Analysts Elizabeth Suzuki, Curtis Nagle and Jason Haas believe that the office product industry is likely to continue to shrink and shift more toward online retailers. Notwithstanding the secular risk, the analysts think Office Depot has been executing a meaningful turnaround and is not getting enough credit.
The Looming Fall Catalyst
BofA Merrill Lynch delved on a new store format concept called Store of the Future, Office Depot is testing. This concept, according to the firm, features a cleaner look, simpler signage, better security systems and store-within-a-store brand partners like Dell.
Additionally, the analyst said the concept lays emphasis on services like printing and tech support, which are high-margin sales for the company. The analysts see the company's showcasing of the Store of the Future format at its analyst day in the fall as positive catalyst for the stock.
See also: How Store Counts Of America's Biggest Retailers Changed Since 2007
Fresh Blood At Helm
The firm noted that Lenovo Group Limited (ADR) LNVGY executive Gerry Smith joined Office Depot as its new CEO in February 2017, with Smith inheriting a struggling product category but an improving business.
Though the firm acknowledges the progress Office Depot has made since its merger with OfficeMax Inc in 2013, it said the company has to go a long way to regain investor confidence after its failed merger with Staples, Inc. SPLS in 2016.
The firm considers the renewed focus on services and B2B, which have less risk of disruption by online competitors, as encouraging.
Key Risks
BofA Merrill Lynch views the following as key risks:
- Not gaining traction and market share in the B2B and services segments.
- Market share loss to online retailers, leading to dilution in pricing of core office products.
- High costs of the Store of the Future concept and other new initiatives may not be justified by the incremental sales generated out of them.
"We believe the relatively new management team has a long way to go to prove itself, but the stock is inexpensive enough for there to be upside as the company continues moving in the right direction," the firm concluded.
Related Link: Can Nordstrom Or Office Depot Rise Above Low Retail Earnings Expectations? _______ Image Credit: By M.O. Stevens (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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