BofA: Office Depot-Alibaba Partnership Another Chapter In Retailer's 'Compelling Transformation Story'

Office Depot Inc ODP announced a new partnership Monday with China's Alibaba Group Holding Ltd BABA that adds to the office supply retailer's "compelling transformation story," according to Bank of America Merrill Lynch.

The Analyst

Bank of America's Elizabeth Suzuki maintains a Buy rating on Office Depot with an unchanged $4.50 price target.

The Thesis

Office Depot's new partnership will combine Alibaba's global supply network and product listing with Office Depot's customer bonds, distribution network, sales associates and marketing in the U.S., Suzuki said in a Monday note. 

Office Depot's asset base includes more than 1,000 retail locations, 50 distribution centers and a fleet of 1,000 vehicles that make it possible to deliver products to 98.5 percent of the U.S. population in one day, the analyst said. 

Office Depot also benefits from the partnership, as it marks a new initiative that doesn't take place in-store, Suzuki said. The agreement gives Office Depot new exposure to global e-commerce, she said, adding that the economics of the agreement aren't yet known, making it difficult to model a precise financial benefit.  

Office Depot's stock is trading at 3.3 times 2019 estimated EV/EBITDA which is among the lowest multiples within the retail hardline space, the analyst said. This may not be justified, as Office Depot is undergoing a transformation, but being valued as if it is a "structurally challenged retailer," she said. 

BofA's $4.50 price target is based on 4.5 times 2019 estimated EV/EBITDA.

Price Action

Office Depot shares were up 0.93 percent at $3.52 at the time of publication Tuesday. 

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