Office Depot: Spiraling Downwards? - Analyst Blog

It seems that Office Depot, Inc. ODP has lost its momentum, as the stock fell nearly 16% ever since the company reported a dismal fourth-quarter 2013 on Feb 25, 2014. Year-to-date, the company has witnessed its market cap erode by 23%.

The slide is a reflection of wary investors as Office Depot continues to disappoint on the earnings front. The company has missed the Zacks Consensus Estimate in the trailing 4 quarters by an average of 122.2%.

In the most recent quarter, earnings fell short of the estimate by 200%. The company posted fourth-quarter 2013 loss of 3 cents per share as against the Zacks Consensus Estimate of earnings of 3 cents. Revenues of $3,486 million also fell short of the Zacks Consensus Estimate.

What is Causing the Dismal Run?

The office supplies industry is currently grappling with secular as well as cyclical headwinds. Improvement in technology has reduced the demand for traditional core office-supply items (paper, toner, ink). Moreover, the decline in business and consumer spending, given the global meltdown and deterioration of credit markets has resulted in sluggish demand for big-ticket items, thereby negatively impacting the top line. The sector's poor run has had a telling effect on the performance of other retailers including Staples, Inc. SPLS.

Additionally, increasing competition from online giants such as Amazon.com Inc. AMZN has squeezed out a large share of profits from office supply retailers.

Given the uncertainties, analysts' have become less constructive on the stock's future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that tumbled 56% to 11 cents for  2014 and 42% to 33 cents a share for 2015 in the past 60 days.

Revival Measures

To bail itself out, Office Depot merged with Office Max. Management was very upbeat on the merger and raised expectations regarding the synergies during the recent fourth quarter conference call.

Management now expects synergies from the merger to exceed more than $600 million by 2016. This excludes any benefit arising from rationalizing the domestic retail store base. Earlier, cost savings in the upper half of $400 million to $600 million were expected to be generated from the merger synergies (purchasing, cost of good sold, supply chain, advertising, headcount and other general & administrative).

Apart from this, Office Depot has undertaken several initiatives, which include containing costs, 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 to regain lost momentum.

Though the merger and initiatives look promising, we believe weakness will persist in the overall sector going forward.

Presently, Office Depot carries a Zacks Rank #5 (Strong Sell). We will not be constructive on the stock, until we see signs of improvement. Another better ranked retail stock for investment purpose, includes Barnes & Noble, Inc. BKS, which sports a Zacks Rank #1 (Strong Buy).