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Office Depot Woos the Markets

Stocks in this article: ODP

NEW YORK (TheStreet) -- Office Depot (ODP), closed at $5, up 3.52%, or 17 cents, on Wednesday. The Boca Raton, Florida-based retailer is trying everything in its power to get back in the good books of the stock markets -- whether it is the acquisition of Office Max, shuttering up to 400 stores in the U.S., or rejigging its product portfolio.

The measures might be working -- the company's stock rose 20% after it beat Wall Street's expectations of a $4.3 billion quarterly revenue by registering $4.4 billion in revenue for the first quarter.

However, due to one-time charges associated with the Office Max acquisition, the company ended up posting an operating loss of $79 million, translating into 21 cents per share. The CEO, Roland Smith, was conscious of projecting to investors that he expected both cost reductions and sales improvements in the following quarters.

The decision by Office Depot to close multiple stores has to be seen in the context that the new entity will still operate close to 1,500 stores in the U.S. by 2016. While it is a far cry from the 2,085 stores that both companies operated at their peak in 2009, the market has only so much demand to address.

ODP ChartODP data by YCharts

Competitors like Staples (SPLS) are feeling the pain as well -- it announced a plan to shutter 225 stores by next year, and was promptly rewarded by a hammering of the stock by 15%. A $74 million acquisition of printing software company PNI Digital should have signalled management's intent to keep growing and expanding its capabilities, but the company has found it much harder than Office Depot to keep the markets happy.

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The market is also transforming steadily but surely. Sales of office supplies are down, but demand for services like copying and printing as well as maintenance is up. The agility with which Office Depot stores can rejig their operations to meet this new type of demand will have a major impact on future performance.

The other major shift in customer behavior that is impacting traditional retailers like Office Depot is the rise of online ordering. Most customers prefer to shop online in the expectation of lower prices, as well as the added convenience of avoiding a commute, even if it is to a neighborhood store.

A quick skim of Office Depot's homepage shows "hot deals" listed prominently to seduce buyers into ordering everything from a laptop to paper envelopes. Mobile shopping apps are available on both iOS and Android and customers can sign up for an email newsletter carrying the best offers of the week.

For now, the market consensus seems to be to hold onto Office Depot stock. Much will depend on next quarter's earnings for the market to go either way. Analysts are also going to keep a hawk-eyed watch on the company's short-term targets. Chief among them is Office Depot's objective of saving $675 million against an original $600 million estimate due to acquisition "synergies" by 2016.

Miss that goal and it could be a very bad day at the office for the company.



This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


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

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