Not the Time for Office Depot

I've always had a soft spot for Office Depot (ODP - commentary - Cramer's Take), where I served my MBA internship. So when I noticed that a sales and earnings speed bump has put the stock in the 50%-off bin, I thought I should check it out more closely.

After all, at 10 times earnings, it certainly looks cheap enough. Its primary competitor, Staples (SPLS - commentary - Cramer's Take), has weathered the storm far better, but it trades at a significantly higher earnings multiple. OfficeMax (OMX - commentary - Cramer's Take) has been hit nearly as hard as Office Depot, but it also sports a higher valuation.

That comparison raises an obvious question: Is Office Depot cheaper than its competitors because it is doing worse than they are? To some extent, this is true, as Staples' same-store sales have been trending down 2%, while Office Depot's are down 5%. OfficeMax has actually seen positive comps, but that is at least partially driven by having closed more than 100 underperforming stores. At any rate, it seems safe to say the whole group is doing poorly, but Office Depot's lower valuation is at least partially merited by virtue of it doing even worse.

At the Goldman Sachs conference last week, management discussed the impact of a slowing housing market, which has apparently been affecting the home-based businesses that constitute a portion of office superstore sales. The company explained that the change in store sales is strongly related to local housing inventory and to the number of days houses stay on the market.

Since Office Depot has a larger concentration of stores in Florida and California -- two of the hardest-hit markets -- this may explain much of the underperformance, and this theory is supported by the fact that the biggest drops have been in the furniture category.

However, it also suggests that things may get even tougher for all of the office suppliers as the housing decline continues to spread. Fortunately, the international business continues to grow, and it accounted for more than 25% of total revenue in the latest quarter.

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At the time of publication, Trent had no positions in the stocks mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.