The Lampert Doctrine Comes to Office Depot

Market watchers have heaped much praise recently on Ed Lampert, who engineered the Sears/Kmart (SHLD Quote - Cramer on SHLD - Stock Picks) merger last year and became Wall Street's highest-paid hedge fund manager. But what about the executives that were actually running the companies where he struck gold?

Lampert's presence as an activist stakeholder has been the common thread at retailers delivering dizzying investment returns in recent years, like Kmart, AutoZone (AZO Quote - Cramer on AZO - Stock Picks) and now Sears Holdings. Meanwhile, the management teams in place at these companies have often gone ignored amid all the hagiography.

One of those executives, Lampert's handpicked chief executive at AutoZone, Steve Odland, is embarking on his own cost-cutting mission at Office Depot (ODP Quote - Cramer on ODP - Stock Picks). Investors are curious to see if Odland can work his magic there without taking cues from the Guru of Greenwich.

Office Depot plays second fiddle to Staples (SPLS Quote - Cramer on SPLS - Stock Picks), the best-in-breed retail chain in the office-supply space. Its stock price was in a funk until Odland came aboard in March, when it subsequently jumped 19% in five days, crossing the $20 mark for the first time since 2002.

Before that, the three-year reign of its former CEO, Bruce Nelson, was viewed with disappointment. Nelson resigned in October, after Office Depot lowered its guidance for its third quarter and the full year, and reported a second-quarter earnings miss. It suffered 16 straight quarters of declines in sales at stores open at least a year from 2000 through 2003.

"Bringing in Steve Odland was a major coup for Office Depot that pretty much solidified their spot as the No. 2 player in office-supply retailing," says Morningstar analyst Anthony Chukumba.

Previously, there was speculation that the company's competitive position could be under fire from a third player, OfficeMax (OMX Quote - Cramer on OMX - Stock Picks). However, the reputation of OfficeMax's new chief executive, Sam Duncan, isn't that of Odland, and the company is already under investigation by the Securities and Exchange Commission for accounting problems that came to light last year.

Meanwhile, few observers see a chance for Office Depot to overtake Staples, but there is opportunity for Odland to cut costs.

"Clearly, there's room here for operating margin improvement at Office Depot, and given his track record, I'd say Odland is just the guy to do that," Chukumba says.

At AutoZone, Odland took the focus off sales growth and whittled down the company's cost structure, a strategy that was famously employed by Lampert at Kmart as well. On Odland's watch, AutoZone's operating margins doubled, while its stock price more than tripled.

That could be ported to Office Depot. In the first quarter, Staples logged a 7.8% operating margin, compared to 4.2% at Office Depot.

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