Office Depot Has Already Left the Station

There are a lot of things to like about Office Depot(ODP Quote). But with the stock at new highs, when I put pencil to paper I don't see the same compelling value found in the stock earlier this year.

That's not to take anything away from Arne's call on this stock. If you had listened to him last December and purchased Office Depot, you'd have doubled your money and then some.

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Now, however, may be the right time to ease up. I'm not suggesting there is anything wrong with Office Depot's story. But it's not twice as good as it was earlier this year, especially given the economic backdrop.

Yes, it's impressive that Office Depot is poised to meet its earnings target of around 20 cents a share in the third quarter and likely will meet the 73 cents per share estimate for the year. And it's also impressive that management has engaged in an exceptional efficiency program, cutting costs, inching margins higher, boosting cash flow and focusing on profits over breakneck growth.

But over time, cost cutting will slow and profit growth will again be dependent on sales growth. And sales growth, in turn, will depend -- at least in part -- on the economy. While the company says the Sept. 11 terror had a big impact on the third quarter, Office Depot's announcement last week that same-store sales in the third quarter would decline 7% to 8% felt more symptomatic of general economic weakness. Prior to Sept. 11, estimates suggested same-store sales would slip 4% to 5% for the quarter.

Given economic uncertainties, it's hard to envision a scenario where Office Depot's retail sales will come roaring back before next year. And while commercial sales and international outlets provide opportunities for the company, a strong dollar and softness in commercial accounts could challenge growth in those segments.

None of this means that Office Depot is a poor company. In fact, it's a good company with management that has done a yeoman's job of steering a profitable course. But the Street has already recognized that. ...