include improvement in customer in-store shopping experience,
investment in Copy & Print Depot and Tech Depot services,
remodeling of stores and introduction of smaller format stores, and
margin improvements through rationalization of stock keeping units
and product pricing.
In view of this, the company rolled out 8 locations of size
5,000 square foot. Moreover, continuing with its margin improvement
initiatives, the company remains committed towards price
optimization and effective promotions. Office Depot kicked off a
new service model in 300 stores before the end of the year, and
plans to initiate the new model in additional 360 stores in the
first quarter of 2012, with the expectation of implementing in all
the stores by the year-end.
We appreciate Office Depot’s rational approach to slow the pace
of stores openings in North America, given the weak consumer
environment. The company opened 6 stores in fiscal year 2009,
significantly down from 59 stores opened in 2008 and 71 stores
opened in 2007.
The company opened 17 stores in fiscal 2010 and 9 stores in
fiscal 2011. The company now plans to increase the store count in
low-single-digit number in fiscal 2012.
Efforts Reaping Results
Despite sluggish economic recovery and underlying pressure in
Europe, Office Depot posted better-than-expected fourth-quarter
2011 bottom-line results. The company reported earnings of 3 cents
a share, surpassing the Zacks Consensus Estimate of a break-even.
Looking out to the year-over-year performance, earnings marked a
sharp improvement from a loss of 10 cents delivered in the year-ago
quarter.
Office Depot’s total revenue of $2,969.7 million portrayed a
marginal increase of 0.3% from the prior-year quarter but fell
short of the Zacks Consensus Estimate of $2,997 million.
Adjusted gross profit increased 6.2% to $900.2 million, whereas
gross margin expanded 170 basis points to 30.3% in the reported
quarter. Adjusted operating profit came in at $35.8 million
compared with $13.4 million in the prior-year quarter, whereas
operating margin increased 70 basis points to 1.2%.
The Concerns
We remain cautious about the macroeconomic environment and
sluggish job market.The recovery in the economy still lacks luster.
As a result, consumers and small businesses still remain watchful
about their spendingfor big-ticket items such as business machines
and other durable products. We observe that the demand for office
products is closely tied to the health of the economy.
Management now expects total company sales for the first quarter
of 2012 to decline between 3% and 4% from the prior-year quarter.
Moreover, Office Depot expects first quarter comparable-store sales
at North American Retail division to be somewhat in line with the
fourth quarter of 2011. The company had witnessed a decline of 5%
during the fourth quarter.
Moreover, due to high exposure to international markets, Office
Depot remains prone to currency fluctuations. The weakening of
foreign currencies against the U.S. dollar may require the company
to either raise prices or contract profit margins in locations
outside of the U.S. An increase in price may have an adverse impact
on the demand for the products.
Let’s Conclude
No one can predict the future but genuine efforts are
implemented to combat the tough economy. Business budget remains
tight, consumers remain cautious than ever before and companies are
trying hard to navigate through the challenging maze.
Going by the pulse of the economy and given the pros and cons,
we prefer to maintain our long-term Neutral recommendation on the
stock. Moreover, Office Depot, which competes with
OfficeMax Inc. (OMX) and Staples
Inc. (SPLS), holds a Zacks #3 Rank that translates into a
short-term Hold rating.
OFFICE DEPOT (ODP): Free Stock Analysis Report
OFFICEMAX INC (OMX): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
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