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Office Depot To Sharpen Edge With CompuCom Buyout

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Office Depot, Inc. ODP seems to be well on track to give itself a complete makeover as it entered into an agreement to acquire CompuCom Systems, Inc. The deal will help this traditional office supplies retailer to widen its domain of offerings. The buyout that is valued at $1 billion will assist the company to acclimatize to the fast changing retail landscape along with providing enterprise-level tech services and products to customers.

The company plans to finance this acquisition with new debt and the issuance of about 45 million shares to Thomas H. Lee Partners, a private equity firm that owns CompuCom. Management believes that the addition of CompuCom will help unlock value and take a huge leap toward automation and innovation that will enable Office Depot to serve clients better. The acquisition is likely to add approximately $1.1 billion in revenues and help realize cost savings of more than $40 million within a period of two years.

Office Depot has undertaken a strategic review of business operating model, growth prospects and cost structure to bring itself back on growth trajectory. 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.

Deal: A Demand of Time

The office products sector has been grappling with multiple headwinds, and Office Depot is not fully immune to these. 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. Stiff competition from online retailers such as Amazon.com, Inc. AMZN has been playing spoilsport. Moreover, analysts believe that with Costco Wholesale Corporation COST and Wal-Mart Stores, Inc. WMT gradually entering in the office supplies market competition is likely to intensify further.

Analysts cited the takeover of CompuCom as a shot in the arm for Office Depot that continues to battle a dismal top-line, which missed the Zacks Consensus Estimate for the 12th straight quarter, when it reported second-quarter 2017 results. We note that the company has been witnessing dismal comparable-store sales run for quite some time now. A look at the company's performance in fiscal 2016 unveils that comps have declined 1%, 1%, 2% and 4% in the first, second, third and fourth quarters, respectively. In the first and second quarters of 2017, the same has tumbled 5% and 6%, respectively.

A Cautious Outlook

After assessing the impact of recent hurricanes, sluggish sales and soft traffic during the back to school period and a temporary rise in the supply chain costs, Office Depot lowered full year outlook. The company now envisions adjusted operating income in the range of $400-$425 million (excluding the impact of the recent deal), down from $500 million projected previously. Management now expects capital expenditures of approximately $125 million in 2017 down from previous estimate of $150 million.

Office Depot now expects total sales to decline in the band of 7-8% during the third quarter of fiscal 2017, including store closures with comparable-store sales projected to decline in the range of 5-6%. Sales for Business Solutions Division are anticipated to tumble between 5% and 6% in constant currency. Management forecasts adjusted operating income between $125 million and $135 million for the quarter and expects to generate free cash flow from continuing operations of approximately $200 million.

As a result of trimmed view, shares fell 8.5% during after-market trading hours yesterday. A glimpse of Office Depot share price movement reveals that it has plunged about 19.1% in the past three months wider than the industry's decline of 4.8%.

Bottom Line

Definitely, Office Depot is trying all means to fight the retail slump and we hope that the buyout of CompuCom may help improve customer base and store traffic, which will be reflected in revenues and per-store profitability. Currently, the company carries a Zacks Rank #4 (Sell).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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